Corrected: BHP sweetener may be inhibited by UK regulations

Corrects item from August 24 to make clear the increased bid level that triggers the need for shareholder approval changes as BHP’s market value rises or falls

By Eric Onstad and Michael Erman

LONDON/NEW YORK (BestGrowthStock) – BHP Billiton’s hostile $39 billion bid for fertilizer group Potash Corp faces a potential obstacle — formal approval by its own shareholders — if it sweetens its offer to the level many investors are calling for.

That threshold based on UK listing requirements is likely to come into any BHP deliberations on how much to sweeten its bid for Potash Corp, the world’s biggest fertilizer company.

“Clearly it’s easier for the company not to have go through that whole process, BHP would want to do things as quickly as possible,” said analyst Charles Kernot at Evolution Securities in London.

Under the UK listing rules, no shareholder vote is needed at the current $130 per share offer since the total takeover price does not equal more than 25 percent of BHP’s total market capitalization.

The market value is based on the share price the day before the world’s top miner BHP unveiled its offer, totaling about $188 billion.

If the bid was increased, the 25 percent threshold would apply to BHP’s market price on the day before the announcement of the sweetener, making it a moving target.

As BHP shares decline, the price at which a shareholder vote would be needed also falls. BHP stock has shed 9 percent since the firm released details of its bid.

Based on August 26 market prices, the requirement would kick in if BHP increased its bid by 11 percent to about $145 per share or $43 billion, according to Reuters calculations.

A Reuters poll showed Potash investors think BHP could succeed with a higher bid of $162 a share, while many analysts regard $157 as a winning offer.

“Putting yourself in the Never Never Land of a shareholder vote? That’s M&A 101 — don’t do it,” said an investment banker not working on the deal.

Analysts and investors say BHP Chief Executive Marius Kloppers has a history of being cautious on M&A deals after he walked away from a hostile bid for Rio Tinto in 2008 during the global economic downturn.

“The board probably would prefer to avoid a shareholder vote, but even if a vote is required it is likely that shareholder approval would be given,” said BMO Capital Markets analyst Tony Robson.


The issue of shareholder involvement in takeover processes is a hot topic in Britain.

Kraft Foods Inc’s takeover of Cadbury, and the failure of Prudential Plc’s bid for American International Group Inc’s Asian arm, have helped fuel debates in Britain about shareholder engagement.

Prudential’s $35 billion bid collapsed in June, scuppered by shareholder opposition to a deal that required their support because it entailed a $21 billion rights issue. Some hailed that as a new era of shareholder activism.

In the wake of the Cadbury acquisition, Britain’s takeover watchdog started a consultation on a slew of potential changes to the UK’s merger rules, which could include raising the minimum acceptance threshold for a bid from 50 percent plus one share.

The Institute of Directors (IoD), a lobby group representing 45,000 senior business people, has argued that any takeover of a large listed UK company should require a vote by shareholders of the acquiring company.

UK listing requirements provide four tests with a 25 percent threshold to determine whether a company needs shareholder approval for a takeover, including the one measuring the total value of the transaction.

According to analysts, only one other test was close to the threshold — the gross capital test which measures the enterprise value of the target company versus the acquirer.

The other two tests measuring gross assets and profits are well below 25 percent, analysts added.

(Additional reporting by Quentin Webb in London; Editing by David Holmes and Erica Billingham)

Corrected: BHP sweetener may be inhibited by UK regulations