DEALTALK-After BHP bid, Potash white knight may be in China

* China consortium may consider bid for Potash Corp

* Sinofert and CIC seen as top bid candidates

* BHP ownership of Potash Corp potentially negative for
China
(For more Reuters DEALTALKS, click [DEALTALK/])

By Joseph Chaney and Michael Smith

HONG KONG/SYDNEY, Aug 20 (BestGrowthStock) – BHP Billiton’s
(BHP.AX: ) $39 billion hostile bid for Potash Corp (POT.TO: ) has
set a high bar for rivals, but China could yet launch its own
bid to secure supply of the vital crop nutrient.

Top Chinese fertiliser company Sinofert (0297.HK: ) — in
which Potash (POT.N: ) owns a 22 percent stake — is the most
logical candidate to lead a counter offer, industry sources
say.

While Sinofert itself is small — its $3.8 billion market
value is less than a 10th of Potash’s — its parent, Sinochem
Group, is a huge state-owned group. Sinochem, the country’s
biggest chemical trader and top fertiliser firm, had revenues
of $36 billion last year.

Aluminium giant Chalco (2600.HK: ) (601600.SS: ), and
state-backed chemicals company ChemChina, could also emerge as
potential bidders, according to the sources.

“I assure you there are numerous organisations in China who
would chase potash (assets),” said an Asia-based investment
banker who has advised Chinese resources companies on overseas
deals.

“China has very few potash reserves for itself, it’s a
commodity which they’re going to be in short supply of. And,
does China want to be over the barrel on yet another
commodity?”

A spokeswoman for Sinofert declined to comment, while
Chalco and ChemChina could not be reached for comment.

Even for cash-rich Chinese companies, the price-tag remains
the biggest obstacle, with few companies able to match BHP’s
all cash offer at $130 per share.

A Chinese suitor — if one emerges — is more likely to
link up with a sponsor such as the country’s $300 billion
sovereign wealth fund China Investment Corp (Read more about U.S. companies investment into China).

“Now, you could maybe cobble together a consortium that
would comprise a Chinese player with a Chinese financial
investor, but again, those things are difficult to knit
together at the best of times,” said another banking source.

Both bankers were unauthorised to speak publicly about the
matter and declined to be named.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For more on the BHP bid [ID:nN22340110] For FACTBOX on potash pricing: [ID:nSGE67J088] Insider on BHP debt http://link.reuters.com/zuq95n Insider on white knight http://link.reuters.com/gak75n Starmine comparative data: http://r.reuters.com/bep85n ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ >

A RIO MODEL?

Two years ago, at the height of BHP’s hostile takeover
attempt for Rio Tinto (RIO.AX: ) (RIO.L: ), China’s state-back
Chinalco bought a 9 percent stake in Rio, a purchase meant to
help block the deal.

While Chinalco saw $10 billion quickly wiped from its
investment, BHP did ultimately abandon the deal, much to the
happiness of Beijing, which was worried about the pricing clout
a combined BHP-Rio would have over a host of commodities needed
to fuel China’s economic growth.

While Potash might not have the same broad and strategic
importance as a diversified miner such as Rio, the mineral is a
crucial ingredient in producing better crop yields. That’s of
vital importance to China and its 1.3 billion people as its
growing middle class increases the rate of food consumption.

A decreasing amount of arable land worldwide adds even more
upside to the long-term outlook for potash, and the
desirability of potash assets.

Rio and Brazil’s Vale (VALE.N: ) have also been mentioned as
potential rival bidders for Potash. The notion of BHP reaching
out to a foreign buyer is also being discussed among bankers.

“One scenario is for BHP to have a pre-sale agreement and
partner up with a Chinese firm for any part of the Potash
operations it doesn’t like,” said another banker.

PRICING POWER

Also at issue for China in the Potash takeover saga is the
testy matter of annual potash price negotiations.

Potash prices are typically negotiated by three major
companies: the Belarussian Potash Company (BPC), the marketing
arm of producers Belaruskali and Russia’s Uralkali (URKA.MM: );
Canpotex, a joint arrangement between Potash Corp, Agrium Inc
(AGU.TO: ) and Mosaic Co (MOS.N: ); and PhosChem, which also acts
on behalf of Potash Corp and Mosaic.

Some agricultural experts say BHP’s potential ownership of
Potash will not have a major impact on the potash pricing
regime, given that BPC has set the tone for prices with major
buyers in China and India at prices below the ones that
Canadian producers want to see in recent years. [ID:nN17126061]

Still, BHP — which strongly advocated a dismantling of the
annual iron ore pricing benchmark — is a critic of annualised
commodity contracts.

The world’s largest miner could easily use its considerable
weight to fight for a more market-based potash pricing system,
frustrating Chinese demands for lower prices.

“Someone like BHP coming in would be a bit more of a
maverick in terms of bringing the industry forward like they
did with iron ore pricing — not them alone, it had to be
everyone else — but they were certainly championing a new
system,” said James Wilson, an analyst at DJ Carmichael.

“It wouldn’t be surprising if they did a similar thing with
potash as well.”
(Additional reporting by Denny Thomas in HONG KONG; Editing by
Michael Flaherty and Lincoln Feast)

DEALTALK-After BHP bid, Potash white knight may be in China