TORONTO/HONG KONG (Reuters) - Chinese officials have ordered state companies to meet investment bankers to explore ways to block BHP Billiton's $39 billion bid for Potash Corp, a source with direct knowledge of the matter said.
In response to the directive, Sinochem is holding meetings with several banks, the source said on Friday, including Citigroup, HSBC and Morgan Stanley.
The order from Beijing underscores the seriousness with which China is taking the potential BHP-Potash tie up and its implications for the pricing and supply of the crop nutrient, despite obstacles to launching a successful counter-bid.
"They are being instructed," the source said, adding the order was issued late last week. "The chairman of Sinochem has been asked to speak to other banks."
A Wall Street Journal report on Thursday said Sinochem had hired HSBC to advise on options pertaining to Potash Corp.
One option being discussed is the possibility of Sinochem linking with China's $300 billion sovereign wealth fund CIC, according to a second banking source familiar with the matter.
The most likely scenario is that China will consider buying a blocking stake, rather than attempt a complete takeover of Potash Corp, said both sources who were not authorized to speak publicly due to the sensitive nature of the discussions.
Assuming a consortium pays a 20 percent premium to Potash's market price, a 15 percent stake would cost about $8.3 billion.
Sinochem and the banks declined to comment. CIC could not immediately be reached.
BHP CEO Marius Kloppers has poured cold water on the possibility of a rival bid but another source close to the situation in Europe said the latest developments are evidence of solid interest in Potash Corp by third parties.
"This shows there's credibility from Potash Corp, it's not just hot air. It's not just a go-it-alone defense. There's quite a lot of activity in terms of discussions," said the source.
Chinese firms have also approached at least one big Canadian pension manager about a rival bid. The disclosure on Thursday by Alberta Investment Management Corp, which manages some C$70 billion ($67 billion) in public sector pension funds, was one of the first pieces of hard evidence to back rumors that China is looking for a way to derail a BHP takeover.
Potash shares in New York closed down 5 cents at $148.50, while BHP's London shares ended the day up 1.8 percent.
BHP's bid for Potash Corp, coupled with consolidation moves in the Russian potash sector, have also raised concerns among other potash importers.
U.S. Awasthi, the head of India's largest fertilizer maker IFFCO, also expressed concerns about the M&A activity in the potash sector.
"Everybody forgets one thing," said Awasthi. "Everybody thinks about industrial profit, but everybody forgets about a farmer's profit."
India, one of the world's largest potash importers, has no production capabilities of its own and relies on imports. In 2008, India imported roughly 6 million tons of the nutrient, with about a quarter of its needs being supplied by Canadian producers.
Earlier this year, IFFCO acquired a 10 percent stake in Calgary-based Americas Petrogas and a 20 percent stake in its GrowMax unit, which owns a potash brine project currently being developed in Peru. However, India is unlikely to attempt a move to block BHP's takeover bid.
"In India we don't have enough capital in our hands to make a big move of this sort," he said.
In addition to concerns about job losses and declines in royalty revenues in the event of a foreign takeover of Potash Corp, Saskatchewan -- the western Canadian province that is home to Potash Corp -- is especially concerned by a takeover led by a Chinese state-owned entity.
"We want to be very circumspect about sovereign entities from customer countries and their involvement in all of this," said Saskatchewan's Premier Brad Wall in a television interview.
Aside from political concerns, a bid from a Chinese state-owned entity could face an additional layer of scrutiny under the Investment Canada Act, notes Steve Szentesi, a Vancouver-based lawyer who focuses on competition law.
"The over-arching consideration under the Investment Canada Act, is whether a transaction is likely to be of net benefit to Canada," said Szentesi. "But in the case of state-owned enterprises there is an additional layer of scrutiny on top of the general net benefit to Canada test."
Additional reporting by Narayanan Somasundaram in Sydney, Michael Flaherty and Denny Thomas in Hong Kong, Tracy Zheng in Beijing and Eric Onstad in London