What the debate on foreign takeovers means to investors
This Canadian investor didn’t like the blocking of the Potash takeover bid and he discusses the implications for other big Canadian stocks.
It’s a good day to talk about foreign deals.
The announcement of a merger agreement between the Toronto and London stock exchanges raises many questions.
One of them is: does Canada give up control over its own markets? There’s already a hot debate going on in Australia over a merger between the Singapore and Australian exchanges.
When Mr. T.E. Gardiner wrote in the latest issue of Investor's Digest of Canada the Toronto-London exchange deal was unknown to the public.
But he honed in on the topic of foreign control. His subject was the blocked takeover bid for Potash Corp. of Saskatchewan (TSX-POT). He discusses the concept of government interference in such deals.
He doesn’t like it.
But it’s not an issue that is liable to go away, says Mr. Gardiner, a Bell Canada retiree and independent investor living in Ottawa.
He cites several other big Canadian firms that might be targets for acquisitive foreign firms. The implications are not as straightforward as many people might assume.
They don’t own the company
When Australian mining giant BHP Billiton (NYSE-BHP) launched its bid for Potash, there seemed to be a consensus in Canada.
“Not just the politicians and the general public, but even corporate executives seemed to favor government interference in this case,” says Mr. Gardiner.
“I don’t understand why. Most shares of Potash are held by non-Canadians, its head office is in Chicago, and it has operations around the world (although admittedly, its largest operations are in Saskatchewan).”
Potash management and the government of Saskatchewan were certainly opposed to the deal, “but they don’t own the company — the shareholders do,” protests this writer.
What’s more, he adds, the Saskatchewan government once owned Potash but sold it. Why should it have any further claim on the company?
Potash management insisted the price wasn’t high enough, but Mr. Gardiner isn’t buying that one, either. The lack of a “white knight” suggests that BHP Billiton’s bid was a sound one. “The managers at Potash may simply have been protecting their own jobs,” he says bluntly.
An extra level of risk
Yes, other countries do the same thing, the author admits. The U.S. blocked a deal that would have given a container port facility to the Chinese. And Potash itself was prevented from acquiring a major European firm in the 1990s when the authorities stepped in.
But that doesn’t make it right, he says. Especially for investors.
“It forces people to consider an extra level of risk — political risk — in their investment decisions. It reduces the potential capital gain an investor can hope to get from shares in such a company.”
Mr. Gardiner doesn’t own shares in Potash. And if he had them, he’d sell them.
Even if the price doesn’t fall, he says, “I’m not sure I want to own shares in a company whose management seems to put its own interests ahead of those of its shareholders, or where the government believes it can step in and tell me I’m not allowed to sell to whomever I choose.”
In fact, the price has gone up since the deal died, pushing 52-week highs at $181.30 (two years ago, it was trading as high as $246). And it yields 0.2 per cent on its $0.39 dividend.
But there are other Canadian resource stocks with dividend yields as good or better than Potash, writes Mr. Gardiner.
What about the banks?
Two that come to mind are Canada’s biggest mining firm, Teck Resources (TSX-TCK.B) and uranium giant Cameco Corp. (TSX-CCO). Teck, which trades at $59.90, yields 1 per cent on its $0.60 dividend. Cameco, trading at $41.94, yields 0.6 per cent on the $0.28 dividend.
Of course, these companies could also face government intervention if a bid is made for them, says the author. “Nor can we assume this protectionism will be limited to the resource sector.”
What if a foreign company took a hankering to one of Canada’s big banks? It is almost certain that the government would block the deal, states Mr. Gardiner.
“That would definitely hamper any future attempts by Canadian banks to buy up big foreign banks. That in turn would hurt growth and profit levels for the banks.”
This could spread to other industries with just a few big names. A classic case would be tech stock Research in Motion (TSX-RIM). “Ruling out a large number of potential buyers (essentially all foreign firms) puts an upper limit on the potential share price, which in turn makes all Canadian companies less attractive as investments,” says the author.
It might even convince the government that a company that is “too important to be sold” is also “too important to fail.” If it began to slide, money might be pumped in to prop it up. He doesn’t like this idea, either.
“The government didn’t bail out Nortel and the world didn’t come to an end,” he states.
It may be that the federal government had little choice in the Potash case, Mr. Gardiner tells his readers in Investor's Digest of Canada. After all, it had Potash management, the Saskatchewan government and the media all ganging up on it.
But it’s a dangerous precedent, he concludes. “As an investor, I want to make my own decisions about when to sell and to whom. I don’t want the government or the media making those decisions for me.”
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