The corner-office door is closing for Mr. Kloppers

October 28, 2010

Born in South Africa and based in Australia - two rugby-obsessed countries - BHP Billiton CEO Marius Kloppers may not be familiar with the American baseball term, "Three strikes - you're out."

Mr. Kloppers already has two strikes against him; Potash Corp. could be his third. The hostile takeover attempt of the Saskatchewan fertilizer giant is not going well for BHP, even though no rival bid is in sight. If Investment Canada or an inadequate premium force BHP into a humiliating retreat, the board of directors will certainly direct a few impolite questions to him, one being: So, smartass, are you capable of doing a deal?

Mr. Kloppers, a former McKinsey consultant, joined BHP in 2003 and became CEO in 2007. At the time, BHP was on top of the world, yet the new boy had a transformational deal in mind. He would buy the industry's second-largest player, Rio Tinto, a deal that would make the enlarged BHP a top player in virtually every ferrous and non-ferrous commodity.

BHP's all-share offer for Rio went out the door in the autumn of 2007 and would have valued the merged companies at $360-billion (U.S.) - more than Microsoft. Rio rejected the offer. BHP went hostile, then dropped the whole thing a year later, when the financial crisis was at its peak.

In retrospect, Mr. Kloppers' decision to walk was huge mistake. At the time, BHP was the strongest mining company on the planet, a cash flow juggernaut that lost relatively little of its value during the crisis and, heroically, kept its dividend intact. If any company had ample ability to buy mining assets on the cheap, it was BHP. Since their crisis lows, mining company values have climbed several hundred per cent. Rio itself has climbed fourfold since the 2008 trough. Buying back then would have been money for nothing, mines for free.

Abandoning Rio was the first strike. The second came earlier this month, when the iron ore joint venture in Western Australia between BHP and Rio finally collapsed, the victim of the two companies' inability to convince global regulators that the tie-up would not harm competition. The end of the venture, which had been valued at $58-billion, marks one of the biggest corporate failures in history.

Still, and thanks to a rising BHP share price, Mr. Kloppers was given board and investor support to go after a company - Potash Corp. - that seemed an easy target. There were no competition problems, because BHP was not a potash miner. There were no financial health problems, because BHP could afford to offer cash. BHP had a decent reputation in Canada, where it played a big role in launching the country's diamond industry, and was set to pump a small fortune into its maiden potash project, called Jansen, in Saskatchewan. As a bonus, its survey of the M&A landscape suggested a rival bid would be unlikely.

The $130-a-share bid, worth $38.6-billion, was delivered in mid-August and it's been downhill for Mr. Kloppers and his right-hand man on the bid, Andrew Mackenzie, ever since.

What went wrong? Bad timing was the first mistake. Rumours surfaced almost a year ago that BHP would lunge after Potash Corp. By the time it got around to making the offer, the grain and fertilizer markets were rising quickly, taking potash prices up with them. Analysts expect potash prices to keep rising, which made it easy for Potash Corp. boss Bill Doyle to reject BHP's offer as "grossly inadequate."

Potash Corp.'s share price, now about $146, rose above the bid price not so much because investors expect a higher offer from BHP (they do), but because the fertilizer markets have come roaring back. Some analysts think BHP will have to bump the bid to as high as $170 a share. At that price, it might be just as cheap to turn the fledging Jansen project into a going concern.

The second mistake was worse. BHP massively underestimated the political resistance to foreign ownership of one of Canada's last great mining companies. Saskatchewan Premier Brad Wall is campaigning against the deal. He is worried about lost tax and royalty payments under BHP control, a scenario BHP itself effectively raised when it said it would happily dismantle the Canpotex potash marketing cartel. BHP is trying to win kudos by promising to retain Potash Corp.'s head office in Saskatoon, among other goodies. But the Canadian company already has these things, so what's the point?

Mr. Wall is lobbying Ottawa to support his anti-BHP stance; Investment Canada, the foreign investment review agency, may listen. Already CLSA, a brokerage firm affiliated with Crédit Agricole Securities, is declaring the takeover attempt "very close to dead."

If that's the case, Mr. Kloppers' career might be very close to dead, too.

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