BUCCANEER C APITALISM

The arguments over the sale of Potash Corporation, the world’s largest source of fertilizer, seem to be all about how much good will come with an influx of new capital to this country. Beyond the cold-blooded reality of what we still (in spite of recent cataclysmic events) call Free Market Economy, there are other more important issues. Those issues are only partly nationalistic, only partly about not selling out another Canadian resource; only partly about more and more foreign ownership; only partly about how we have been taken for a ride by promises from foreign companies – like U.S. Steel promising to keep Stelco up and running. Oh yeah! I know I know - Potash is already run by an American from an office in Chicago. That has happened and you can’t put the toothpaste back in the tube.

The issues are about the entire myth of how T & A is always good. It is what the shameless acquirers refer to as “win-win.” They are missing the fatal flaw. That flaw was nearly, and may still be, fatal to the world of so-called capital growth.

First of all, I question whether or not it is capital growth. At the heart of my anxiety is the $38.6 billion (U.S.) that the Australian mining giant is ready to pay. I haven’t seen a Potash Corporation balance sheet, but does it show an enormous overhang of punishing debt? If the deal goes through – the new company will have just that. One of the so-called “principles” of Acquisition and Takeover is that very often it is a “reverse” takeover. A smaller company, using borrowed funds, will take over a larger company, and use that company’s resources to pay down the debt. In other words, the takeover is paying for itself. It really does work, until the debt payment comes due. If you look closely at major companies that have gone bankrupt, or have asked for protection from creditors, it is because they have encumbered their company with too much debt. Two circumstances make that debt unserviceable:” the inability of the acquired company to generate enough profit to pay down the debt, and (this is the serious one) the debt markets suddenly turn sour and creditors start calling in their loans, or the loans, bonds, debentures – whatever, come due and there’s no money to pay.

However you cut it, the situation is good for the Australian company. What do they have to lose? The worst scenario (all too often the real one) is that they can’t service their enormous debt and the market has gone so cold that they can’t float a common stock issue to raise capital, much less issue new (and probably junk ) bonds to pay the debt. It doesn’t get better, like the poor sucker who keeps making the minimum payment on a credit card debt, the interest piles up.

This my friends, is called “capital growth.” It is not. It is, if you remember the Tom Wolfe book and then movie “Barbarian at the Gate” a highly leverage takeover leading to capital destruction not capital growth. You don’t add value to the economy by increasing its obligations.

Potash is a good product. The world needs it. Just ask yourself this: “If I owned something and someone came along and offered me a preposterously high price for it, would I sell, or would I ask myself: what does this guy know that I don’t?”

I offer a more sinister possibility. (This one is for the “conspiracy theory” junkies who enjoy looking for the hidden truth.) If you control the world’s largest supply of potash. what is to stop you from using this near monopoly to reduce supply and maneuver the marketplace into paying through the nose? My favourite is the huge nickel deposit at Voisey Bay in Labrador. Inco, the once-proud Canadian company, paid several billion for it. I spoke to the Federal Minister responsible and suggested that Inco was buying the mine to keep it out of production. He scoffed. Now, almost fifteen years later, how much nickel is being mined in Labrador?

Think about it.