BHP's Bid Faces Regional Setback

Saskatchewan's government is expected to give the thumbs down to BHP Billiton's proposed $38.6 billion takeover of Potash Corp. of Saskatchewan people familiar with the matter said Tuesday.

Provincial officials are expected to tell the Canadian government—as early as Tuesday—that BHP's proposed deal to buy Saskatchewan's biggest company doesn't benefit the province, these people said. BHP and Saskatchewan had been in negotiations over the deal and the province's support, said two people familiar with the matter. Those discussions have broken down, these people said.

Before the provincial government would consider supporting the deal BHP would have to offer compensation for the 3 billion Canadian dollars （$2.9 billion） in revenue Saskatchewan believes would be lost over the next 10 years as a result of a takeover, a provincial official said. So far, that hasn't happened, the official added. A provincial spokeswoman said Saskatchewan's premier, Brad Wall, will disclose the recommendation on Thursday.

A Saskatchewan rejection wouldn't kill the BHP bid for Potash Corp., the world's largest supplier of the fertilizer potash. The province provides a recommendation to federal Canadian investment regulators, who have final say over a transaction. The deadline for that decision is Nov. 3, and an Industry Canada spokesman declined to comment on it, citing confidentiality provisions.

But experts say the federal government is watching the province's decision very closely. In order to get approval, BHP must show Canadian regulators that a takeover will benefit the country as a whole, and that's much tougher if the province where most of Potash Corp.'s business takes place, and whose finances in large part depend on royalties and tax revenues from the potash business, says it won't benefit the region.

Even if BHP gets Canadian government approval, it must woo Potash shareholders and regulators at a number of governments, including the U.S., to close its unsolicited transaction.

Saskatchewan's decision has been complicated by the unpopularity of BHP's proposed takeover in the province, where a recent poll shows 55% of residents opposed. Mr. Wall and other Canadian politicians also are contending with the perception that previous big mining takeovers, such as the purchase of aluminum and copper giant Falconbridge by Switzerland's Xstrata PLC and of nickel miner Inco by Brazil's Vale SA, haven't proved good for the country.

Talks between Saskatchewan and BHP have focused on the loss of local revenue the province expects if the purchase goes through. Saskatchewan could lose C$2 billion over the next decade, as BHP writes off the costs of developing another local potash mine against Potash Corp. earnings, estimated a report commissioned by Saskatchewan. The provincial government estimated it could lose an additional C$1 billion over the same time period as BHP writes off the interest costs of financing the takeover, a Saskatchewan official said.

BHP has noted that its new mine would account for around C$58.5 billion in royalties and taxes for Saskatchewan during its 50-year life span. But it has pledged to develop that mine regardless of whether it buys Potash Corp.

It also offered to defer its mine-development write-offs, but provincial officials instead demanded more than C$1 billion in upfront tax payments, a person familiar with the matter said. The Saskatchewan official said BHP merely offered a $370 million one-time payment into an infrastructure fund, and that the province never demanded a special tax.

BHP has in recent years pursued a series of failed merger and joint-venture attempts. In recent days, regulators from countries around the world indicated they would not approve a proposed $116 billion iron-ore joint venture between BHP and Rio Tinto. That plan grew out of advanced merger discussions between the two companies, which ultimately faltered amid the global financial crisis.