On Friday August 20, BHP Billiton launched one of the largest ever cross-border hostile bids, a $US40 billion proposed takeover of Canada’s PotashCorp. It is the largest cross-border bid globally since the end of the GFC, and the largest hostile bid since the $US100 billion acquisition of ABN Amro by RBS and others.

BHP started with a more friendly approach, with CEO Marius Kloppers meeting William Doyle, CEO of PotashCorp, on August 12. Kloppers discussed BHP’s proposal and left Doyle with a formal letter, applying the pressure by giving PotashCorp just six days to respond. Five days later, the PotashCorp Board unanimously rejected the unsolicited proposal, having concluded that the offer “grossly undervalued” PotashCorp. The same day, PotashCorp made public details of the confidential approach and the board’s basis for rejecting it. The following Friday — August 20 — BHP formally launched a bid at $US130 per share. By the end of the day the stock price had already reached $US149.67 per share, suggesting that a significantly higher bid was expected.

Hostile bids are rare in the world of M&A. Typically they are only made where the target is of great strategic importance to the bidder, but refuses to negotiate, and where the bidder is confident that there is substantial value upside. Otherwise the risks are perceived as too great. This is particularly true with a large bid such as this, where the target is nearly a quarter the size of BHP. In short, this is a very significant strategic move by BHP.

So what is the strategic appeal for BHP? At the highest level, the acquisition — if successful — would clearly continue BHP’s stated strategy of “adding tier 1 assets and further diversification”. PotashCorp is the world’s largest potash company, with some of the lowest cost production, so it is ideally placed to benefit from long-term increases in demand for fertilisers to support primary food production, driven by the forecast increase in the world population by some three billion to nine billion over the next 30 years.

In addition, PotashCorp’s operations are based in Saskatchewan, making for a neat fit with BHP’s existing substantial greenfield land holdings in that region. The business also fits well with BHP’s track record as a successful operator of long-life, low-cost, high-volume resource deposits.

But could climate change — and, in particular, carbon price risk — also be an issue? BHP is one of the world’s largest miners. In the year just ended, around half of its revenue, and 70 per cent of its profits, came from resources like coal, petroleum and iron ore, that are highly carbon intensive. So the company has a significant negative exposure to risks associated with climate change, whether through direct carbon taxes, the impact of an ETS scheme or longer-term reductions in the use of fossil fuels.

So the acquisition of PotashCorp would materially diversify BHP’s overall business away from carbon-intensive businesses. BHP’s negative exposure to climate change risks would, in part, be offset by a positive exposure to growth in demand for fertiliser linked directly to world population growth.

Few major companies in Australia have engaged in public discussion regarding climate change risks and how they are seeking to address them. Nevertheless, leading companies such as IAG, Mirvac, NAB, News Corp, Telstra, Westpac and Woolworths were signatories to Cambridge University’s Copenhagen Communiqué on Climate Change. This called for “urgent and significant action” by world leaders, including the introduction of a global emissions cap and an emissions reduction pathway.

Behind the scenes, we know that leading companies are beginning to shape corporate strategy to mitigate climate change risks over time, with a growing number of assignments undertaken for Pottinger’s clients, including a significant element related to climate change.

So far, BHP has made no mention of climate change as a strategic driver for its proposed acquisitions of PotashCorp, so we watch with interest to see whether it confirms this aspect of its overall strategy.

Meanwhile, as with any hostile takeover attempt, the outcome of BHP’s bid remains far from certain. The initial offer has been firmly rejected by PotashCorp and a range of potential white knights are known to be considering the situation carefully.

The PotashCorp share price at time of publishing was $US148.55 per share — $US18.55 above the BHP offer, implying ongoing anticipation of an increased bid or a counterbidder. Indeed, a recent Reuters poll of PotashCorp investors suggested that a successful bidder may have to offer around $US162, with some suggesting figures as high as $US190 a share. These figures are still some way short of the company’s all time closing high of $US239.50 per share on June 17, 2008.

Nigel Lake is Joint CEO of corporate advisory firm Pottinger. Pottinger is a signatory to the Copenhagen Communiqué, along with other leading Australian and global companies. This article first appeared on Climate Spectator