Letter of Credit would solve hollow "Net Benefit" rule

How timely this is, Potash (POT:TSX) watchers (see prior post “Is there a message for Potash in NB Power vote?” Sept 29-10)? Just three years after acquiring Hamilton’s Stelco steel mill, U.S. Steel has announced (hat tip Globe and Mail) that it is temporarily shutting down the blast furnace “indefinitely”.

“Temporarily” spins so much better than “indefinitely”. But when you combine both words, it sounds ominous.

No layoffs are reportedly pending, although staff ranks have been cut by 800 (about half) following the 2007 takeover. With no blast furnace, no steel will be moving through Hamilton harbour. Everyone involved in the supply chain will suffer, even if the Stelco staff – who are currently working without a contract – are paid to mind other parts of the historic plant. Jobs will be lost.

It seems this is par for the course as far as U.S. Steel is concerned, and Industry Minister Tony Clement is already on the case. As the Federal government’s existing lawsuit against U.S. Steel works its way through Federal Court, one has a clear picture of the hollow nature of the Canada Investment Act. Foreign conglomerates can provide undertakings, in secret, and then blame economic downturns for why they can’t follow the very undertakings that were required for the takeover to proceed.

Since financial penalties are all that could come to pass if the Federal government were to win the day in court, the Stelco case is a stark reminder for the public servants analyzing the proposed BHP/Potash deal.

It’s one thing to argue a “Net Benefit” to Canada, but its something else to have it actually enforce it. Effectively.

Let’s just improve the Act this Fall; amendments might sail through Parliament, and it would force all parties to show where they stand on the topic of foreign takeovers. My new rule would require Bidders to post a letter of credit at closing, representing, say, 20% of the deal price, which the Feds can cash if the Net Benefit test is ultimately betrayed. If BHP is serious about their “net benefit” promises, then posting a $10 billion L/C shouldn’t stand in the way of proceeding. They could secure it with the Saskatchewan Potash mine itself, if they didn’t have the cash to back the L/C.

That would make people think twice about the promises they’re making in the heat of the moment. And politicians wouldn’t feel neutered when they go to enforce the laws of the land, only to find that it’s “heads they win, tails we lose”.

MRM