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Defending the decision

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The federal government's decision to block BHP Billiton's (BHP-N) $39-billion US bid for PotashCorp. of Saskatchewan Inc. (POT-N) came as a surprise to BHP's executives, who were convinced the takeover attempt had met the "net benefit" requirements and would be approved, sources close to the Anglo-Australian mining giant told The Globe and Mail.

BHP would not confirm that it was caught off guard, saying only in a statement that it is "disappointed, but continues to believe that the offer is of net benefit to Saskatchewan." Two executives close to the company, however, said that Marius Kloppers, BHP's CEO, and his right-hand man on the bid, Andrew Mackenzie, attached a very low probability to the deal getting turned down.  Kloppers "was shocked and surprised," one of them said.

BHP, the world's biggest mining company, has a month to appeal the decision, which was announced late Wednesday in Ottawa by industry minister Tony Clement, and make any additional commitments, after which the government will reach a final decision. Many analysts expect BHP to abandon the takeover attempt and devote its resources to other investments.

"The market believes there is some likelihood BHP will return with a revised offer," research analyst Michael Bush and his colleagues at National Australia Bank wrote said in a note Thursday. "There is always this chance, though in our view, BHP has twice demonstrated a relatively rapid willingness to walk away from deals facing regulatory opposition."

BHP believed it had made ample concessions and promises to meet Investment Canada's "net benefit" requirement. It promised to make Saskatoon its global potash headquarters and expand the office. It said it would invest in infrastructure in the province. But BHP's desire to eventually pull out of Canpotex, the international potash sales and marketing cartel controlled by PotashCorp, Mosaic and Agrium rankled the Saskatchewan government. It feared a BHP takeover would cost the province billions in lost revenue.

Saskatchewan premier Brad Wall came out forcibly against BHP's proposed takeover. Several other provincial government supported him.

Before Wednesday, the government had turned down only one other foreign takeover attempt in the last 25 years. Some investors were as surprised as BHP about the government's decision. They now question whether Canada is "open for business," as the Conservatives claim it is.

"I think it comes as a shock to the market," John Stephenson, senior vice president at First Asset Investment Management Inc., told Reuters. "I think it goes in the face ... of the direction of the government of Canada for the last number of years, which is we're open for business. Clearly, we're sending a signal that no, we're not."

On the assumption that PotashCorp is gone, analysts are speculating on BHP's next move. The company has about $12.5 billion in cash which it could lever up for a big-bang acquisition or deploy for a share buyback. Some mining executives think BHP will go after copper or oil assets, possibly some of the assets being shed by BP, the British oil company that is raising funds to pay for clean-up and claim settlement costs from its Gulf of Mexico oil well blowout.  Mackenzie, the chief executive of BHP's non-ferrous activities and the man who was directing the PotashCorp bid, spend much of his career at BP.

In a note published last week, Morgan Stanley said that BHP may spend as much as $25 billion US buying back shares in the next two years if its PotashCorp takeover attempt were to fail. Nomura Holdings said in September that a buyback would provide much greater returns for shareholders than a takeover of PotashCorp.

In London trading Thursday morning, BHP shares were up 5.6 percent, to 2,408 pence, giving the company a market value of £127-billion.

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