Canada’s rejection of a bid by Malaysia’s state oil company for Progress Energy Resources Corp. casts doubt on Beijing-based Cnooc Ltd.’s $15.1-billion takeover of Nexen Inc. and raises questions about the openness of Prime Minister Stephen Harper’s government to foreign investment.
Industry Minister Christian Paradis said in a statement he wasn’t satisfied the C$5.2 billion ($5.23 billion) acquisition by Petroliam Nasional Bhd, known as Petronas, is in Canada’s interest. Harper’s Conservative government reviewed the bid under its foreign takeover law, which says transactions must be judged to have a “net benefit” to Canada.
“The implication now is that the government does not want a foreign national oil company to acquire Canadian companies,” said Eric Nuttall, a portfolio manager with Sprott Asset Management LP in Toronto. “For a Conservative government to make this decision is mind-boggling. The amount of capital that that decision wipes out is stunning.”
The Petronas rejection marks the second time in two years Harper’s administration has denied a multi-billion dollar overseas bid. The government blocked BHP Billiton Ltd.’s $40 billion hostile offer for Potash Corp. of Saskatchewan Inc. in 2010 after the province’s premier, Brad Wall, opposed it.
Canadian Finance Minister Jim Flaherty said Petronas still has the opportunity to negotiate with government officials to salvage its rejected bid for Progress.
“The proposals have to be correct, and certain conditions from time to time will be proposed by the minister of industry and it’s his responsibility, and I think that’s what’s going on in this particular application.” Flaherty told CTV.
The ruling undermines Harper’s message that Canada welcomes foreign investment, investors said. Harper has called it a “national priority” to sell more natural resources to Asia, to boost growth in the world’s 11th-largest economy by diversifying exports away from the slower-growing U.S. market, which consumes three-quarters of Canada’s shipments abroad.
Canada’s gross domestic product of $1.74 trillion exceeds Malaysia’s annual output of $279 billion, according to data compiled by Bloomberg.
Current projects in Canada’s oil-sands, part of the third- largest oil deposits in the world, require investments of C$220 billion, the Canadian Energy Research Institute said in a March report.
Canada needs an “immense” amount of capital to develop its oil and gas, Natural Resources Minister Joe Oliver said on Sept. 4. “We don’t have enough capital in this country so we are welcoming capital from outside,” he said after a speech in Toronto.
The Petronas decision will probably prompt a selloff in shares of Progress and Nexen, as well as companies such as Encana Corp. and Talisman Energy Inc. that have been perceived as takeover targets, said Sachin Shah, a merger arbitrage strategist at Tullett Prebon Americas Corp. in New York.
“This is going to put a pall on basically the whole energy sector, and maybe even materials -- gold, copper, silver,” Shah said in a telephone interview. “If he wants to look for net benefit, watch what happens Monday. Billions of dollars are going to be lost.”
Progress shares closed at C$21.65 on Friday in Toronto, down 0.9 percent and below the C$22 a share offer from Petronas. The company’s stock is up 64 percent this year, while the S&P/TSX Energy Sector index is little changed over that period. Nexen shares dropped 1.5 percent to $25.40 in New York, 7.6 percent less than the $27.50 offered by Cnooc. It was the biggest drop in three months for Nexen, paring the year-to-date gain to 55 percent.
Investors should buy Progress shares if they fall as far as C$17, said Catharine Sterritt, a Toronto-based risk arbitrage strategist at Bank of Nova Scotia, in an e-mailed report.
Patti Lewis, a spokeswoman for Nexen, and Peter Hunt, a spokesman for Cnooc, did not immediately return e-mails seeking comment.
Petronas has 30 days to appeal or provide additional concessions, at which point the government will make a final decision, according to the statement by Paradis. The company can be given more time if both parties agree.
“We’re very surprised by the decision,” Progress Chief Executive Officer Michael Culbert said by phone from Calgary after the decision was released minutes before the midnight review deadline on Oct. 19.
Petronas will appeal the ruling and Progress will “help where we can help,” Culbert said. “We believe that the transaction is of net benefit to Canada. Progress will continue to work with the federal government to prove that point.”
Still, some investors say it’s hard to decipher the government’s intentions without any explanation for the rejection. Investment Canada Act rules prevent Paradis from commenting, aside from saying the deal didn’t provide a net benefit.
The Globe and Mail newspaper reported Oct. 20 that Petronas refused a last-minute request by the government to set a new deadline for the review, citing three people familiar with the discussions. According to the report, the government wanted more time to consider concessions from Petronas that were needed to meet the net benefit test.
Azman Ibrahim, a spokesman for Petronas in Kuala Lumpur, declined to comment when contacted by Bloomberg News.
“Canada has a long standing reputation for welcoming foreign investment,” Paradis said in his statement. “The government of Canada remains committed to maintaining an open climate for investment.”
The lack of transparency of the review process allows politicians to treat controversial takeovers like a “pinata,” said Perrin Beatty, president of the Canadian Chamber of Commerce.
“What we have today is completely a black box,” he said in an interview Friday. Until the government provides more clarity, every large deal is “subject to political debate.”
The government has been seeking more ambitious commitments from companies looking for approval of foreign takeovers, said Dany Assaf, a partner with Toronto-based law firm Torys LLP.
“When I first started practice in this area in the mid-90s, Investment Canada regulatory approval was really just a matter of process,” Assaf said in an Oct. 11 interview. “Today, the negotiations are more intense. Businesses are going to have to offer more.”
Under the Investment Canada Act, the government reviews foreign takeovers valued at more than C$330 million.
The government considers six main factors in determining whether an acquisition provides a “net benefit,” according to Industry Canada. The criteria are the impact on economic measures such as employment; the degree of participation of Canadians in the business; the impact on productivity and technology development; the effect on competition; the compatibility of the investment with “national industrial, economic and cultural policies”; and the contribution to Canada’s ability to compete globally.
Canada issued additional guidelines in 2007 for investments by state-owned enterprises, saying such companies are expected to run the acquired business on a “commercial basis.” State- owned firms may be required to appoint Canadian managers or directors or list shares of the acquiring company or Canadian business on a local stock exchange, Industry Canada says.
In announcing its offer July 23, state-owned Cnooc pledged to follow through on Nexen’s capital spending plans and keep the company’s employment level and management. It also promised to make Calgary the head office of North American operations, and list its common shares on the Toronto Stock Exchange.
Prior to the BHP rejection, Canada blocked the acquisition of the aerospace division of MacDonald Dettwiler & Associates Ltd. by a U.S. company in 2008. Before then, the country hadn’t rejected any foreign takeovers since the Investment Canada Act took effect in 1985.
“After BHP’s purchase of Potash was rejected, this will give the impression Canada isn’t open for business,” Geof Marshall, who manages $6.3 billion of fixed-income assets at CI Investments Inc. in Toronto, said in an e-mail. “We’re entering a new era of capital controls as part of the next phase of global deleveraging and this will see governments even more protective of national business interests.”
Ed Fast, Canada’s international trade minister, said the Progress rejection is not a precedent for other rulings. “This decision does not set a precedent because every single application is considered on its own merits,” Fast told reporters in Vancouver.
The bid by Beijing-based Cnooc for Nexen of Calgary has raised questions about the degree of control state-owned enterprises should be allowed to have. Fifty-eight percent of Canadians oppose the Nexen takeover, according to a poll by Angus Reid Public Opinion released Oct. 16.
One Conservative lawmaker, Rob Anders of Calgary, said last month some of his colleagues are concerned about the sale of Canadian assets to Chinese state-owned businesses.
“I know there are people inside my caucus who have concerns about asset sales to China,” Anders told reporters. “I’m never in favor of the whole state-ownership thing, especially in the case of a non-benevolent country like China.”
Opposition lawmakers from the New Democratic Party have called for the government to block the Nexen bid, citing among their concerns Cnooc’s environmental practices.
“I would say the Petronas decision certainly makes the case of betting on Nexen weaker than it was before this announcement,” said Stephen Jarislowsky, CEO of Montreal-based Jarislowsky Fraser Ltd., Nexen’s second-largest shareholder according to data compiled by Bloomberg. “We believe that it should go through. Whether it does go through, we don’t know.”
Harper said Sept. 6 he’s aware Canadians are wary of Chinese investment, and said his government is preparing a “policy framework” to address issues raised in acquisitions such as the Nexen deal. The government said Oct. 11 it had extended its review of the Nexen takeover by a month.
“It could be the death knell of Nexen if the grounds are around reciprocity and state-owned enterprises,” Jack Mintz, director of the University of Calgary’s School of Public Policy. Canada’s foreign-investment rules remain vague and “the government needs to send a clear signal on what’s on and what’s off in terms of foreign investment.”
“It is unfortunate that this transaction was not approved as anticipated,” said Linda Sims, a spokeswoman for Canada Pension Plan Investment Board, which holds 16 percent of Calgary-based Progress’s shares, according to data compiled by Bloomberg. “CPPIB continues to believe that there is substantial intrinsic value in Progress Energy and that this proposed acquisition is of long-term benefit.”
The Petronas decision is “shocking” said Gordon Currie, an analyst at Salman Partners in Calgary. “I don’t yet know what the government’s reasoning is, but this has implications for the Nexen and Celtic deals, and may cause a ’chill’ on future transactions with foreign investors.”
Exxon Mobil Corp., the world’s largest energy company by market value, said Oct. 17 it had agreed to buy Celtic Exploration Ltd. for C$2.86 billion in cash and stock, adding oil and gas production in Canada’s Montney and Duvernay shale.
Most people in Canada’s oil and natural gas sector thought the government would approve the bid by Petronas, said Mike Tims, chairman of Peters & Co., a Calgary investment bank.
The deal was viewed as positive because Progress is a small company that couldn’t afford to extract resources quickly. A liquefied natural gas terminal proposed by Petronas for Canada’s west coast would create new gas markets, he said.
“We’ll see a bunch of stocks pull back because we’ve been introduced, for a period of time, to new uncertainty until we see what the policies actually end up being,” Tims said.
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