In what investors say is a test case for the $15.1 billion bid by Cnooc Ltd. of China for Calgary-based Nexen Inc. (NXY), the Canadian government said it “was not satisfied that the proposed investment is likely to be of net benefit to Canada,” according to an Oct. 19 statement from Industry Minister Christian Paradis. The minister couldn’t comment further.
The rejection is Canada’s second in two years following the 2010 failure of BHP Billiton Ltd. (BHP)’s $40 billion bid for Potash Corp. of Saskatchewan Inc. In both decisions, government officials gave little explanation for their reasoning.
“It could be the death knell of Nexen if the grounds are around reciprocity and state-owned enterprises,” said 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.”
Prime Minister Stephen Harper has touted Canada as an energy superpower and is seeking deeper trade ties with China and India to diversify exports away from the slower-growing U.S. market, which consumes three-quarters of Canada’s exports. Canada’s foreign-takeover law requires acquisitions offer a “net benefit” to the country.
Petronas Appeal
“We’re very surprised by the decision,” Progress Energy Chief Executive Officer Michael Culbert said by phone from Calgary after the decision was released two minutes before a midnight deadline for the review.
Petronas will appeal the ruling and Progress Energy 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.”
Azman Ibrahim, a spokesman for Petronas in Kuala Lumpur, declined to comment when contacted by Bloomberg News.
Canada’s gross domestic product of $1.74 trillion exceeds Malaysia’s annual output of $279 billion, according to data compiled by Bloomberg.
Progress Energy closed at C$21.65 on Oct. 19 in Toronto, down 0.9 percent and below the C$22 a share offer from Petronas. Nexen shares dropped 1.5 percent to $25.40 in New York, 7.6 percent less than the $27.50 offered by Beijing-based Cnooc. It was the biggest drop in three months for Nexen.
‘Welcoming Investment’
Harper said Sept. 6 his government is preparing a “policy framework” for foreign investment to clarify issues raised in takeovers such as Cnooc’s offer for Nexen. A decision on that friendly bid is expected next month. Two calls to the mobile phone of a Cnooc spokeswoman went unanswered.
Under the Investment Canada Act, the government reviews all foreign takeovers valued at more than C$330 million to determine whether they are in the country’s interest.
In weighing whether an acquisition provides a “net benefit,” the government considers several factors, including the impact on economic activity and employment; the degree of participation of Canadians in the acquired business; the impact on productivity and technology development and the effect on competition.
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. Bank of America Merrill Lynch advised Petronas, while Bank of Montreal (BMO) worked with Progress.
‘Shocking’ Decision
“Canada has a long standing reputation for welcoming foreign investment,” Paradis said in the statement. “The government of Canada remains committed to maintaining an open climate for investment.”
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. (CLT) for C$2.86 billion in cash and stock, adding oil and gas production in Canada’s Montney and Duvernay shale.
“The Industry Minister has created a real mess,” said opposition New Democratic Party lawmaker Peter Julian. “I don’t think that anyone can have any confidence in what they will come up with for a decision on Cnooc and Nexen,” he said.
‘Look Tough’
The government may have used Petronas to “look tough” before accepting Cnooc’s bid, while in the past the government has “rubber stamped” other investments, Julian said. Canada has only blocked three foreign takeovers in 27 years.
The Petronas rejection comes a day after the country’s telecommunications regulator blocked a C$3 billion takeover of Astral Media Inc. (ACM/A) by BCE Inc. (BCE), both of Montreal. The regulator said the purchase would give BCE too much clout in the market for specialty television and radio.
Progress Energy agreed in late June to the takeover by Petronas, as Malaysia’s state-owned oil and natural-gas company is known, after rejecting two acquisition proposals from a “multi-national oil company,” according to a July 20 regulatory filing. The board of Progress, a Calgary-based natural gas producer, was in talks with the unidentified company until June 11, about two weeks before the Petronas deal was announced.
Progress then received an unsolicited proposal from a third party, according to a July 27 statement. That prompted Petronas to sweeten its offer to C$22 a share, valuing Progress at C$5.16 billion.
Montney Shale
Petronas closed a deal with Progress in August 2011 to develop Montney assets, paying C$267.5 million up front for a 50 percent interest and committing to spend another C$802.5 million to fund development.
The two companies also worked together to potentially develop a liquefied natural gas export project for the west coast. The terminal that would be located in Prince Rupert, British Columbia, is among more than a handful proposed by oil and gas companies for Canada’s Pacific coast, and could export two billion cubic feet of gas a day by 2018, according to research analysts at Calgary investment bank Peters & Co. Ltd.
Canada should create clearer rules on foreign investment such as whether bids from state-owned enterprises will be treated differently, said Mintz of the University of Calgary.
“I wonder how much Nexen shares are going to drop on Monday,” he said.