Canada’s Review of Cnooc-Nexen Deal Sparks Transparency Demands

The Canadian review of Cnooc Ltd. (883)’s $15.1 billion bid for Nexen Inc. (NXY) triggered calls for simpler foreign-investment rules as government-controlled Chinese companies account for a rising share of Asian takeovers.

“What the government should do is sit down and either pick the sectors that are going to stay Canadian or pick the actual companies,” Ian Telfer, chairman of Goldcorp Inc. (G), the world’s second-largest gold miner by market value, said yesterday at the Bloomberg Canada-Asia conference in Vancouver. “Let everyone know what those rules are and then allow foreigners to make bids for other ones.”

Chinese investment in Canada’s resources sector has topped C$16 billion ($16.3 billion) since 2009, even as bilateral cooperation remains muted partly because of “institutional hurdles,” said Chinese Ambassador Zhang Junsai.

“Priority should be given to enhancing transparency, effectiveness and predictability of investment regulation,” Zhang said at a Sept. 5 conference in Calgary hosted by Chinese state-owned PetroChina Co.

With its bid for Calgary-based oil and natural gas producer Nexen, Cnooc will become the largest Asian spender among completed and pending acquisitions in Canada in the past decade, with spending of $20.1 billion. Chinese state-owned companies account for 62 percent of Asian investment in mergers and acquisitions in Canada in the same period, according to figures compiled by Bloomberg.

‘Litmus Test’

Canada’s review of Cnooc’s bid for Nexen is a gauge of the country’s receptiveness to Chinese investment, Howard Balloch, 61, chairman of the Asian division of investment bank Canaccord Financial Inc., said yesterday at the Vancouver conference.

“It’s a litmus test,” said Balloch, a former ambassador to China.

The Nexen and Cnooc approval process “will be seen in China as an indication of how open the Canadian economy is for major energy investments,” Balloch said.

Canaccord advised on the C$2.2 billion takeover of Calgary- based oil and gas producer Daylight Energy Ltd. by China Petroleum & Chemical Corp. (600028) last year.

Chinese companies are moving cautiously to increase their presence in Canada’s energy sector and are considering larger investments after the Daylight acquisition, the “first 100 percent takeover,” Wenran Jiang, 56, an associate professor of political science at the University of Alberta in Edmonton, said at the Bloomberg conference.

‘Open for Business’

“The Chinese are moving forward slowly,” said Jiang, who is also an adviser to the Alberta government on China. “When the prime minister went to China in February actively courting Chinese investment, I think the signal was very clear to the Chinese that Canada is open for business, and some of the upper- scale investments could be accommodated.”

On Aug. 29, Cnooc applied for Canadian approval of the deal, setting in motion a 45-day review period the federal government can extend another 30 days to mid-November.

The government must review foreign takeovers with asset values greater than C$330 million to ensure they provide a “net benefit” to the nation.

The Canadian government may require foreign state-owned companies to make commitments, or “undertakings,” in acquisitions of Canadian companies. State-controlled companies are expected to “operate on a normal commercial basis,” Natural Resources Minister Joe Oliver said at a press conference on Sept. 4. “That’s part of the consideration in determining the net benefit to Canada.”

‘Different Category’

The fact that Cnooc is a state-owned company is among a “range” of elements being considered in Canada’s review of the bid for Nexen, Prime Minister Stephen Harper said at the Vancouver conference. Such ownership makes it “a different category under the act” and different from “genuine private” investments, he said.

Cnooc confirmed in a circular to Nexen shareholders set to vote on the deal on Sept. 20 that it would make Nexen’s Calgary office its headquarters for North and Central America operations, retain Nexen management and employees, maintain spending levels, list on the Toronto Stock Exchange and continue Nexen’s charitable and community involvement.

‘Clear Framework’

Foreign investors are playing a guessing game on what constitutes the net-benefit test, since the federal government rejected BHP Billiton Ltd. (BHP)’s $40 billion hostile takeover bid for Potash Corp. of Saskatchewan Inc. in 2010, said Don Campbell, senior adviser at law firm Davis LLP in Vancouver and co-author of a report on Canada-Asia trade released yesterday by the Asia Pacific Foundation of Canada.

The federal government hasn’t lived up to its commitment after the Potash Corp. rejection to put out a “clear framework” on foreign-investment rules, Campbell said in a Sept. 5 telephone interview from Vladivostok, Russia, ahead of the Asia-Pacific Economic Cooperation meeting this weekend. “Asians have been looking for more clarity in terms of an expressed framework, rather than an indefinite term of what national interest would be,” he said.

Asian acquisitions of Canadian companies and assets, pending and complete, have increased in six of the last 10 years to $33.3 billion so far this year, from $777 million in 2002, figures compiled by Bloomberg show.

To contact the reporters on this story: Rebecca Penty in Vancouver at rpenty@bloomberg.net; Christopher Donville in Vancouver at cjdonville@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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