Nexen Sale Said to Turn on China Backing Canada Deals

Canada plans to ask China to allow several transactions in exchange for approval of state-owned Cnooc Ltd. (883)’s $15.1 billion bid for Nexen Inc. (NXY), said a person with knowledge of the matter.

This list of deals by Canadian companies in China underscores that reciprocity will be part of foreign investment policies Prime Minister Stephen Harper’s government will release soon, said the person, who spoke on the condition of anonymity because the discussions aren’t public. He declined to say what transactions were on the list. Another person with knowledge of the matter said Canada is seeking concessions from China before agreeing to the Nexen deal.

Harper urged Chinese Premier Wen Jiabao to permit proposed investments by Toronto-based Manulife Financial (MFC) Corp. and Bank of Nova Scotia (BNS) on a visit to Beijing in February. Canada rejected a C$5.2 billion ($5.23 billion) bid by Petroliam Nasional Bhd., Malaysia’s state-owned oil company, for Progress Energy (PRQ) Resources Corp. on Oct. 19. The rejection sent shares of Canadian oil and gas companies tumbling yesterday, including Calgary-based Nexen.

Harper said yesterday his government will soon release a “clear and new policy framework” governing foreign investment in Canada, which holds the world’s third-largest oil reserves.

“Our view is that foreign investment generally speaking is of benefit to the Canadian economy,” the prime minister told reporters in Ottawa. “At the same time, we are committed to the Investment Canada Act, which requires us to evaluate whether individual transactions are in the net benefit of Canada, and this government has in certain cases decided that’s not the case.”

Scotiabank China

Canadian companies with pending investments in China include Bank of Nova Scotia, the country’s third-biggest bank, and Manulife Financial, the biggest insurer. Laurie Lupton, a spokeswoman for Manulife, didn’t have an immediate comment.

Canadian insurance companies in China are at a disadvantage compared with local competitors when it comes to regulatory requirements, in part because they can’t apply to open up more than one branch at a time, Anthony Zobl, economist and senior policy adviser at the Ottawa-based Canadian Life & Health Insurance Association Inc. said in a Sept. 4 interview.

Rick Waugh, chief executive of Scotiabank, said in an interview with Bloomberg News the lender hasn’t asked for reciprocity and understands the approval process can be an “extended process.”

‘Heavy Lifting’

“There are reasons and exceptional circumstances, but I think it’s for the private sector to do our own heavy lifting,” Waugh said in the interview.

While Canada’s financial system has been rated the world’s soundest by the World Economic Forum for five straight years, its banks and insurers have had difficulty with Chinese ownership limits and slow regulatory approvals for foreign financial institutions, according to a report by the Canadian Chamber of Commerce in January.

Speaking to lawmakers in Ottawa today, Harper said Chinese companies have been able to invest easily in Canada, while his country’s investments in China have been more difficult.

“Canada has had a situation with the People’s Republic of China for some years where their investment has been virtually unrestricted here and we have had more difficulty with our investment there,” Harper said in response to a question about a foreign investment protection agreement between the two countries.

Net Benefit

A decision on the Cnooc bid for Nexen will be made based on the six criteria for “net benefit” laid out in the Investment Canada Act and the government’s guidelines on investments by state-owned enterprises, said Margaux Stastny, a spokeswoman for Industry Minister Christian Paradis, the lawmaker responsible for reviewing foreign investments.

Takeovers of Canadian energy firms by state-owned enterprises are testing Harper’s pledge to sell more of his nation’s oil and gas to fast-growing Asian countries such as China, whose economy is more than four times larger than Canada’s. Canada needs foreign investment to finance the C$220 billion required to develop its oil sands projects. China’s economy is forecast to grow 7.7 percent this year, compared with 2 percent in Canada, based on a Bloomberg survey of economists.

“We do need greater clarity and certainly some consistency if we’re going to go running around the world telling everybody we’re open for business,” said John Stephenson, who helps manage C$2.7 billion at First Asset Management Inc. in Toronto. “We do need to develop these resources and that needs a lot of capital we just don’t have domestically.”

Complicate Deals

Linking transactions in Canada to approvals by other governments may complicate deals such as Cnooc’s bid for Nexen, said Gordon Houlden, a former Canadian diplomat in China.

“If the procedure is already a bit of a black box, it becomes even more complex,” said Houlden, director of the China Institute at the University of Alberta in Edmonton.

The regulatory process for the Nexen acquisition is proceeding normally, said Peter Hunt, a Calgary-based spokesman for Cnooc, China’s largest offshore oil producer. Patti Lewis, a spokeswoman for Nexen, didn’t immediately respond to a voicemail and e-mail seeking comment yesterday.

“It’s ok that the government calls a timeout; we need to look at how we treat those sovereign oil companies,” said Rick George, former chief executive officer of Suncor Energy Inc. (SU), Canada’s largest oil company, in Calgary yesterday. “At the same time, you don’t want to turn off the tap on foreign investment. What I’m hopeful for is that the government comes out with a clear set of guidelines.”

Planned Meetings

Progress Energy pared declines yesterday after executives at Petronas and Progress said they planned to meet Canadian government officials to “better understand” Canada’s objections in a bid to win approval for the deal. Petronas has 30 days to appeal the ruling or make additional concessions.

Progress CEO Michael Culbert said he’s “hoping” the Canadian government will see a net benefit to the sale of his company to Malaysia’s state oil firm.

“What we’re trying to do is really move forward,” Culbert said in a phone interview yesterday from the Calgary airport before departing for Ottawa.

Nexen fell 1.9 percent to C$23.59 in Toronto after dropping 4.4 percent yesterday. It was down 1.8 percent at $23.71 in New York, about 14 percent below Cnooc’s $27.50 offer price. Progress Energy fell 3.4 percent to C$18.98 after falling 9.3 percent yesterday, its biggest drop since March 2009.

Beijing-based Cnooc has already made several commitments to Canada to win support for the Nexen sale. These include listing its shares on the Toronto Stock Exchange (X), establishing Calgary as its base for North and Central America and maintaining Nexen’s employment levels and capital spending program.

“All those things make the Canadian government more likely to approve the CNOOC deal,” said University of Alberta professor Wenran Jiang.

To contact the reporters on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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