Financial firms including Bank of Montreal and Goldman Sachs Group Inc. (GS) risk losing as much as $190 million in advisory fees if the Canadian government rejects C$23 billion ($23.2 billion) of planned takeovers.
Canada turned down a C$5.2 billion bid by Malaysia’s state- owned oil company for Calgary-based Progress Energy Resources Corp. (PRQ) on Oct. 19, raising concern that a $15.1 billion bid for Nexen Inc. (NXY) by Cnooc Ltd. (883) of China may face the same fate. BCE Inc. (BCE)’s C$3 billion takeover of Astral Media Inc. (ACM/A) was rejected by Canada’s broadcast regulator a day earlier.
Investment bankers on both sides of the three deals stand to make as much as $190 million in advisory fees, according to estimates by New York-based Freeman & Co., which specializes in mergers consulting in the financial industry. Freeman uses its own model to estimate bank fees based on deal size, industry and nature of the transaction.
“In the case that the deals fail, adviser banks may get paid a small percentage, depending on negotiation, of the total fees,” Lam Nguyen, a director at Freeman, said yesterday. “In addition, banks advising the target side may split a percentage, depending on negotiation, of the breakup fees if there are breakup fees.”
Progress Energy and Kuala Lumpur-based Petroliam Nasional Bhd., or Petronas, have been speaking with government officials in Ottawa this week on how to resolve the impasse. The government ruled the Petronas purchase doesn’t provide a “net benefit” to Canada.
Progress said estimated fees and costs from its takeover are not expected to exceed C$22.7 million, according to regulatory filings. The amount includes “employee obligations,” fees to Bank of Montreal (BMO)’s BMO Capital Markets as its financial adviser and Bank of Nova Scotia (BNS) for a fairness opinion, as well as legal fees and other costs, according to the July 20 filing.
Paul Deegan, a spokesman for Toronto-based Bank of Montreal, declined to comment. Scotiabank spokesman Joe Konecny didn’t immediately provide a comment.
The potential combined advisory fees for both sides on the Progress-Petronas deal are estimated at $40 million to $50 million, Freeman’s Nguyen said.
Transaction costs for Petronas, which is being advised by Bank of America’s Merrill Lynch unit, haven’t been disclosed. Kerrie McHugh, a bank spokeswoman, declined to comment.
Investment bankers have the most to lose if deals fail, said Frank Turner, co-chairman of the corporate group at Osler, Hoskin & Harcourt LLP law firm.
“They’re the ones whose compensation is typically most tied to a successful outcome,” Turner said in a phone interview from Calgary yesterday. “For the financial advisers on the sell side, the banking fee is usually success loaded.”
BCE, Canada’s largest telecommunications company, agreed in March to buy Montreal-based specialty broadcaster Astral to bolster its French-language programming. The deal was rejected Oct. 18 by the Canadian Radio-television Telecommunications Commission, which said it would have given Montreal-based BCE too much control. While BCE has asked the federal government to intervene to overturn the regulator’s ruling, it will have to pay Astral a C$150 million break fee if the deal fails.
That’s creating huge uncertainty for bankers, lawyers and anyone else doing deals in Canada, said Mirko Bibic, BCE’s chief legal officer.
“I think people are going to be asking themselves what is the investment climate today and what is it going to be tomorrow if the markets and investors don’t have the clarity around what rules exist and if there’s going to be any consistency in their application,” Bibic said in an Oct. 22 phone interview. “That’s a fundamental issue that we really need to look at carefully.”
Astral said transaction costs were estimated at C$14.7 million, including C$7.1 million in fees to financial advisers. Royal Bank of Canada (RY) and Montreal-based National Bank of Canada (NA) advised Astral.
Bank of Montreal and Canadian Imperial Bank of Commerce advised BCE. CIBC spokesman Tom Wallis and National Bank spokeswoman Joan Beauchamp declined to comment. Mark Langton, a BCE spokesman, declined to say how much BCE’s advisers stand to lose from a failed deal.
Freeman’s Nguyen estimates potential total advisory fees for both sides on the Astral-BCE takeover are $30 million to $40 million.
Bankers will not entirely lose out if a deal fails. “There’s usually a work fee, but the majority of the fee is on a contingent basis on the success or completion of the deal,” Eric Castonguay, a managing director at PwC in Toronto, said in a phone interview yesterday.
Work fees are usually non-refundable and are typically fixed monthly to help cover costs for banks working on the transaction, Castonguay said. Bankers may also get part of any break fees if a deal doesn’t go through, he said.
Cnooc’s takeover of Nexen also faces a government review under the Investment Canada Act. The act requires the government to consider foreign takeovers valued at more than C$330 million to determine whether they are in the country’s interest and provide a “net benefit” to Canada.
Nexen estimates fees, costs and expenses tied to the Cnooc takeover to be about C$81.7 million. That includes fees to its financial advisers, New York-based Goldman Sachs, and Royal Bank, the country’s biggest bank. Royal Bank spokeswoman Gillian McArdle and Michael DuVally, a spokesman at Goldman Sachs, declined to comment.
The potential advisory fees for both sides in the Nexen- Cnooc deal are estimated at $80 million to $100 million, Nguyen said.
Cnooc, which is being advised by Bank of Montreal and Citigroup Inc., said yesterday it’s assuming the Nexen purchase will get approved. The Chinese oil explorer expects the deal to be done by year-end and is prepared for all possible outcomes, Chief Financial Officer Zhong Hua said in a conference call.