Hedge Funds Led by Paulson Bet on Nexen Offer: Corporate Canada
Paulson & Co., the hedge fund run by billionaire John Paulson, and mutual fund firm Franklin Resources Inc. (BEN) are among foreign investors betting Canada will approve Cnooc Ltd. (883)’s $15.1 billion acquisition of Nexen Inc. (NXY)
Paulson & Co., Franklin, Arrowgrass Capital Partners LLP, Mason Capital Management LLC and Eton Park Capital Management LP, all based outside Canada, bought shares in Calgary-based Nexen in the third quarter, regulatory filings show. Ontario Teachers’ Pension Plan tripled its stake while T. Rowe Price Group Inc. and Jarislowsky Fraser Ltd. sold.
The purchases were made before Canada rejected a C$5.2 billion ($5.2 billion) bid by Petroliam Nasional Bhd. for Progress Energy Resources Corp. (PRQ) on Oct. 19, which cast doubt on the Nexen deal. Nexen shares have risen since, with the spread between China-owned Cnooc’s $27.50 offer and shares of the Calgary-based energy company the lowest since Oct. 18 as of Nov. 16, suggesting investors are growing more optimistic the deal will be completed, according to data compiled by Bloomberg.
“Most people believe that Nexen will get completed,” said Sachin Shah, a merger-arbitrage strategist with Tullett Prebon Americas Corp. in Jersey City, New Jersey.
Hedge funds that bet on events such as mergers will probably buy more Nexen stock once Hertz Global Holdings Inc. (HTZ)’s $2.6 billion purchase of Dollar Thrifty Automotive Group Inc. (DTG) closes and cash is freed up, Shah said last week in a telephone interview. U.S. antitrust regulators approved the acquisition on Nov. 16.
“Nexen will jump,” Shah said. “The event guys are putting money into Nexen but they can’t absorb all of Nexen because of the size of the market cap. They don’t have enough liquidity.”
Nexen fell 0.7 percent to $25.42 at the close in New York today, 7.6 percent below the offer price and up 60 percent this year.
The Canadian government is reviewing the sale of Nexen under the country’s foreign-takeover law. Canada extended its review of the deal for a second time on Nov. 3, setting the deadline to Dec. 10.
“We feel there’s a good chance it gets approved,” said Phil Skolnick, an analyst in New York with Canaccord Genuity Corp. “It’s not really a household name in Canada. Most of its production’s outside Canada, although it has a big resource base in Canada. In order to get that resource base developed so it can start generating tax revenue in Canada and Alberta, you need somebody with deeper pockets.”
Bloomberg reported on Nov. 16 Kuala Lumpur, Malaysia-based Petronas submitted a revised bid for the Calgary firm, according to a person with knowledge of the matter. That helped send the stock up 2.3 percent to C$20.43 in Toronto.
In blocking the Petronas offer for Progress Energy, Industry Minister Christian Paradis said the deal hadn’t satisfied Canada’s requirement that foreign takeovers represent a “net benefit” to the nation. Paradis gave Petronas 30 days to appeal or make concessions, resetting the deadline to Nov. 18 or Nov. 19, depending on how the period is counted.
Investors have overcome the “initial shock” of the Progress decision and now believe the government wanted more time to develop new foreign-investment guidelines that Prime Minister Stephen Harper has promised, Skolnick said in a phone interview.
Paulson & Co. acquired 6.05 million Nexen shares during the quarter, a stake valued at $153 million, according to a filing with regulators that show the fund’s holdings as of Sept. 30.
Spokespeople for Paulson & Co., Arrowgrass Capital, Mason Capital and Eton Park declined to comment. Franklin Resources, manager of the Franklin and Templeton mutual funds, bought 22.5 million shares in the quarter. Matthew Walsh, a spokesman for the San Mateo, California-based company declined to comment.
The majority of Nexen’s shareholders, or 53.3 percent, are based in the U.S., and 34.7 percent are in Canada, according to Bloomberg data.
T. Rowe Price, the Baltimore-based asset manager that has posted a profit every quarter since going public in 1986, sold 16.1 million Nexen shares in the third quarter, reducing its stake by 64 percent, according to Bloomberg data.
“Many deals fall apart so I thought, ‘Why not take some risk off the table and sell a portion of the holdings,’’ Timothy Parker, portfolio manager of the $4.4 billion T. Rowe Price New Era Fund, said in a telephone interview.
‘‘I can’t guarantee it, but my personal opinion is the deal is likely to go through,’’ Parker said. ‘‘The Canadian government wants to be seen as open to deals and business. It is not in their interest to say no.’’
Denis Durand, a senior partner at Jarislowsky Fraser, which sold 2.7 million shares, said the Montreal-based money manager reduced its Nexen stake before Cnooc’s bid for Nexen was made public on July 23. The company reinvested proceeds in other Canadian energy producers, which he didn’t identify.
While Harper has called it a national priority to sell more of his country’s energy resources to Asia, he has said the Nexen sale raises ‘‘difficult policy questions.”
The government’s hesitation has created the most uncertainty about Canada’s stance on foreign investment in “some considerable time,” said Tony Baldanza, a partner with expertise in foreign-investment law at Fasken Martineau DuMoulin LLP, a Toronto-based law firm. “There are many, many deals parked waiting for these outcomes,” he said in a phone interview.
Both Cnooc and Petronas will likely secure approval for their takeovers, Baldanza said. The government will probably also release guidelines designed to discourage state-owned enterprises from trying to acquire Canada’s biggest energy producers, without imposing quantitative ownership limits on foreign investors.
“I don’t think the government wants to see a flood of SOE deals,” he said. “It’s going to want to manage this.”
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