Nexen Gives Top Return on Bet Canada Clears Bid: Real M&A

Nexen Gives Top Return on Bet Canada Clears China Bid
Bank of Nova Scotia says Cnooc is likely to win approval because of its commitment to keep Nexen employees, a Calgary headquarters and a listing on the Toronto Stock Exchange. Photographer: Dave Olecko/Bloomberg

Nexen Inc., the target of the largest overseas bid from a Chinese company, is offering traders the chance to make the most money on any North American deal by betting the $15.1 billion takeover will get Canadian approval.

Cnooc Ltd., China’s biggest offshore oil and gas explorer, agreed to pay $27.50 a share for Calgary-based Nexen in a deal that will need to withstand the government’s review under its foreign-takeover law. The 66 percent premium to its 20-day stock average is more than double the industry average, and less than a third of Nexen’s production comes from Canada, according to data compiled by Bloomberg. That signals Nexen won’t be the next Potash Corp. of Saskatchewan Inc., one of only two Canadian deals to be blocked in 27 years, said WallachBeth Capital LLC.

While the $40 billion hostile bid for Potash was rejected in 2010 for not providing a “net benefit” to the country, Bank of Nova Scotia says Cnooc is likely to win approval because of its commitment to keep Nexen employees, a Calgary headquarters and a listing on the Toronto Stock Exchange. With Nexen closing at $25.90 yesterday, traders can make a 6.2 percent return wagering the deal will close, the biggest potential gain among North American takeovers greater than $1 billion, the data show.

“The spread is very attractive,” Keith Moore, an event-driven strategist at MKM Partners LLC in Stamford, Connecticut, said in a telephone interview. “The spread reflects people’s fears because of the political risk, but I think ultimately they will get Canadian approvals. Cnooc has done their homework, and they showed the deal’s benefit to Canada right up front.”

‘Net Benefit’

Today, Nexen rose 0.4 percent to $26, the highest closing price since May 2011.

Industry Minister Christian Paradis said in an e-mailed statement that the deal is subject to review by the federal government and that he will need to affirm that it is a “net benefit” to the country. The Investment Canada Act specifies that the minister must consider six factors, including the effects on employment, competition within an industry, the degree of participation by Canadians in the business and Canada’s ability to compete globally.

The nation’s Competition Bureau also said it will study the transaction, and the largest opposition party, the New Democrats, called for a “thorough public review.”

The acquisition will provide “significant long-term benefits to Canada,” Cnooc said in a statement yesterday, adding that it will enhance Nexen’s planned capital expenditures in Canada and elsewhere and build on the company’s existing charitable programs.

“Put simply, we are in Canada to invest,” Cnooc Chief Executive Officer Li Fanrong said on a conference call yesterday.

‘Negative Noise’

Cnooc said that “initial phone calls” were made to government officials in Canada.

“They went through a lot of trouble to list these arrangements and get ahead of the political flak,” Peter Lobravico, New York-based vice president of merger arbitrage trading and sales at Wall Street Access Corp., said in a phone interview. “You can be sure there’s going to be some negative noise on this one since the Potash deal was blocked.”

Davis Sheremata, a spokesman for Nexen, declined to comment beyond yesterday’s conference call. Michelle Zhang, Beijing-based deputy manager of media for Cnooc, declined to comment on any regulatory issues beyond the conference call. State-controlled Cnooc said it expects to complete the transaction by the end of the year.

“This is a very high-profile transaction for Canada,” Catharine Sterritt, a Toronto-based risk arbitrage strategist at Bank of Nova Scotia, said in a phone interview. “The government will do full due diligence.”

Potash Rejection

Still, “we like the deal, we think it will get approved and it makes sense.”

In November 2010, the Canadian government rejected Melbourne-based BHP Billiton Ltd.’s hostile bid for Potash amid opposition from Saskatchewan officials and company executives. Potash and Alliant Techsystems Inc.’s 2008 bid for MacDonald Dettwiler & Associates Ltd.’s space business are the only two deals to be blocked since the legislation was enacted in 1985.

The Nexen deal is also subject to approval by shareholders and authorities in the U.S., China and possibly Europe, according to the statement. Cnooc had to drop its $19 billion hostile bid for El Segundo, California-based Unocal Corp. in 2005 as U.S. lawmakers proposed legislation to block it.

Higher Premium

Cnooc executives have been studying the failed Potash and Unocal deals, said people with knowledge of the effort. That encouraged Cnooc to pledge to Nexen executives during negotiations never to pursue a hostile offer, and prompted the companies to call Canadian political leaders in a weekend blitz, one of the people said.

Cnooc is more likely to obtain approval from Canadian regulators because it’s paying a richer price than BHP’s attempt to buy Potash, said Yemi Oshodi, New York-based managing director of M&A and special situations trading at WallachBeth.

The $27.50-a-share cash offer for Nexen is 66 percent higher than its average stock price in the prior 20 days and compares with an average premium of 28 percent for takeovers of Canadian oil explorers and producers greater than $1 billion, data compiled by Bloomberg show. It’s also the fourth-highest premium on record for the Canadian industry. Cnooc based the deal’s valuation on the U.S.-traded shares.

‘National Treasure’

BHP offered about a 25 percent premium for Potash a month after the stock had dropped to its lowest level in more than a year, data compiled by Bloomberg show. Potash, the world’s biggest fertilizer producer, was also the fourth-largest publicly traded company based in Canada at the time of the bid, and Saskatchewan Premier Brad Wall called the fertilizer “a very strategic resource.”

About 30 percent of Nexen’s production last year came from its Canadian operations, according to regulatory filings. The rest was in the North Sea, the Gulf of Mexico, Yemen and elsewhere. The company already had a joint venture with Cnooc for crude production in oil-sands reserves at Long Lake in northern Alberta.

With a $9 billion market value before the deal, Nexen was the smallest among its Canadian oil peers, said Lanny Pendill, an analyst for Edward Jones & Co. in St. Louis.

“It’s not the same as buying Potash,” MKM’s Moore said. Canada probably won’t determine that Nexen is “a national treasure.”

There’s still about a 30 percent probability that Canada blocks the deal, according to Pendill.

‘Attractive Spread’

“While it’s not likely, you cannot ignore that there is a chance the Canadian government doesn’t approve it,” Pendill said in a phone interview. “There’s significant downside if it does get vetoed.”

Nexen shares ended yesterday at $25.90, 5.8 percent below Cnooc’s offer for the biggest gap among pending deals in North America valued at more than $1 billion, data compiled by Bloomberg show. That means traders can still make money, said WallachBeth’s Oshodi.

“This is really an attractive spread,” Oshodi said in a phone interview. “I’m actually surprised the spread isn’t a little tighter. Ultimately, I think a deal will get done.”