Petronas Rejection Casts Doubt on Cnooc $15.1 Billion Bid

Petronas Rejection Casts Doubt on Cnooc $15.1 Billion Nexen Bid
The bid by Beijing-based Cnooc Ltd. for Nexen Inc. of Calgary has raised questions about the degree of control state-owned enterprises should be allowed to have. Photographer: Nelson Ching/Bloomberg

Canada’s rejection of a bid by Malaysia’s state oil company for Progress Energy Resources Corp. casts doubt on Beijing-based Cnooc Ltd.’s $15.1-billion takeover of Nexen Inc. and raises questions about the openness of Prime Minister Stephen Harper’s government to foreign investment.

Industry Minister Christian Paradis said in a statement he wasn’t satisfied the C$5.2 billion ($5.23 billion) acquisition by Petroliam Nasional Bhd., known as Petronas, is in Canada’s interest. Harper’s Conservative government reviewed the bid under its foreign takeover law, which says transactions must be judged to have a “net benefit” to Canada.

“The implication now is that the government does not want a foreign national oil company to acquire Canadian companies,” said Eric Nuttall, a portfolio manager with Sprott Asset Management LP in Toronto. “For a Conservative government to make this decision is mind-boggling. The amount of capital that that decision wipes out is stunning.”

The Petronas rejection marks the second time in two years Harper’s administration has denied a multi-billion dollar overseas bid. The government blocked BHP Billiton Ltd.’s $40 billion hostile offer for Potash Corp. of Saskatchewan Inc. in 2010 after the province’s premier, Brad Wall, opposed it.

Shares Drop

Shares of Nexen dropped 5 percent to $24.14 in New York, about 12 percent below Cnooc’s $27.50 offer price. Progress Energy shares plunged 9 percent to C$19.64 in Toronto, 11 percent below the C$22 per share offered by Petronas.

The cost of insuring Nexen debt against default rose. Five-year credit-default swaps tied to the company’s bonds traded at 111 basis points today compared with 98 basis points on Oct. 19, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Petronas has 30 days to appeal or provide additional concessions, at which point the government will make a final decision, according to the statement by Paradis. The company can be given more time if both parties agree.

Petronas and Progress said today they will meet with Canadian officials “to better understand Industry Canada’s requirements” for the takeover bid. The two companies “will work together to ensure that the Minister has the necessary information to determine that the proposed acquisition of Progress would likely be of net benefit to Canada,” according to a statement released in Calgary.

Policy Framework

Harper told reporters today he wouldn’t “say anything that would prejudice that particular discussion during this time,” adding that his government would “fairly shortly” publish “a clear and new policy framework” for foreign investment.

“Foreign investment, generally speaking, is of benefit to the Canadian economy, and as a general rule, we obviously welcome interest in the Canadian economy,” Harper said.

Canada’s ruling in this case shouldn’t be seen as a precedent for other transactions, International Trade Minister Ed Fast said.

“This decision does not set a precedent because every single application is considered on its own merits,” Fast told reporters in Vancouver yesterday. “Each application has its own specific circumstances that are being brought to bear.”

The ruling undermines Harper’s message that Canada welcomes foreign investment, investors said. Harper has called it a “national priority” to sell more natural resources to Asia, to boost growth in the world’s 11th-largest economy by diversifying exports away from the slower-growing U.S. market, which consumes three-quarters of Canada’s shipments abroad.

Canada’s gross domestic product of $1.74 trillion exceeds Malaysia’s annual output of $279 billion, according to data compiled by Bloomberg.

Proposed Projects

Current proposed projects in Canada’s oil-sands, part of the third-largest oil deposits in the world, require investments of C$220 billion, the Canadian Energy Research Institute said in a March report.

Progress Chief Executive Officer Michael Culbert said he’s “hoping” the Canadian government will see a net benefit to the sale.

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

Peter Hunt, a spokesman for Cnooc, said in an e-mail that “our regulatory application is proceeding as normal.” Patti Lewis, a spokeswoman for Nexen, did not return e-mails seeking comment.

Strategic Acquisitions

Petronas has stepped up strategic acquisitions abroad while investing more in domestic oil and gas exploration to replenish Malaysia’s diminishing energy reserves. Tenaga Nasional Bhd., Malaysia’s biggest electricity generator, is among companies that have complained of gas supply shortages.

The Southeast Asian nation’s underground gas holdings should now last 37 years, two fewer years than previously forecast, even after reserves grew 3.6 percent to 92.1 trillion cubic feet, Malaysia’s finance ministry said in a Sept. 28 report. Natural gas output declined 5.3 percent to 5.62 billion cubic feet a day during the first seven months of 2012, mainly due to “operational challenges,” it said.

“We’ve seen price increases of between three and ten-fold for certain commodities and investment has surged,” Jeffrey Wilson, lecturer in politics and international studies at Murdoch University in Perth, said by phone. “This has really skewed the bargaining power in negotiations between multinational resource corporations and governments squarely in favor of the host governments.”

Decipher Intentions

Some investors say it’s hard to decipher the government’s intentions without any explanation for the rejection. Investment Canada Act rules prevent Paradis from commenting, aside from saying the deal didn’t provide a net benefit.

The Globe and Mail newspaper reported Oct. 20 that Petronas refused a last-minute request by the government to set a new deadline for the review, citing three people familiar with the discussions. According to the report, the government wanted more time to consider concessions from Petronas that were needed to meet the net benefit test.

The lack of transparency of the review process allows politicians to treat controversial takeovers like a “pinata,” said Perrin Beatty, president of the Canadian Chamber of Commerce.

‘Black Box’

“What we have today is completely a black box,” he said in an Oct. 19 interview. Until the government provides more clarity, every large deal is “subject to political debate.”

Opposition lawmaker Peter Julian, the New Democratic Party’s spokesman on natural resource issues, said Paradis’ late night announcement showed “not only a lack of transparency, but a level of improvisation and incompetence that we’ve rarely seen.”

“I’ve been in parliament for eight years and I’ve never seen an announcement made at midnight on a Friday night,” Julian told reporters.

The government has been seeking more ambitious commitments from companies looking for approval of foreign takeovers, said Dany Assaf, a partner with Toronto-based law firm Torys LLP.

“When I first started practice in this area in the mid-90s, Investment Canada regulatory approval was really just a matter of process,” Assaf said in an Oct. 11 interview. “Today, the negotiations are more intense. Businesses are going to have to offer more.”

Under the Investment Canada Act, the government reviews foreign takeovers valued at more than C$330 million.

Net Benefit

The government considers six main factors in determining whether an acquisition provides a “net benefit,” according to Industry Canada. The criteria are the impact on economic measures such as employment; the degree of participation of Canadians in the business; the impact on productivity and technology development; the effect on competition; the compatibility of the investment with “national industrial, economic and cultural policies”; and the contribution to Canada’s ability to compete globally.

Canada issued additional guidelines in 2007 for investments by state-owned enterprises, saying such companies are expected to run the acquired business on a “commercial basis.” State-owned firms may be required to appoint Canadian managers or directors or list shares of the acquiring company or Canadian business on a local stock exchange, Industry Canada says.

In announcing its offer July 23, state-owned Cnooc pledged to follow through on Nexen’s capital spending plans and keep the company’s employment level and management. It also promised to make Calgary the head office of North American operations, and list its common shares on the Toronto Stock Exchange.

Prior Rejections

Prior to the BHP rejection, Canada blocked the acquisition of the aerospace division of MacDonald Dettwiler & Associates Ltd. by a U.S. company in 2008. Before then, the country hadn’t rejected any foreign takeovers since the Investment Canada Act took effect in 1985.

“After BHP’s purchase of Potash was rejected, this will give the impression Canada isn’t open for business,” Geof Marshall, who manages $6.3 billion of fixed-income assets at CI Investments Inc. in Toronto, said in an e-mail. “We’re entering a new era of capital controls as part of the next phase of global deleveraging and this will see governments even more protective of national business interests.”

The bid by Beijing-based Cnooc for Nexen of Calgary has raised questions about the degree of control state-owned enterprises should be allowed to have. Fifty-eight percent of Canadians oppose the Nexen takeover, according to a poll by Angus Reid Public Opinion released Oct. 16.

Conservative Concern

One Conservative lawmaker, Rob Anders of Calgary, said last month some of his colleagues are concerned about the sale of Canadian assets to Chinese state-owned businesses.

“I know there are people inside my caucus who have concerns about asset sales to China,” Anders told reporters. “I’m never in favor of the whole state-ownership thing, especially in the case of a non-benevolent country like China.”

“I would say the Petronas decision certainly makes the case of betting on Nexen weaker than it was before this announcement,” said Stephen Jarislowsky, CEO of Montreal-based Jarislowsky Fraser Ltd., Nexen’s second-largest shareholder according to data compiled by Bloomberg. “We believe that it should go through. Whether it does go through, we don’t know.”

Harper said Sept. 6 he’s aware Canadians are wary of Chinese investment. The government said Oct. 11 it had extended its review of the Nexen takeover by a month.

“It could be the death knell of Nexen if the grounds are around reciprocity and state-owned enterprises,” Jack Mintz, director of the University of Calgary’s School of Public Policy. Canada’s foreign-investment rules remain vague and “the government needs to send a clear signal on what’s on and what’s off in terms of foreign investment.”

‘Intrinsic Value’

“It is unfortunate that this transaction was not approved as anticipated,” said Linda Sims, a spokeswoman for Canada Pension Plan Investment Board, which holds 16 percent of Calgary-based Progress’s shares, according to data compiled by Bloomberg. “CPPIB continues to believe that there is substantial intrinsic value in Progress Energy and that this proposed acquisition is of long-term benefit.”

The Petronas decision is “shocking” said Gordon Currie, an analyst at Salman Partners in Calgary. “I don’t yet know what the government’s reasoning is, but this has implications for the Nexen and Celtic deals, and may cause a ’chill’ on future transactions with foreign investors.”

Shale Gas

Exxon Mobil Corp., the world’s largest energy company by market value, said Oct. 17 it had agreed to buy Celtic Exploration Ltd. for C$2.86 billion in cash and stock, adding oil and gas production in Canada’s Montney and Duvernay shale.

Calgary-based Encana Corp., Canada’s biggest natural gas producer, fell 3.9 percent, NuVista Energy Ltd. fell 3.2 percent and Cequence Energy Ltd., dropped 7.1 percent. NuVista and Cequence both have operations in the Montney shale region of British Columbia. Celtic Exploration Ltd. fell 1.4 percent to C$25.84.

Investors should buy Progress shares if they fall as far as C$17, said Catharine Sterritt, a Toronto-based risk arbitrage strategist at Bank of Nova Scotia, in an e-mailed report.

Most people in Canada’s oil and natural gas sector thought the government would approve the bid by Petronas, said Mike Tims, chairman of Peters & Co., a Calgary investment bank.

The deal was viewed as positive because Progress is a small company that couldn’t afford to extract resources quickly. A liquefied natural gas terminal proposed by Petronas for Canada’s west coast would create new gas markets, he said.

“We’ll see a bunch of stocks pull back because we’ve been introduced, for a period of time, to new uncertainty until we see what the policies actually end up being,” Tims said.

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