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Nexen Price Defies Hedge Fund Cnooc Deal Bets

Nexen Price Defies Hedge Fund Cnooc Deal Bets
Nexen shares closed down 1.8 percent to $24.35 yesterday in New York, compared with Cnooc’s offer of $27.50. Photographer: Nelson Ching/Bloomberg

When Justin Trudeau, running for leader of Canada’s third-largest political party, said he favored Cnooc Ltd.’s bid for Nexen Inc., lobbyist John Capobianco got a flurry of calls from investors looking to make money on one of the last big global mergers of the year.

U.S. investors wanted to know if the move would affect Canada’s review of the $15.1 billion takeover, even though Prime Minister Stephen Harper’s government doesn’t need the support of Trudeau’s Liberal Party to remain in power.

“When you’re in the U.S., you can get information through headlines like anybody else but it’s the political climate that you don’t get from the newspapers that they want,” said Capobianco, senior vice president of the Toronto office of Fleishman-Hillard, a government and public-relations firm.

Hedge funds such as Paulson & Co., run by billionaire John Paulson, and Farallon Capital Management LLC, founded by former Goldman Sachs Group Inc. trader Thomas Steyer, have been buying Calgary-based Nexen stock on bets Canada will approve the deal.

Investors are hungry for any hint from government officials which way they are leaning on the decision, said Peter Lobravico, vice president of merger arbitrage at Wall Street Access, a New York-based brokerage and trading firm.

“Nexen is really the largest pure arbitrage situation out there right now,” Lobravico said in a phone interview. “If this deal blows, it’ll ruin everyone’s year.”

Tough Year

The government’s decision on Nexen-Cnooc, which ranks 6th of 18 of the largest global mergers and acquisitions tracked by Bloomberg, is slated to be announced by Dec. 10 while Progress Energy Resources Corp. said yesterday it expects a decision on a C$5.2 billion ($5.2 billion) takeover bid from Petroliam Nasional Bhd. of Malaysia by the end of the year.

Nexen shares rose 1.8 percent to $24.78 at 9:44 a.m. in New York, compared with Cnooc’s offer of $27.50. The offer price represents an 11 percent premium, ranking 16th highest of 113 North American deals tracked by Bloomberg. Progress, based in Calgary, rose 1 percent to C$20.51 in Toronto. The C$22 per share bid by state-owned Petronas represents a premium of 7.3 percent.

The outcome of both deals could hurt the 2012 returns of funds and determine how much capital they can deploy next year, Lobravico said in a telephone interview.

It’s been a tough year for traders who bet on mergers closing, Lobravico said. Disappointments include Coty Inc.’s withdrawal of its $10.7 billion bid for Avon Products Inc. in May. Closing of the biggest merger, Glencore International Plc’s $33 billion purchase of Xstrata Plc, has been dragging on since it was announced in February.

Nexen Stock

Demand for fixed-income securities such as 10-year U.S. Treasury bonds, which have returned 5.1 percent this year, has made it difficult for arbitrage investors to outperform other investment strategies, said Lobravico.

Patti Lewis, a Nexen spokeswoman, and Peter Hunt, a spokesman for China-owned Cnooc in Calgary, didn’t immediately return a e-mail message seeking comment on the likelihood of government approval.

Hedge funds own 34 percent of Nexen stock, according to data compiled by Bloomberg, compared with 3.2 percent of Suncor Energy Inc., the largest Canadian oil and gas producer by market capitalization. Paulson & Co., Franklin Resources Inc., Arrowgrass Capital Partners LLP, Mason Capital Management LLC and Eton Park Capital Management LP, all based outside Canada, bought shares in Nexen in the third quarter, regulatory filings show.

Policy Framework

Paulson & Co. acquired 6.05 million Nexen shares during the quarter, according to a filing with regulators that show the fund’s holdings as of Sept. 30. San Mateo, California-based Franklin Resources, manager of the Franklin and Templeton mutual funds, bought 22.7 million shares in the quarter, making it the second-biggest shareholder at 4.3 percent.

Spokesmen for Paulson & Co., Farallon Capital Management, Arrowgrass Capital Partners, Mason Capital Management and Eton Park Capital Management declined to comment on the Nexen takeover. Matthew Walsh, a Franklin Resources spokesman, said in an e-mail that the company doesn’t typically comment on individual securities it owns.

Harper has said he will release a new “policy framework” on foreign investment around the time of the decisions.

The demand for information -- from comments made by members of Harper’s cabinet to investors inquiring about the body language of politicians in briefings with reporters -- has provided a boon to lobbyists with political ties to the government such as Capobianco, who ran as a candidate for Harper’s Conservative Party in 2004 and 2006. Capobianco’s firm was hired by U.S. investors for advice on the Nexen deal, he said.

Volatility Rises

Options to hedge against changes in Nexen’s stock price reached the most expensive in more than a year on Nov. 29, suggesting Nexen shares are becoming more volatile, according to data compiled by Bloomberg.

“There’s a lot of rumors flying around,” said Sam La Bell, an energy analyst with Veritas Investment Research Co. in Toronto. “If you’re an arbitrager, this is driving you crazy.”

The bids by Cnooc and Petronas are testing Harper’s pledge to deepen trade and investment ties with Asia even as some voters are wary of the deal. Fifty-eight percent of Canadians believe the government should block the Nexen takeover, an online survey of 1,000 people taken Oct. 10 to Oct. 11 by Angus Reid Public Opinion showed. The New Democratic Party, Harper’s main opposition in Parliament, has opposed the bid.

‘We’re Waiting’

The government blocked the Petronas takeover in October, only the third time Canada has denied a foreign acquisition in 27 years. Petronas has submitted a revised bid for approval and Progress Chief Executive Officer Michael Culbert said yesterday he expects Canada to decide by the end of the year.

“It’s really something that’s in the hands of the Canadian federal government,” Culbert said in a phone interview from Calgary. “We’re waiting, as others are, and we’ll just wait to see what transpires here, which we hope to be by the end of the year.”

Canada also blocked BHP Billiton Ltd.’s $40 billion hostile takeover of Potash Corp. of Saskatchewan Inc. in 2010.

It has become common for investors to hire government-relations consultants since the government rejected the Potash bid, said David Simon, founder and chief executive officer of Twin Capital Management LLC., a hedge fund based in New York that owns shares in Nexen.

“It’s just like you hire a lawyer in Washington to give you a read on an antitrust situation,” Simon said in a telephone interview. “They’re not giving you any proprietary information. They’re just giving you a view of how the process is going to work.”

Twin Capital hasn’t employed political lobbyists on the Nexen or Progress takeovers, he said.

Bird Talk

Hedge funds and other arbitrage investors are looking for clues about which way Harper is leaning on foreign investment, as well as the timing of the decisions and the policy framework, Sachin Shah, a merger-arbitrage specialist at Tullett Prebon Americas Corp. based in Jersey City, New Jersey.

“If Harper and all these other guys talk to a bird here and and a bird there, that bird will talk to another bird and these guys want to know what that bird is saying,” Shah said in a phone interview.

‘Easy Money’

While investors often hire lawyers to advise them on regulatory matters affecting mergers, the use of political consultants is increasing, said Tony Baldanza, a partner with expertise in foreign-takeover deals at Fasken Martineau DuMoulin LLP, a Toronto-based law firm that has also been providing government-relations consulting to investors.

“The arbs are looking for every advantage, including insight into the political dynamics,” Baldanza said by phone. “This is a high-stakes one, in the sense that there’s easy money to made if they’re right.”

While the government has until Dec. 10 to rule on Nexen, it can extend its review with Cnooc’s consent.

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