Progress’ Petronas Sale Fails to Die as Deal Odds Rise
Traders are regaining confidence that Progress Energy Resources Corp. (PRQ), battered last week after the Canadian government blocked its takeover by Malaysia’s Petroliam Nasional Bhd., will get bought after all.
The natural-gas producer based in Calgary added 7.9 percent yesterday to C$19.81, the biggest rally since July, as Petroliam Nasional, known as Petronas, extended the deadline for completing the C$5.2 billion ($5.2 billion) deal to Nov. 30. For Bank of Nova Scotia, the delay is a sign the state-owned enterprise wants to negotiate with the Canadian government, which requires foreign takeovers to benefit the nation.
While Progress Energy sank 15 percent last week after the rejection, Canadian Finance Minister Jim Flaherty did say Petronas can try to persuade government officials to reconsider. The narrowing difference between Progress Energy’s price and the C$22-a-share offer implies odds the bid will succeed rose to about 75 percent from 60 percent, said Westchester Capital Management Inc. Even after yesterday’s rally, traders willing to stomach the risk can still earn 11 percent if the agreement closes, or four times more than the median spread for pending Canadian deals, data compiled by Bloomberg show.
“It looks like the parties are saying the right things, and, as a result, people have become more optimistic,” Roy Behren, who co-manages the $4.7 billion Merger Fund (MERFX) at Westchester Capital, said in a telephone interview from Valhalla, New York. “Given the body language of the merging parties, it appears that they’re committed to try and work at getting the deal done,” he said. If the deal succeeds, traders holding the stock “are going to make the money.”
Greg Kist, a spokesman for Progress Energy, declined to comment on the deal’s prospects. Azman Ibrahim, a spokesman for Kuala Lumpur-based Petronas, didn’t immediately respond to an e- mail seeking comment outside normal business hours.
Progress Energy fell 9.3 percent to C$19.64 on Oct. 22 after Canadian Minister of Industry Christian Paradis blocked the deal late on Oct. 19, saying the proposal wasn’t in the nation’s best interests. The Investment Canada Act requires foreign takeovers to provide a net benefit to the country. Six factors are considered, such as the effect on jobs, competition within an industry, the degree of participation by Canadians in the business and Canada’s ability to compete globally.
The same test prompted officials to block BHP Billiton Ltd.’s 2010 purchase of Potash Corp. of Saskatchewan Inc. Petronas can still negotiate with government officials to salvage its rejected agreement, Flaherty said Oct. 21.
“I’m sure they will continue to work on it,” the finance minister said during an interview with the CTV television network. “There is another period of time during which they can continue to have discussions and try to satisfy the concerns that the department of industry has.”
Yesterday, Petronas and Progress Energy issued a statement saying they extended the deal’s deadline to the end of November from Oct. 31, prompting the surge in Progress Energy’s shares. Both companies have both met with officials at Industry Canada to gain clarity on the government’s opposition, and Petronas plans to make “further submissions” to the government in a bid to win approval, according to yesterday’s statement.
Progress Energy’s stock rose because the statement showed the companies’ continued commitment to the transaction and gave investors renewed optimism it can close, Catharine Sterritt, a Toronto-based risk arbitrage strategist at Bank of Nova Scotia, said in a phone interview. She estimated a 70 percent chance that Petronas will get the regulatory approval it needs.
“We view this announcement positively as this indicates that Petronas is still interested in completing the transaction and is going to cooperate to address Industry Canada’s concerns,” Stacey McDonald, a GMP Securities LP analyst, wrote in a note to clients yesterday. Petronas’s “intention to stay involved was a key hurdle and in our view the extension increases the probability that it will submit another bid.”
Petronas has 30 days past the government’s Oct. 19 rejection to resubmit the deal for approval, Paradis said in a statement a week and a half ago.
Cnooc Ltd., China’s largest offshore oil producer, is also awaiting approval from Canada for its $15.1 billion purchase of Nexen Inc. To appease the government, Cnooc pledged to locate its North and Central American headquarters in Calgary, retain Nexen’s employees and management, enhance the company’s planned capital expenditures in Canada, and expand charitable programs.
While the gap between Progress Energy’s stock price and the C$22 bid from Petronas has narrowed after reaching its widest point last week, the spread is still attractive, Sterritt said.
“We continue to like it,” she said. “The next event we’re going to be focused on is what happens during the 30-day notice period that they’re currently in with respect to the Investment Canada net-benefit test. We believe the transaction makes a lot of sense and that they’re highly likely to be able to meet the net-benefit test.”
Should the acquisition succeed, traders who bet on mergers and acquisitions would get an 11 percent return from the stock’s closing level yesterday. The median spread among pending Canadian deals is 2.8 percent, data compiled by Bloomberg show. Today, the stock rose 0.4 percent to C$19.89.
Without a deal, Progress Energy shares may drop to about C$14, Steve Toth, an analyst at Canaccord Financial Inc., wrote in a report yesterday. That’s a 29 percent decline from yesterday’s closing price.
Still, the market is implying that the odds are in Petronas’s favor, Westchester Capital’s Behren said.
“You don’t know what’s going on behind closed doors,” he said. “But it’s heading in the right direction.”
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