Doubts have deepened about the fate of Chinese state-controlled CNOOC Ltd.’s attempt to win a toehold in the North American oil and gas industry with a C$15.1 billion (U.S. dollar at par) takeover bid for Nexen Inc. of Calgary.
The Canadian government cast a shadow over the Chinese move by rejecting a smaller but similar bid by Malaysia’s state-owned Petronas to buy Progress Energy Resources for C$6 billion (see NGI, July 2).
The Progress offer failed to pass the “net benefit” test posed by Canada’s foreign investment review and approval legislation, federal Industry Minister Christian Paradis announced late Friday night, long after even after-hours trading shut down on stock exchanges for the weekend.
The test, a long-standing Canadian requirement, says the government must be shown that a proposed foreign takeover will give the country more than it stands to lose.
The two companies said last Monday they would continue to pursue a deal and will be meeting with officials from Industry Canada “to better understand Industry Canada’s requirements. Petronas and Progress 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.”
The federal industry minister did not provide reasons for the decision, saying a confidential review may be extended because the companies have 30 days to “make any additional representations and to submit any further undertakings.”
Progress CEO Michael Culbert, in a statement Saturday, said, “The long-term health of the natural gas industry in Canada and the development of a new liquefied natural gas (LNG) export industry are dependent on international investments.”
Although Canadian financial services specialists have criticized the net benefit legislation as vague, it is clear on some difficult requirements for foreign state sovereign wealth funds and corporations. The rules demand pledges from buyers to behave as commercial entities with open and understandable governance structures, to appoint independent and preferably Canadian members on boards of directors, and to follow Canadian accounting and auditing standards.
Paradis only distributed a short statement affirming that the Petronas bid for Progress had been rejected.
The foiled takeover bid grew out of a joint venture between Petronas and Progress on a C$1 billion shale gas drilling program in northern British Columbia (BC) and Alberta. The partnership also included an agreement to develop an LNG export terminal on the northern Pacific coast of BC, with the Malaysian state company committed to paying 80% of project costs.
Shareholders of Nexen have voted 99% in favor of accepting the C$15.1 billion takeover offer by CNOOC, an arm of state-controlled China National Offshore Oil Co. But Canadian Prime Minister Stephen Harper has repeatedly cautioned North American money managers against assuming the bid is a done deal.
Economic nationalism and national security are priority themes on all sides of the Canadian political spectrum, and they are a popular tune. Since the CNOOC offer was announced during the summer, opinion polls have repeatedly and consistently shown that Canadians favor blocking the Chinese takeover by a large majority of two-thirds to three-quarters.
In Canada, outside the financial circles that stand to gain directly, the Nexen takeover aroused economic and political doubts from the moment it was announced. As in the U.S. — where economic and political resistance, including a bipartisan coalition in Congress, blocked an $18.5 billion bid by CNOOC for Unocal Corp. (see NGI, Aug. 8, 2005) — Canada harbors widespread hesitation about turning over key elements of industry to foreign industrial empires of any variety, investor- or state-owned.
In late 2010, the federal government sided with vehement provincial opposition to reject a $38.6 billion attempt by Australian mining giant BHP Billiton Ltd. to take over Potash Corp. of Saskatchewan Inc., a global fertilizer producer based in its namesake province. The scheme jeopardized a “strategic resource” for Canada, explained the government in Ottawa.
Two years earlier in 2008, federal authorities also intervened to stop a proposed takeover of the aerospace division of Vancouver-based MacDonald Dettwiler & Associates Ltd. by a U.S. heavyweight in the field, Alliant Techsystems Inc. The explanation in Ottawa was that the target of the deal represented a critical ingredient in Canadian know-how and technology development.
In the Alberta, home of both Progress Energy and Nexen, the provincial intergovernmental affairs ministry has made it plain that even the avowedly pro-business Conservative parties that hold office in Edmonton and Ottawa adhere to the national tradition of upholding economic independence and security. Provincial spokesmen do not dissent from the Harper government’s wary approach, saying “we respect the federal net benefit test as a good and thorough process.”
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