Ottawa’s new takeover rules, which enshrine the government’s desire to keep other states from controlling a resource that has made Canada a magnet for foreign money, have been met with approval by Canadian energy executives, many of whom feared a harsher policy that would severely constrain investment.
The rules all but forbid further takeovers of Canadian oil sands companies by state-controlled enterprises. But they still give substantial room for foreign capital to come in, leaving the door wide open to minority investments and joint venture partnerships.
Across the great expanse of Canada’s resources sector – from Bay Street to companies extracting oil near Fort McMurray, to mines spread across the Canadian Shield – the new rules were met with praise.
The government announced the guidelines as it gave its blessing to two controversial deals – CNOOC Ltd.’s $15.1-billion (U.S.) takeover of Nexen Inc. and the $6-billion (Canadian) purchase by Malaysia’s Petronas of Progress Energy Resources Corp.
Though markets had broadly expected the deals to be approved – an expectation that frayed briefly amid volatile trading Friday afternoon that created a momentary plunge in both Nexen and Progress shares – investors had persistent fears that Ottawa would establish a punitive policy.
“They could have just said no,” said Ari Levy a vice-president at TD Asset Management who oversees several energy and resource funds. Instead, he said, “ there are opportunities to still do transactions.” In the oil sands, in particular, “these are massive projects and the risk almost cries out to be shared on a lot of them....I think they got it right.”
Prime Minister Stephen Harper is “putting forward an olive branch to China and saying: we want to improve relations, we want to let this happen. But going forward we are going to be tougher so these SOEs are not driven by pure government policy,” said Steve Letwin, CEO of gold mining co. Iamgold Corp.
At the same time, Mr. Letwin said, it sends a signal to the United States that Canada is interested in opening up its energy market to investors beyond North America. “It is a pretty strong signal to Obama and his crew [not to] take us for granted.”
The decision also removes uncertainty that has been stalling progress on other deals. At one major U.S. investment bank, senior executives have delayed trips to Canada in anticipation of the Nexen decision, judging that their time would be better spent once there was clarity from the government.
The government’s explicit statement that it still welcomes minority investments from state-owned firms is good news for companies like Athabasca Oil Corp., which has spent months attempting to complete a minority interest deal with Kuwait’s state-owned oil corporation. Others, too, have pursued similar strategies, and the new rules may trigger the announcement of new transactions. Encana Corp., for example, is widely believed to be pursuing another joint venture with a foreign acquirer.
The new rules “look positive,” said Athabasca chief executive Sveinung Svaerte. “They said they would welcome joint ventures. As you know, that has been Athabasca’s financial model.”
That could, conversely have a negative impact on smaller companies, for whom foreign companies have proven among the most generous bidders.
“Unfortunately this is not very positive news for shareholders because they are no longer going to get the premiums that have come with these takeovers,” said John Brussa, chairman of Penn West Petroleum Ltd. and a director and legal adviser to a number of prominent petroleum companies.
But it may help smaller natural gas firms, the Progress takeover smooths the way for the potential construction of a large natural gas export terminal that stands to life gas prices in western Canada. Those terminals require capital equal in size to oil sands projects.
“A decision like this that allow foreign investment, whether it comes through joint ventures or equity, is critical for Canada to go forward and be competitive in the world LNG markets,” said Progress chief executive Michael Culbert.
At the same time, it allowed Mr. Harper to side with a Canadian public leery of Chinese takeovers. Ottawa “had to address the popular opposition to the [CNOOC] deal,” said Yuen Pau Woo, president and CEO of the Asia-Pacific Foundation of Canada. “The prime minister’s statement simply provides the flexibility to reject or push back on a future takeover bid but it does not lock them into that position.”
And it leaves little grounds for acquirers from some countries to argue against, said Wei Shao, partner at Fraser Milner Casgrain LLP and co-chair of the firm’s China practice.
“If you look at the Chinese regime and their own system, how can they come back and say they are being treated differently?” he said. Mr. Shao, who has acted as a corporate lawyer on behalf of Chinese firms said the new rules will boost investment from private Chinese firms.
Domestically, too, it provides some symmetry. Canada has spent years ridding itself of Crown corporations in the oil patch. Having done that, there is no justification now for giving unlimited entry to foreign-owned state companies, said veteran oilman Jim Gray, a leader in Calgary’s business community.
Having clarity doesn’t hurt, either for future deals. No matter how restrictive the new rules are, “creative investment bankers and lawyers will figure out how to play within those rules to help continue to bring in foreign capital,” said Sasha Jacob, CEO of Toronto investment bank Jacob & Co.
With files from reporters Richard Blackwell, Gordon Pitts and Joanna Slater