The federal government has blocked a Malaysian state-owned company’s attempt to take over a Canadian natural gas firm.
Petronas offered $6-billion to buy Progress Energy Resources Corp., but in order for the deal to be approved, it had to show Ottawa the takeover would be a “net benefit” to Canada. Industry Minister Christian Paradis late Friday evening said Petronas did not meet this standard, although it still has an opportunity to convince the government otherwise.
Ottawa has never blocked an oil and gas takeover, and has never clarified the rules surrounding the net benefit test in the Investment Canada Act.
Progress Energy chief executive Michael Culbert said Petronas will appeal the decision, according to Bloomberg.
“We’re very surprised by the decision that we received this evening,” Mr. Culbert told Bloomberg. As its suitor appeals, it will “help where we can help,” he said.
“We believe that the transaction is of net benefit to Canada and Progress will be continuing to work with the federal government to prove that point.”
The decision comes as the Harper government, which has gone to enormous lengths to convince outsiders Canada is open to foreign investment, reviews CNOOC Ltd.’s proposed takeover of Nexen Inc. The stakes are much higher in that $15.1-billion deal because it involves the oil sands and China. It would mark China’s largest investment in Canada, and critics argue Ottawa is ceding control of the country’s natural resources to foreigners. On the flip side, it will take hundreds of billions of dollars to develop Alberta’s bitumen reserves, and energy proponents argue it cannot be done without overseas investors and buyers like CNOOC.
The Conservative government had to make a call on the Petronas/Progress deal Friday, and did so three minutes before midnight.
“I can confirm that I have sent a notice letter to Petronas indicating that I am not satisfied that the proposed investment is likely to be of net benefit to Canada,” Mr. Paradis said in a statement. “I came to this decision after a careful and thorough review of the proposed transaction.
“Under the Investment Canada Act, Petronas now has up to 30 days to make any additional representations and submit any further undertakings, which can be extended with my agreement and that of the investor,” Mr. Paradis said. “Subsequently, I will either confirm this initial decision or approve the acquisition.”
He added the Investment Canada Act barred him from commenting further on the deal.
One challenging issue for Petronas, which is wholly owned by the government of Malaysia, is Ottawa's guidelines for approving deals involving state-owned enterprises. As part of its net benefit test, Ottawa requires such national oil companies to operate as commercial entities, with transparent governance structures, independent directors on their boards and Canadians standards of accounting and auditing.
Industry Canada says non-Canadian firms are "encouraged to support their plans for the Canadian business by submitting specific undertakings." They can include appointment of Canadians to its board of directors, listing of shares on a Canadian stock exchange, and employment of Canadians in senior management positions.
Because of the confidential nature of the Investment Canada review, it is unclear what level of commitments Petronas made.
In contrast, CNOOC Ltd. – which is traded on New York and Hong Kong stock exchanges – made public commitments on several of the recommended undertakings in its propoised acquisition of Nexen. Critics say the Chinese companies remains an arm of the Beijing government, rather than a fully commercial operation.
Other wholly-owned national oil companies, including the Kuwait Petroleum Corp., have signalled an interest in acquisitions in Canada, but have little transparency in their governance structure.
Even as the government rejected the takeover, it painted itself as a friend of outside investors.
“Canada has a long standing reputation for welcoming foreign investment,” Mr. Paradis said. “The government of Canada remains committed to maintaining an open climate for investment.”
Alberta, which does not have the power to block transactions, reiterated its support for takeovers such as those proposed by Petronas and CNOOC, although it does not address specific deals.
"We respect the federal net benefit test as a good and thorough process. We must also respect the appeal period,” Mark Cooper, a spokesman for spokesperson for Alberta's International and Intergovernmental Relations Minister Cal Dallas, said in an interview Saturday. “In general we are supportive of foreign investment and the overall benefits it can bring to Alberta's economy.
“We work hard to attract investors to Alberta and will continue to do so,” he said.
The federal New Democratic Party wants Prime Minister Stephen Harper to kill the proposed CNOOC/Nexen marriage. The Official Opposition, however, did not weigh in on the Petronas/Progress deal, which is further ahead in the review process than CNOOC and Nexen.
It is extremely rare for Ottawa to kill takeover deals, although the government has stepped in three times since 2008. In all three cases, the government questioned whether the deals would benefit Canadians.