Those who have discussed the issue with him report that Prime Minister Stephen Harper has been worried a state-owned company, likely from China, would take a run at a major Canadian energy producer.
Now that the massive China National Offshore Oil Corp. (CNOOC Ltd.) has bid $15.1-billion for Nexen Inc., it’s easy to understand the Prime Minister’s uneasiness. His initial statements were properly guarded, as befits the complexity of the file and his own apparent hesitations.
It has been said that the CNOOC bid is a standard business transaction: one company taking over another, in this case with the support of the Nexen board. CNOOC trades on stock exchanges. It has made commitments about keeping headquarters in Calgary, maintaining staff and conducting business pretty much as before.
Except that CNOCC is not your ordinary multinational company. It is a state-owned enterprise (SOE) and, as such, benefits from state money, rather than borrowing on open markets. That it offered a 61-per-cent premium for Nexen’s shares is a margin that a non-state-owned company could likely never manage. The proverbial playing field, in other words, is tilted in favour of a company that does not have to borrow at market rates, enjoys preferential tax treatment and can therefore offer such a high premium.
What might come next? With the huge piles of capital in hand, China’s SOEs could swallow other energy-related companies, paying premiums for shares that normal market-oriented companies could not.
Then there is the matter of quid quo pro – that is, if Chinese companies can take over Canadian companies in such an important area as energy, would a Canadian company be allowed to do the same in China? Chances are no, because the Chinese usually welcome foreign investment in major economic sectors only with Chinese partners, often SOEs.
For those with a sense of history, a delicious irony attends the CNOOC bid and the largely enthusiastic reaction it has received from the provincial government and the Alberta oil patch.
Three decades ago, these same voices excoriated the creation of a Canadian state-owned energy company, Petro-Canada, calling its Calgary headquarters “Red Square” and denouncing it as a government-favoured intruder in the midst of free-enterprise heaven. When a Chinese SOE enters the field some decades later, its arrival is greeted with open arms.
Irony aside, the government anticipated in a general way that something like a CNOOC bid might happen. In December, 2007, the Harper government issued “guidelines” under the Investment Canada Act for takeovers by foreign SOEs. The guidelines (not laws) said the government would more carefully scrutinize SOE corporate governance and reporting than with normal private company transactions, as well as monitor the commitment to hire Canadian executives and continue to make investments in Canada.
These guidelines, like the existing “net benefit” test in the act, are so vague that a government can essentially make any decision it likes about foreign takeovers and justify the decision with one of these elastic phrases. Mr. Harper has made improved relations with China a new trend keystone of his foreign and trade policies. Recently, the Canadian and Chinese governments completed a “complementarity” study, the first stage in the direction of a full-blown free-trade and investment negotiation.
Blocking the CNOOC takeover would imperil both the improved relations and the possibility of a free-trade negotiation, something the Chinese government had proposed. Mr. Harper’s government has also boasted about Canada welcoming foreign investment and opposing protectionism – except when it stopped the Australian firm BHP Billiton Ltd. from taking over Potash Corp. of Saskatchewan.
Public opinion polling for the Asia Pacific Foundation of Canada shows that Canadians are lukewarm in their attitudes toward China, whereas they are over-the-moon positive about Australia. The BHP-Potash controversy was different in three ways: BHP was a private company, period, and the Saskatchewan government opposed the takeover, whereas the Alberta government favours the CNOOC deal. Saskatchewan was hostile, whereas thus far the Alberta public is nonchalant.
But there remain very large questions that will concern Mr. Harper, including a lack of reciprocity, a tipped playing field that favours state-owned companies and the long-term ambitions of Chinese SOEs.
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