One can only hope that Petronas will try to salvage its $6-billion takeover bid for Progress Energy, and the Conservative government will allow a revised deal to go through.
Otherwise, in a 163-word press release distributed at 11:57 pm on a Friday night, the government will have destroyed billions of dollars of Canadian wealth.
Before Petronas’ initial offer, Progress shares were trading in the $10 to $11 dollar range. Let’s be generous and say that the fair market value of the shares were $12, so Petronas’ $22 per share offer represents a $10 premium over the market price. With more than 230 million shares outstanding, the cost to Canada of quashing this deal is conservatively more than $2.3-billion.
By far the largest shareholder is the Canada Pension Plan Investment Board, which own 37.5 million shares - so this deal costs the CPP $375-million. The remaining shares are owned mostly by a collection of pension funds, mutual funds and private investors.
It is difficult to estimate how much of these gains would come back to the Federal government as capital gains revenue, given the existence of RRSPs, TFSAs and other investing vehicles. A conservative estimate is a 10 per cent effective tax rate, resulting in a capital gains tax revenue loss of $193-million.
Over all, this $2.3-billion loss is split with the government losing roughly $550-million, and the private sector losing $1.75-billion.
This may be the most expensive merger rejection in Canadian history; while the BHP Billiton-Potash deal was larger, BHP was not offering much of a premium over market value. Destroying half a billion in government revenues and billions in economic value is not a decision that should be taken lightly.