Progress Energy Resources Corp. and its state-owned suitor, Malaysia’s Petronas, have gone to Ottawa in an attempt to rescue their $6-billion union and seek an explanation for why the government wouldn’t approve it.
Executives from the two companies were on their way to the capital on Monday, shortly after reassuring investors that they haven’t given up hope of closing the deal.
The federal government’s surprising decision to turn down the deal just before midnight on Friday roiled the shares of Canadian energy companies. Sources told The Globe and Mail on the weekend that the government wanted more time to assess the deal, but Petronas said no – leaving Ottawa no choice but to issue a formal rejection of the deal.
The government has not indicated why it’s hesitant about the deal, which many investors had assumed would get approval without much difficulty. Prime Minister Stephen Harper did not discuss the specifics at a press conference on Monday, but reiterated his promise to provide a clearer policy on foreign takeovers when the government evaluates the $15-billion bid by CNOOC Ltd. for Nexen Inc.
“The government does in the not too distant future have an intention to put out a clear and new policy framework regarding these sorts of transactions,” Mr. Harper said.
Mr. Harper said each deal is assessed on its own merits, and Ottawa welcomes foreign investment so long as it meets the Investment Canada Act threshold of providing a benefit to the Canadian economy.
“We are in the process of obviously gathering the forces and getting to Ottawa to fully understand the reasons,” Progress’ Greg Kist, vice-president of marketing, government and corporate relations in an interview. “What are the issues, what is outstanding, what are the remedies that are necessary here?”
Petronas, he noted, publically discloses financial reports, answers to a board, and some of its subsidiaries trade publicly – all of which should help alleviate concerns that the company does not play by Western business rules. Another source close to the deal believed Petronas’ listings in Malaysia helped satisfy the corporate governance requirements.
Petronas planned to set up a board for its Canadian subsidiary as well, Mr. Kist said. The name Progress Energy Resources would be scraped in favour of the more patriotic “Progress Energy Canada,” he added.
“The plan was to carry on with Progress Energy as the entity here in Canada, with the management team and employees all in place,” he said. Billions were earmarked to develop its liquefied natural gas business. Petronas and Progress expected the takeover deal to be approved because they believed Investment Canada officials were satisfied and thought it would be a net benefit for the country.
But the PMO threw in a wrench in the final hours on Friday, demanding more time to ensure the transaction would be consistent with whatever would eventually emerge in the new foreign investment framework.
“It was all done, until it was not done,” said one source close to the talks. Petronas was given 30 days to change to government’s mind.
Petronas and Progress now think Ottawa asked for an extension because it did not want to approve any takeover by a state-owned enterprise until it completed its discussions with CNOOC and announced its new investment policies.
Another person familiar with the Petronas discussions said he believes Ottawa was reluctant to approve any major foreign takeover at a time when it is still pushing CNOOC for more commitments in its proposed Nexen acquisition. “We got caught in the poker game between Ottawa and CNOOC.”
Industry Minister Christian Paradis has long insisted the CNOOC-Nexen deal would be judged according to the current net benefit test under the Investment Canada Act.
If the current Petronas bid fails to secure federal support and the CNOOC-Nexen proposal is approved, Peter Glossop, a partner with Osler Hoskin & Harcourt said: “State owned entities in Canada need to be prepared to commit to substantial governance and transparency undertakings, including possibly maintaining or obtaining a public listing of shares of the [state-owned enterprise] or the Canadian target business on a Canadian stock exchange, in order to be approved.”
John Zahary has gone through Canada’s foreign investment review process twice: once when Korea National Oil Corp. bought the company he was running, Harvest Energy Trust, in 2009; and then again when KNOC bought Hunt Oil Co. when he was running Korea’s Canadian operations.
He said the government demands three main things: guaranteed levels of employment and capital spending, even when the market turns south, as well as financial reporting information.
“Every time you do one of these things, that is the net benefits test,” said Mr. Zahary, who now runs Sunshine Oilsands Ltd., noting that a foreign company must fill at least 25 per cent of their Canadian subsidiary’s board seats with Canadians. “The Canadian government asks for, and receives, commitments by a foreign acquirer all the time to maintain levels of employment, to maintain levels of capital spending, because the Canadian government doesn’t want [the buyer] shutting down the assets, shutting down the company.”