-Andrew Vaughan/The Canadian Press
The Canadian government is opening up one small area of the market to more foreign ownership, and domestic investors should be applauding the move.
Ottawa announced on Thursday that it will allow foreign investors to own up to 49 per cent of domestic airlines, up from the current 25 per cent cap – a big deal for anyone overseas who has been waiting in line to buy shares in Air Canada and WestJet Airlines Ltd.
But even if you're a Canuck who holds no such affection, the easing of ownership restrictions on any sector is good news: Removing the barriers to capital deepens the pool of investors, which is good for share prices.
Okay, the upside may have been hard to see in the initial reaction from airline stocks. Air Canada and WestJet shares fell on the announcement from Transport Minister Marc Garneau, as investors weighed the impact of greater competition from ultra-low-cost carriers such as Canada Jetlines Inc., Enerjet and NewLeaf Travel.
"NewLeaf Travel, which started operations earlier this year, while still very small, has already had some impact on yields for Canada's incumbent carriers," Cameron Doerksen, an analyst at National Bank Financial, said in a note. "If two more low-cost carriers enter the market, there will be even more overlap and pricing pressure for WestJet and Air Canada."
The competition is great for consumers if it translates into better service and lower fares. But the benefits of lower foreign ownership restrictions – or no restrictions at all – extend to shareholders too, and go well beyond the airline sector.
In Canada, foreign investors are restricted in a number of areas deemed particularly important to national security, culture or economic activity. In addition to airlines, ownership caps are also in place on telecom firms, broadcasters and large financial services – and recall that Ottawa killed BHP Billiton's attempted $40-billion (U.S.) takeover of Potash Corp. in 2010 and Alliant Techsystems Inc.'s $1.3-billion (Canadian) run at the space divisions of MacDonald Dettwiler and Associates Ltd. in 2008.
While these are rare examples of the government throttling takeover attempts, many observers believe they nonetheless had a chilling effect on foreign investors – witness Potash Corp.'s subsequent decline – even if investors weren't eyeing an outright takeover.
Ownership restrictions can also cause price distortions and other headaches. China's restrictions on foreign investors likely fed the stock market bubble there, and subsequent bust.
Even Norway has seen an impact. One academic study of the country's stock market, by Bernt Arne Odegaard, found that non-voting shares traded at a premium to voting shares – in the case of dual-class share structures – for the simple reason that foreign investors for a time could only buy the non-voting versions.
If ownership restrictions can chill investors and cause distortions, easing restrictions should have the opposite effect. When Norway lifted restrictions on foreigners in 1995, the price difference between voting and non-voting shares disappeared, making the country's stock market far more attractive to all investors.
This isn't to say that suddenly Canadian airline stocks are screaming buys or that removing all barriers to foreign investors will drive a stock market boom and fuel a wave of mergers and acquisitions activity.
But it does suggest that permitting foreign investors to buy more shares of Canadian companies is a good thing – and if it leads to more competition, that's okay too.
"There seems to be a lack of competition or competitive pressure in many Canadian sectors," said Warren Bailey, professor of finance at Cornell University's Samuel Curtis Johnson Graduate School of Management, pointing to retail banks and telecom services, in addition to airlines. "One has to hope that [the airline move] might improve things a bit."
David Berman