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The Globe and Mail

Petronas move spurs fear of investor chill

The Petronas Twin Towers in Kuala Lumpur, Malaysia.

Goh Seng Chong/Bloomberg News

The federal government has delivered a veiled but powerful message to state-owned foreign enterprises that are keen to acquire Canadian resources: You must play by Western business standards.

Ottawa rejected a $6-billion bid by Malaysia's national oil company, Petronas, to acquire Calgary's gas-rich Progress Energy Resources Corp., offering no explanation for its decision, which was announced at midnight Friday.

The ruling is expected to spark a selloff in certain stocks when markets open Monday as investors suddenly see a greater risk that Ottawa will turn down high-profile takeovers, including a deal by China's CNOOC Ltd. to acquire Nexen Inc.

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Petronas appears to have come up short on Ottawa's requirement that foreign state-owned companies wanting to buy Canadian firms must be clearly separate from their political masters and operate as commercial corporations, lawyers and bankers watching the case said Sunday.

And they say the decision sends a worrying signal to other state-owned enterprises (SOEs) that are waiting in the wings to invest in Canada, even as the government continues to insist the country needs foreign capital to develop its bountiful resources.

In addition to other Chinese firms, companies such as India's ONGA and Kuwait's national petroleum corporation have indicated interest in investment in Canada.

If the decision stands, "it could have a significant chilling effect on foreign investors – especially SOEs – that may be contemplating investments and acquisitions in the Canadian resource sector," lawyers from Osler Hoskin & Harcourt LLP said in a commentary Sunday.

Osler lawyers Frank Turner and Peter Glossop said it remains unclear precisely why Ottawa turned down Petronas, though sources told The Globe and Mail that the company rejected a federal request for more time to conduct its review. However, they noted that, in contrast to China's CNOOC, the Malaysian firm made no public commitments to meet the government's requirements for government-owned companies.

CNOOC's parent firm, China National Offshore Oil Corp. is wholly owned by Beijing, but the international subsidiary has minority public ownership with shares listed in New York and Hong Hong. When it announced its $15.1-billion deal with Nexen in July, it promised to list its shares in Toronto, establish a separately incorporated, Calgary-based subsidiary that would serve as North American headquarters, and have independent Canadian directors. The public listing is seen as important for providing transparency into a company's operations.

Finance Minister Jim Flaherty insisted Sunday that the Petronas-Progress deal is not dead – a message that gave some heart to Progress shareholders. "There's another period of time during which they can continue to have discussions and try to satisfy the concerns that the Department of Industry has," Mr. Flaherty told CTV's Question Period.

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In Vancouver, Trade Minister Ed Fast cautioned against reading too much into the Petronas rejection, Bloomberg reported.

"This decision does not set a precedent because every single application is considered on its own merits," he said.

It's unclear how far apart the two sides are. Sources close to the transaction believe Investment Canada staff had few qualms about the deal, and the decision to ask for more time came from the Prime Minister's Office through the minister, who must make the final call. Prime Minister Stephen Harper has promised the government will release a new "framework" that will provide greater clarity around the rules for foreign investment, especially when the deal involved state-owned enterprises.

But for now, the government has created tremendous uncertainty about its appetite for investment from nationally owned companies, especially those from emerging markets like China that face significant opposition from the Canadian public.

"I don't think we know what the message is here until we get some clarity from the government. But the risk here is that you get a real chill on the investment side," John Manley, head of the Canadian Council of Chief Executives, said in an interview.

Both Petronas and CNOOC worry that government's new framework is an attempt to change the rules of the road after the companies have submitted their transactions for review, sources close to the deals said Sunday.

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Paul Boothe, a former associate deputy minister in the Industry Department, said it is more likely an effort to clarify the existing guidelines.

"It would be problematic if you changes the rules for transactions that were under way," Mr. Boothe said. "That's certainly not consistent with having a stable and consistent investment review process."

With files from reporter Nathan Vanderklippe in Calgary

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