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Ottawa right to protect Canada's resources

These are stories Report on Business is following Monday, Oct. 22, 2012.

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The Canadian chill
Canadian officials need to shed at least some light on why they rejected a Malaysian bid for a Canadian gas jewel. But we shouldn't get our knickers in a twist over the fact that they did it.

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It may seem like the Canadian government is sending a message to investors, both foreign and domestic, that they're not keen on big mergers in industries where key resources are at play or where there are consumer concerns to consider.

But that's simplistic. And it's wrong to suggest that the Conservatives are robbing shareholders of hefty takeover premiums without sound reasoning, or that foreign suitors need not apply.

Both Finance Minister Jim Flaherty and Trade Minister Ed Fast sought to ease concerns among foreign investors yesterday, stressing their nixing of the $6-billion takeover of Progress Energy Resources Corp. by Malaysia's Petronas isn't the end of the story and shouldn't be seen as signal to foreign investors to stay away. And the government could still allow a second run by Petronas.

Nonetheless,  as The Globe and Mail's Carrie Tait reports, expect shares of Progress and Nexen Inc., whose takeover by China's CNOOC is under scrutiny, to tumble today when markets open, along with other stocks investors believe may one day bring a hefty takeover premium.

The fear is that the government's opposition to the 2010 takeover of Potash Corp., coupled with its Progress decision late Friday and along with the CRTC's rejection of BCE Inc.'s takeover of Astral Media last week, is shaping up as a pattern.

But you've got to look at each deal on its own.

The BCE-Astral rejection was surprising, but for entirely different reasons, none of which involved foreign suitors.

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In the Potash deal, there was a major foreign suitor, but huge concerns over government revenues and future projects, among other things.

I even saw one mention yesterday of how the London Stock Exchange was pushed back in its bid for TMX group Inc. That was, of course, different, in that it was a move by Canada's banks to control the country's stock exchanges, which, yes, raises questions, but not where the federal government is concerned.

And, of course, Quebec's bid to declare the Rona Inc. hardware store chain a strategic asset was just plain nutsy.

Once you've been through each deal, you've then got to ask why the government shouldn't protect our resources and ensure that each and every proposed takeover is in our interest. Which is not to say that the Petronas-Progress deal isn't - the government won't tell us what's going on - but takeovers such as this one should certainly be given a thorough going-over.

Progress is big in natural gas in British Columbia and Alberta, for example, and Nexen, while global in nature, has huge interests in the oil sands and also B.C.

As The Globe and Mail's Shawn McCarthy writes, some observers, such as lawyers at Osler Hoskin & Harcourt LLP, worry that Friday's decision could have "a significant chilling effect" on foreign investors.

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"I don't think this is necessarily protection of the shareholders of the company," Alan Jochelson, a mergers and acquisitions specialist at Gowling Lafleur Henderson LLP, told The Globe's Ms. Tait. "It is really looking at ultimately to what extent are we prepared as a country to have foreigners own our assets."

That's true, but at the same time the government not only has the right, but also the responsibility to protect, and, yes, at times shelter, Canada's jewels. That doesn't mean they can't change hands, but it does mean we should make certain they fall into the right hands.

A big problem here is that we don't know why Ottawa blocked Malaysia's state-owned Petronas from the takeover of Progress, why it didn't meet the "net benefit" test. The government, of course, can hide behind confidentiality rules, but it has left a bad air of uncertainty.

Was it because the Malaysian company didn't spell out its plans well enough? Was reciprocity an issue? Were there concerns over the fact that Malaysia is No. 60 in Transparency International's corruption rankings, a far cry from bottom-ranked Somalia at 182, but also a far cry from Canada's No. 10 spot? Or, as AltaCorp Capital wondered, was Ottawa troubled by the many "high-profile" acquisitions recently, or tax issues surround repatriation of funds? Or questions over pricing of natural gas that could affect government revenue?

"It could be that the federal government was of the view that Petronas was trying to take advantage of stranded Canadian natural gas and that the deal was structured in a way that would allow them to pay artificially lower costs in terms of taxes and royalties due to a potential disagreement over transfer pricing," said AltaCorp.

"By owning the full value chain for the delivery of [liquid natural gas], Petronas was in a position that it could dictate what would be assumed in terms of a deemed price for its natural gas – with the bias for this to obviously be lower in order to limit royalty and tax expense on the Canadian side of the business. "

There's also the issue of reciprocity, though, AltaCorp said, that's probably a bigger issue in CNOOC's Nexen takeover.

"There may be some aspect that the government is looking at this deal as an unfavourable opportunity for a NOC (national oil company) to do business in Canada, while Canadian firms are not presented with the same opportunity elsewhere," the analysts said of the Petronas deal.

"The point is a valid one – do Canadian companies have the same reciprocal rights to doing business in a foreign country? How does a Canadian company compete against an NOC, if they don't have the same investment opportunities? (Not to mention a higher cost of capital.)"

Related stocks set to sink
Expect the Canadian government's decision to ripple through the market today, not only Progress Energy Resources Corp. but others as well.

While Progress will undoubtedly take a hit, so too could shares of Nexen Inc. given the uncertain climate that dogs the outlook for its takeover by CNOOC.

Analysts wonder whether Celtic Exploration could also feel the chill while its takeover by ExxonMobil is reviewed.

"We certainly don't believe the stock will drop to its pre-acquisition price range of $11 to $12 per share," FirstEnergy Capital said of Progress.

"Taking on risk of the Petronas deal falling through and possibly a reduced level of deal tension for the acquisition of the company, we do believe the stock could be discounted by 30 per cent and trade down to the $15 per share level until more is known on Petronas' willingness to accommodate the government's deadlines and demands."

While CNOOC is another matter, analysts are also projecting a hit to Nexen.

"The rejection of the Petronas-Progress deal will obviously impact Nexen's shares of Monday, as this news appears to put the CNOOC deal at much more risk than the market perceived before Friday night," FirstEnergy said.

"We reiterate here that we do not believe that the rejection of the Petronas/Progress deal means with any certainty that the government will reject the CNOOC/Nexen deal, but rather that the government is not yet ready with a planned set of rules/guidelines to announce regarding foreign takeovers," it added in a report.

"However, we must acknowledge that the Canadian government is likely aware that if it were to a allow a Malaysian [state-owned enterprise] takeover but block a Chinese SOE takeover, the Chinese would feel slighted."

Caterpillar cuts forecasts
Caterpillar Inc. has slashed its outlook for the year in yet another sign of the troubles dogging the global economy.

"As we've moved through the year, we've seen continued economic weakening and uncertainty," said chief executive officer Doug Oberhelman.

"It's definitely impacting our business with dealers intending to lower inventories and mining customers delaying some projects and reducing orders," Mr. Oberhelman added in a statement.

"We're focused on being very nimble and taking actions to respond to the current environment while at the same time keeping our 2015 goals and expectations in mind. It requires a pragmatic and steady approach as we balance our actions in the short term with what we need to do to be prepared for better growth when the world economy improves."

The giant equipment company cut its projections for revenue this year to about $66-billion (U.S.), down from a range of $68-billion to $70-billion earlier.

It also expects earnings per share of $9 to $9.25, down from its previous projection of $9.60.

"The decline in the sales and revenues outlook reflects global economic conditions that are weaker than we had previously expected," the company said.

"In addition, Cat dealers have lowered order rates well below end-user demand to reduce their inventories. Production across much of the company has been lowered, resulting in temporary shutdowns and layoffs. Lower production will continue until inventories and dealer order rates move back in line with dealer deliveries to end users."

It does have a "slightly" better view of 2013, with "modest improvement in the United States, China and most of the developing world, but continuing difficulty in Europe." It said it does not forecast a global recession.

Caterpillar sales rose 5 per cent in the third quarter to $16.45-billion from a year earlier, while profit surged to $1.7-billion, or $2.54 a share, from $1.14-billion or $1.71.

Agrium boosts dividend
Canada's Agrium Inc. is doubling its dividend after buying back almost 9 million shares, good news for shareholders amid a weaker outlook for potash-related stocks.

Agrium said its dividend would climb to $2 (U.S.) on an annualized basis, or a quarterly payout of 50 cents beginning in January.

"This is the third significant increase to our dividend since December of last year," said chief executive officer Mike Wilson.

"The increased dividend and $900-million substantial issuer bid are an indication of our confidence that our integrated business model will continue to deliver strong results for the benefit of shareholders."

Markets mixed
Forget about energy stocks for the moment: Global markets are mixed so far this morning.

Tokyo's Nikkei inched up 0.1 per cent, and Hong Kong's Hang Seng 0.7 per cent.

In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were bouncing between red and green, but little changed, by about 8:45 a.m. ET.

Dow Jones industrial average and S&P 500 futures were up.

What to watch for this week
The Bank of Canada and its U.S. counterpart take centre stage this week, with questions surrounding the message the Canadian central bank wants to send.

Governor Mark Carney and his colleagues announce their policy decision tomorrow. And while they won't change their benchmark overnight rate from its current 1 per cent, analysts wonder whether they will change a key line in their statement. That key line has, for now, been a signal that the next move in rates will be up. But given that Mr. Carney omitted that statement in a speech earlier this week, economists expect he could change it tomorrow.

"There remains some chance the bias is left intact, though this says more about its conditional nature rather than confidence in the medium-term outlook," said Mark Chandler and Ian Pollick of RBC Dominion Securities.

"Instead, the BoC may choose a 'third way,' outlining various economic scenarios in an uncertain forecasting environment and the associated policy responses that might be expected."

For those reasons, there's heightened speculation surrounding tomorrow's decision.

"Many took the Governor's remarks this past week as a sign that the bank was about to drop its very soft-pedaled warning of rate hikes to come," said chief economist Avery Shenfeld of CIBC World Markets, though he believes Mr. Carney won't change his message.

"In its most recent incarnation, there has been no sense of urgency in terms of the timing of when those hikes would take place, and very specific conditions under which they would happen at all. If the bank dropped that message in its entirety, it would leave investors guessing whether the next move was even a hike, would rally the short end a bit, and take some of the wind of the Canadian dollar's sails. So in this case, words do count."

A day after the rate decision, the Bank of Canada will release its widely watched Monetary Policy Report, and could well trim its outlook for economic growth.

"In the July edition of the MPR, the BoC expected growth to be 2.1 per cent in 2012 and 2.3 per cent in 2013," said Charles St-Arnaud of Nomura Securities in New York.

"Based on the level of uncertainty and the recent data, we believe that growth in 2012 could be revised to 2 per cent and for 2013 to 2.2 per cent for 2013. This should still see the output gap closing in the second half of 2013."

While Canada's central bank is unveiling that report, the U.S. Federal Reserve will be preparing to release its policy announcement that afternoon.

"After pressing harder on the monetary gas pedal in September, the Fed will likely stay in cruise control for a few months to monitor the effectiveness of recent policies," said Sal Guatieri of BMO Nesbitt Burns.

"With the unemployment rate trending lower and the expansion picking up some, there is little urgency for additional monetary fuel. ... The statement should also repeat that policy makers will take additional action 'if the outlook for the labour market does not improve substantially and retain a super-easy stance 'for a considerable time after the economic recovery strengthens.'"

For shareholders, several major companies are scheduled to report quarterly results, including Canada's two major railways, Apple Inc., Yahoo Inc., Potash Corp. of Saskatchewan, Cenovus Energy Inc., Nexen Inc., Precision Drilling Corp., Caterpillar Inc., Facebook Inc., Xerox Corp., AT&T Inc., Encana Corp., Rogers Communications Inc. and Teck Resources Ltd.

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