Executives at China’s state- controlled oil producer Cnooc Ltd., plotting their nation’s largest foreign takeover, have been studying history for lessons from two dramatic failed mergers, said people with knowledge of the effort.
Cnooc executives and their advisers, who announced a planned $15.1 billion takeover of Canada’s Nexen Inc. (NXY) yesterday, are seeking to avoid the missteps that doomed BHP Billiton Ltd. (BHP)’s $40 billion offer for Potash Corp. of Saskatchewan Inc. in 2010 and Cnooc’s $19 billion bid for California-based Unocal Corp. in 2005. Both collapsed amid opposition from the targets’ executives as well as government leaders.
Those lessons encouraged Cnooc, led by Chairman Wang Yilin, to pledge to Nexen executives during negotiations never to pursue a hostile offer, said one of the people, who spoke on condition of anonymity because the talks were private. And it prompted Cnooc and Nexen to phone Canadian political leaders in a weekend blitz, including those in the western provinces of Alberta and British Columbia where Nexen operates, this person said.
“The Chinese have probably been courting the government for months,” said David Taylor, who helps run the IA Clarington Focused Canadian Equity Class Fund in Toronto and owns Nexen shares. “BHP was so arrogant, they didn’t court the government and probably didn’t let them know until the day they made the bid.”
Cnooc’s offer for Calgary-based Nexen would be the largest foreign takeover of a Canadian energy company, and the fourth- biggest overall, according to data compiled by Bloomberg.
Nexen, formed in 1971 as a unit of Occidental Petroleum Corp., has been struggling with setbacks in its Long Lake oil sands project in Canada and its operations in the North Sea. The company hired Goldman Sachs Group Inc. and Royal Bank of Canada last year to solicit potential buyers, said people with knowledge of that decision.
Cnooc was among the parties contacted during that so-called strategic review, and the Chinese company declined, the people said. By December, Nexen Chief Executive Officer Marvin Romanow said that the review had ended and the board decided to remain independent and focus on improving the Long Lake operation.
Earlier this year, Cnooc executives changed course and the companies started discussing a deal, said people with knowledge of the matter. At that point, Cnooc was already a partner with Nexen on its biggest and most challenging project. Cnooc in November bought Opti Canada Inc., a bankrupt producer whose biggest asset was a 35 percent stake in the Long Lake project, for $2.4 billion.
Cnooc studied BHP’s failure to win Canadian approval to buy Potash in a hostile offer. Under the Investment Canada Act, the government can block takeovers unless they provide a “net benefit” to the nation. Prime Minister Stephen Harper’s Conservative government blocked BHP in 2010, amid opposition to the deal from Saskatchewan officials and Potash executives. It was only the second transaction in 25 years to be rejected.
Another state-owned Chinese company, the fertilizer trader Sinochem Group, considered a rival bid for Potash in partnership with Canadian pension funds, people with knowledge of those talks said in 2010. An offer was never tabled.
Cnooc’s concessions on the Nexen bid include a Calgary headquarters for its North American operations, and the preservation of jobs, similar to what BHP offered. Cnooc is also promising to list its shares on the Toronto Stock Exchange -- something BHP offered only after announcing its offer and starting negotiations with the government. Cnooc’s bid is backed by Nexen’s management, something BHP never got from Potash.
Nexen and CNOOC made “initial phone calls” to Canadian government officials in Ottawa, CEO Li Fanrong said on a conference call yesterday.
“We will comply with Canadian government requirements,” Li said.
These concessions increase the chances of the deal winning approval by the Canadian government, Lysle Brinker, director of energy equity research at IHS Herold, said by telephone from Cape Elizabeth, Maine.
“Cnooc probably wouldn’t have gone ahead with this if they didn’t have some pretty high confidence they would receive approval,” Brinker said.
The sale of Nexen is also less sensitive than Potash Corp., the largest fertilizer producer in the world by market value, and a key employer in the agricultural-based economy of Saskatchewan.
By contrast, Nexen ranks sixth among Canadian oil producers, in an Alberta-based energy industry that’s already attracted about $53 billion in Chinese investment in the past decade, including Cnooc’s investments in Opti and MEG Energy Corp. (MEG) Canada accounts for only 28 percent of Nexen’s output, which includes operations in the Gulf of Mexico and North Sea.
While the bid for Nexen may become a “political football,” it will be “hard to block this deal on national interest grounds,” Sam La Bell, an analyst with Veritas Investment Research Co., said by phone.
“This isn’t a Potash; it’s not on the same order as Potash, where there’s one province that absolutely doesn’t want the deal done,” La Bell said.
Alberta Energy Minister Ken Hughes said the Cnooc bid is “further evidence of the vital importance of Alberta’s oil sands to meet global energy demand,” according to a statement.
The Nexen takeover comes as Canadian companies prepare to build new pipelines for transporting Canadian fossil fuel to Asia in an effort to reduce its dependency on the U.S. market, which has depressed prices for crude produced in Alberta’s oil sands and the Bakken in Saskatchewan.
Cnooc has hired Michael Coates, a lobbyist with Hill + Knowlton Strategies Canada, to represent the company in its dealings with the federal government, according to public lobbying records.
Coates, who helped prepare Harper for debates in the 2004, 2006 and 2008 election campaigns, was retained to lobby the government on environmental reviews of energy projects, according to the records. He lobbied several senior government officials near the end of March, including Industry Canada deputy minister Richard Dicerni, Industry Minister Christian Paradis’ policy adviser Bruce Winchester, Natural Resources Canada deputy minister Serge Dupont and Trade deputy minister Louis Levesque.
Politics also derailed Cnooc’s bid for Unocal. After the El Segundo, California-based company signed a deal to be sold to Chevron Corp. (CVX:US) in 2005, Cnooc, then led by Chairman Fu Chengyu, made a hostile offer at a higher price. U.S. lawmakers pilloried the offer and proposed legislation to block it, and Unocal executives stuck with Chevron, citing uncertainty about government approval. Cnooc eventually dropped its bid.
“In 2005, there was more anxiety about Chinese oil companies,” said Erica Downs, a fellow at the John L. Thornton China Center at the Brookings Institution. “Since then, those companies have been doing things quietly and gradually and have been trying to structure their deals so they won’t attract additional scrutiny.”