Bloomberg News

Executives Urge Harper to Approve Cnooc’s Nexen Bid

September 26, 2012

Canadian Prime Minister Stephen Harper

Stephen Harper, Canada's prime minister. Photographer: Chris Kleponis/Bloomberg

Canada’s top executives are urging Prime Minister Stephen Harper’s government to approve Cnooc Ltd. (883)’s takeover of Nexen Inc. (NXY:US) while calling on it to curb foreign companies’ power to buy Canada’s biggest oil and gas producers.

The government will probably permit the $15.1 billion bid, given the small proportion of Nexen’s assets based in Canada and the need for the nation to deepen ties with China, Jim Prentice, vice chairman of Canadian Imperial Bank of Commerce, said in Ottawa yesterday at a conference organized by the Canadian Council of Chief Executives.

“The government will see the wisdom to approve that transaction, and I think the Canadian public can be convinced of it because it’s in Canada’s interests,” said Prentice, who was industry minister in 2008 when Canada blocked the acquisition of MacDonald Dettwiler & Associates Ltd. (MDA) by a U.S. company. It was the first time Canada had rejected an acquisition under its foreign-takeover law in effect since 1985.

Harper’s policy of selling more of the nation’s natural resources to Asia -- which he calls a “national priority” to help boost economic growth -- is being tested by concern among Canadians about the sale of Calgary-based Nexen to a state-owned firm. China, the world’s second-largest economy, is seeking greater access to Canada’s oil sands, the world’s third-largest pool of reserves, to support growth.

Suncor Different

Opposition lawmakers have called on Harper’s majority Conservative government to hold public consultations on the deal. Industry Minister Christian Paradis, whose department is reviewing the transaction, has said it will be “scrutinized closely.”

Rob Anders, a Conservative lawmaker who represents a Calgary district, said the government should put conditions on the transaction that could include restricting Cnooc from transferring oil-sands extraction technology outside Canada.

“I’m not crazy about a state-owned enterprise, period, whether it’s a Norwegian or a Canadian or a Chinese state-owned enterprise,” Anders told reporters in Ottawa today.“It’s important we have conditions in this case and it’s important we have conditions going forward.”

Canada would probably be more reluctant to approve the takeover if Beijing-based Cnooc were attempting to acquire Suncor Energy Inc. (SU), Canada’s largest energy company, said former industry minister John Manley, the council’s chief executive officer.

Different Size

“If it were Suncor, you would have a different set of questions being asked, simply because of its scale and its importance in the Canadian context,” Manley said in an interview at the conference. Suncor is Canada’s “biggest independent, and that puts it in a somewhat different category.”

The government should send a quiet signal to the Chinese if they don’t want to see acquisitions on a “much larger scale,” he said.

While the Nexen bid is “path breaking,” it presents the government with fewer difficulties than BHP Billiton Ltd. (BHP)’s $40- billion hostile takeover of Potash Corp (POT:US), Manley said. The government rejected that acquisition in 2010.

“Nexen is an important company, but it’s not as unique as Potash was in its sector nor is it even by any means one of the biggest Canadian companies,” said Manley. Potash is the world’s largest fertilizer producer.

‘Competitive Advantage’

Asian state-owned enterprises have the ability to “influence overall activity” in Canada’s oil and gas sector because of the “distinct competitive advantage” such companies have over domestic firms, CIBC (CM) said in a report distributed yesterday at the conference.

The government “needs to maintain Canada’s openness to foreign capital within a policy framework that maintains a strong Canadian market presence in the oil sands,” said CIBC, the country’s fifth biggest lender by assets.

The country has an interest in “making sure we have a strong Canadian presence in the oil sands because it’s such an immense resource for the country,” said N. Murray Edwards, chairman of Canadian Natural Resources Ltd. (CNQ), speaking on a panel with CIBC’s Prentice. “There are certain assets in the oil sands that I would argue are much more strategic for a Canadian presence than maybe the assets that Nexen has.”

While Canada will probably approve the Nexen bid, it may impose conditions, Edwards said.

“The question will be for Cnooc, are the conditions put forth by the government of Canada conditions they can live with,” Edwards said.

Keep Employees

Cnooc has offered to make Calgary the headquarters of its North American operations, keep Nexen’s current employees and management, and list its shares on the Toronto Stock Exchange.

Asian state-owned enterprises have paid an average premium of 77 percent over market price for Canadian oil and gas companies since 2005, compared with an average premium of 12 percent for domestic acquirers, CIBC said in the report.

The findings suggests some state-owned firms “are either being driven by a lower cost of capital, or non-market strategic imperatives,” the bank said in the report.

The “wave of foreign investment” in the oil sands should improve the overall credit quality of Canadian oil and gas producers, credit-rating company DBRS Ltd. said in a report issued today. “Increased investment activity from foreign national oil companies will likely draw greater political scrutiny,” the firm said in the report.

Below Offer

Cnooc said July 23 it planned to acquire all of the common shares of oil and gas producer Nexen. The company’s shares rose 4 cents to $25.24 in New York trading today, leaving them 8.2 percent below Cnooc’s offer of $27.50, which represented a premium of 61 percent when the takeover was announced.

Cnooc has sent documents to banks containing proposed terms for a $6 billion loan, a person familiar with the matter said. The company has approached a range of banks including lenders from Singapore, China, Australia, Europe and the U.S., the person said, asking not to be identified because the details are private. Citigroup Inc. is Cnooc’s financial adviser, the person said.

The Chinese producer is offering to pay an upfront 25 basis-point fee for the 12-month facility with no limits on commitment size, the person said, citing details from the term sheet. The margin on the loan starts at 80 basis points more than the London interbank offered rate for the first six months, before increasing to 100 basis points for the next three months and 120 basis points for the final period, the person said.

‘Less Issue’

A bid by Cnooc for less than 100 percent of Calgary-based Nexen Inc. (NXY) would have made securing Canadian-government approval for the transaction easier, according to Felix Chee of China Investment Corp. Chee spoke on the panel with Prentice and Edwards.

“There’s less issue if Cnooc, for example, had bought an operating interest in the assets,” said Chee, the Chinese sovereign wealth fund’s chief representative in Canada. “What wasn’t expected was to buy the whole goddamn head office.”

The takeover would have caused less “fuss” if Irving, Texas-based Exxon Mobil Corp. (XOM:US) had been the acquirer, Chee said. “I don’t know if the issues would be the same if it was Exxon- Nexen. I don’t think it’s about foreign investment; it’s about China.”

While Canada is a “receptive jurisdiction” for foreign investment, a “million pairs of eyes” in China are watching to see whether the Nexen bid is approved, he said.

China seeks a “fair and objective assessment” by the Canadian government of foreign acquisitions by state-owned companies, Chinese Commerce Minister Chen Deming said yesterday in a speech in Toronto.

“In recent years more Chinese companies are going global for mergers and acquisitions,” Chen said through a translator. “Some of them are state-owned companies but they are independent business players and they strictly observe laws and regulations of host countries,”

To contact the reporter on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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