The politics of take-overs

The Canadian government is clearly having a tough time deciding whether to allow a state-owned Chinese company take over one of our major petroleum producers, Nexen Inc. On Friday, it was announced that the cabinet is taking another 30 days to consider whether to allow the China National Offshore Oil Corporation (CNOOC) to go ahead with the $15.1 billion deal. The new target date for a decision is now December 10.

The dilemma is obvious. Prime Minister Harper has been working hard to build better trade relations with China over the past few years. The Chinese ambassador to Canada has even raised the possibility of a free trade deal. But it’s one thing to improve trade relations. It’s quite another to have a foreign government proxy play an increasingly larger role in our most important resource sector.

China is already involved in our energy industry. In 2010, Penn West Petroleum entered into a $2.6-billion joint venture with China Investment Corp. (CIC) to develop oil sands properties in northern Alberta. That deal also involved CIC taking a 5 per cent stake in Penn West.

Last January, it was announced that Cretaceous Oilsands Holdings Ltd., a subsidiary of PetroChina, had taken 100 per cent control of the MacKay River oil sands project from Athabasca Oil for $680 million and is aiming to eventually ramp up production to 150,000 barrels a day.

Then came the announcement last week that another PetroChina subsidiary, Phoenix Energy Holdings Ltd., is teaming up with TransCanada Corp. to build a new $3 billion pipeline to that would carry up to 900,000 barrels a day from Fort McMurray to near Edmonton.

The pattern is obvious. China is taking an increasingly aggressive role in developing the oil sands and is investing billions of dollars in the process. The takeover of Nexen would be the jewel in the crown — at least so far. But if that deal goes ahead, where does it end? No wonder the cabinet is in a quandary.

Meanwhile, the NDP is promising to make life difficult for the Conservative government if the deal is approved. The official opposition party wants the sale blocked both on national security and environmental grounds. Further complicating matters is the concern being expressed in the U.S. Congress over allowing a Chinese company to gain control of Nexen’s leases in the Gulf of Mexico. The whole thing is a political nightmare.

And that’s not all Ottawa has to contend with. The government is still coping with the fall-out from its completely unexpected Oct. 19 decision to reject the $5.2-billion offer from Petronas, the Malaysian state oil firm, for Progress Energy Resources. The Globe and Mail described the veto as “careless”, noting that “Malaysia is no geopolitical threat”.

That deal isn’t dead yet, however. Petronas and Progress have until mid-November to show that the acquisition is of “net benefit” to Canada (whatever that means) and the expectation is that the companies will find a way to achieve that.

Other energy patch deals are also running into trouble. Athabasca Oil has experienced a long delay getting government approval for a joint venture project with Kuwait and Spain that would be worth a reported $2 billion.

Hal Kvisle, CEO of Talisman Energy says Ottawa should butt out of these deals and let the free market take its course. “If it is a state-owned company that primarily operates as a commercial venture with minimal political interference, then I think we should welcome those companies to Canada,” he told the Globe and Mail in an interview. It should be noted that Talisman itself has been identified as a potential take-over target if the Nexen deal is approved.

Book publishers too
Then there’s the matter of the huge publishing merger between Germany’s Bertelsmann, the parent company of Random House, and British-based Pearson PLC, which owns Penguin. Neither is a Canadian company but between them Random House and Penguin dominate this country’s book publishing industry. There is already intense speculation in the arts community that allowing the two to combine will lead to a reduction in the number of Canadian titles published each year. Whether Ottawa can do anything about that is questionable, but the issue is potentially another political hot potato.

The problem always comes back to the same critical point: we do not have a clearly defined set of guidelines for foreign takeovers or significant joint ventures. The federal government has been promising such a policy ever since it vetoed BHP Billiton’s hostile take-over bid for Potash Corporation of Saskatchewan in 2010. We’re still waiting, although Mr. Harper has said we can expect some news “fairly shortly”.

Ideally, such a policy should be clear, concise, and easily understandable. In the real world of international politics, that may be too much to ask but even some general guidelines would be better than nothing. Certainly, we should avoid a U.S.-style solution where several regulatory bodies can stick their noses in, extending the review period indefinitely.

As far as investors are concerned, no take-over bid should ever be considered a sure thing, even one that is purely domestic. The CRTC decision on BCE’s bid for Astral proves that.

So if you are fortunate enough to hold shares in a company that becomes a take-over target, your best bet is usually to sell into the market on the news, take your profits, and exit. There are too many things that can go wrong.

Photo © Andrew Johnson

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