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Progress, Petronas move to salvage acquisition

Industry minister Paradis blocked acquisition after it was ruled the deal didn’t provide a net benefit to Canada.


October 24, 2012
by The Canadian Press

CALGARY—Progress Energy Resources and the Malaysian state-owned company that wants to buy it are looking to salvage their $6-billion deal as observers warned Ottawa’s stunning last-minute rejection could scare away foreign investment.

Progress and Petronas said they’re meeting with Industry Canada officials to “better understand” what the government’s requirements are with respect to the deal.

“Petronas and Progress will work together to ensure that the minister has the necessary information to determine that the proposed acquisition of Progress would likely be of net benefit to Canada,” the companies said in a release.

Three minutes before midnight last Friday, Industry Minister Christian Paradis announced the transaction did not pass the net benefit test imposed on large foreign takeovers of Canadian companies—a process widely criticized for its lack of clarity.

Petronas has 30 days to amend its deal and send it back to Ottawa for review.

Analysts at CIBC World Markets give 25% odds to the deal being saved and say there’s a 50% chance another multinational oil company comes along if the Petronas deal fails.

A source familiar with the matter said odds are “extraordinarily high” the deal ultimately gets done. Before Friday’s bombshell, the person would have put the likelihood of a green light at 99%, but the “ruffled feathers” make it more like 95% now.

“I’m sure there are people who are very offended and there’s guys getting on a plane in Kuala Lumpur who weren’t expecting to spend their week in Ottawa.”

After Progress accepted Petronas’ initial $20.45-per-share offer this summer, another unidentified bidder swooped in with a rival bid. Petronas trumped the competing offer by sweetening its bid to $22 per share.

If the Petronas deal falls through, the likes of ExxonMobil or UK gas giant BG Petroleum are potential buyers, the CIBC analysts said.

They said it’s not likely the government’s quibbles centred around things like job promises or reciprocal market access, suggesting the decision may have had more to do with Ottawa positioning itself for the much more politically troublesome $15.1-billion takeover of Calgary-based Nexen Inc. by China National Offshore Oil Co.

One theory is that the government will ultimately approve a tweaked Progress-Petronas deal, but wants to make it look like it’s being tough on foreign investment so that it has more credibility when it waves through the CNOOC-Nexen one.

“Another theory is that the government does not want to be seen as anti-China and easily approving the Progress-Petronas deal would make it look like the government’s issue is primarily with China as opposed to the national oil company business model and other concerns.”

There were reports that Industry Canada asked Petronas to allow it to extend its review for a second time, but the Malaysian company refused.

Whatever the reason, the analysts say it’s “bad news for Canada.”

“Global investors have already been struggling with why they need to own Canadian energy and this announcement clearly does not help,” they said. “After years of healing the wounds introduced by the Alberta government’s disastrous royalty review and the royalty trust termination, the last thing global investors needed was a reminder that Canada is a risky political environment.”

Investors punished Progress shares on earlier this week, pushing them down more than 9% to $19.64 on the Toronto Stock Exchange.

Other Canadian energy players with deals in the works—notably, Nexen and Celtic Exploration—were also dragged down by the surprise news.

Nexen was off more than 4% to $24.04. A review of the CNOOC-Nexen deal by Industry Minister Christian Paradis is set to end on Nov. 11, though it can be extended by 30-day increments with the buyer’s consent.

While the NDP has not taken a stand on the Progress-Petronas deal, it has raised red flags about CNOOC’s environmental and human rights record and urged Ottawa to block the deal.

But the process under which both transactions are being handled by Investment Canada is cause for concern, said opposition natural resources critic Peter Julian.

Interim Liberal Leader Bob Rae said the government’s “complete lack of transparency” in the decision is a major problem.

“Decisions that are made in secret and are made by the (Prime Minister’s Office), are not decisions that build confidence for anyone—not for the people who are against the investment or the people who are making the investment,” he said. “Nobody knows exactly why the government decided to do what it did.”

The Canada Pension Plan Investment Board, Progress’ top investor, was predictably disappointed.

“We think that it is unfortunate that this transaction was not approved as anticipated. CPPIB continues to believe that there is substantial intrinsic value in Progress Energy and that this proposed acquisition is of long-term benefit.”

©The Canadian Press