CNOOC’s Nexen bid fuels foreign holding debate – by Claudia Cattaneo and Jameson Berkow (National Post – August 3, 2012)posted in Canadian/International Media Resource Articles, Oil and Gas Sector-Politics and Image |
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CALGARY — China’s largest overseas acquisition to date, CNOOC Ltd.’s US$15.1-billion bid to purchase Canadian oil and gas producer Nexen Inc., was crafted to surpass foreign-investment requirements in Canada and the United States, yet risk remains that the landmark bid from the state-controlled company will not proceed.
The risk is reflected in Nexen’s share price, which is trading about $2 below the bid price, a significant discount that suggests the market is worried political noise could drown out the benefits. “If the stock is down $2 per share, that is the price of uncertainty,” said Glen Hodgson, chief economist at The Conference Board of Canada.
Observers say the primary risk in both countries is politics. There are concerns, expressed publicly and privately, about the perceived loss of control of energy resources, worries that the bid could open the floodgates to a flurry of Chinese purchases in Canada, and that ultimately it is being used by the communist country for foreign-policy reasons over and above business considerations.
In Canada, the deal’s hurdles include passing the vague ‘net benefit test’ under the Investment Canada Act and convincing the Competition Bureau the deal will not lessen or prevent fair competition.
In the U.S., the deal must pass a review by the government’s inter-agency Committee for Foreign Investment, known as CFIUS, which focuses on national security.
The approval process in both countries is complicated by allegations of insider trading by the U.S. Securities and Exchange Commission against a Hong Kong entity lilnked to CNOOC that purchased $14.3-million in Nexen shares four days before the CNOOC bid was made public on July 23. The allegations are fuelling mistrust that Chinese state-backed investors aren’t playing by free-market rules. In 2005, Vancouver-based money manager Bill Wheeler sued state-controlled China National Petroleum Corp., alleging it profited by trading on insider information in its US$4.18-billion takeover of Calgary-based Petro Kazakhstan Inc.
“The fact that there has been noise from politicians in the U.S., even though it’s 6% of production and they could divest it, it still weighs on the spread, because it takes on this unpredictable path,” said a New York-based analyst who declined to be named. “We are in an election year. U.S. politics is stupid enough as it is, but now we get into some really ridiculous things.”
In Canada, the political risk stems from the potential for a groundswell of resistance against Chinese investment. Even within the Canadian oil-and-gas industry there is nervousness the deal could give the Chinese a window into operations and expertise. There is further risk from the net benefit test, which lacks transparency.
“Our legislation is murky and the bureaucrats and politicians may like it that way but the investment community does not,” Mr. Hodgson said.
Tony Baldanza, a partner at Fasken Martineau in Toronto specializing in foreign-investment law, said there are bureaucratic and political hurdles to the deal. While he is betting on the deal being approved based on passing regulatory requirements, he notes politics adds a layer of uncertainty.
“If it captures the imagination of the electorate and the politicians become more engaged, as opposed to treating it as one more merger, then they will do the political calculations,” Mr. Baldanza said.
One aspect that could prove controversial is the ability of state-owned enterprises (SOEs) to avoid paying taxes in Canada.
For the rest of this article, please go to the National Post website: http://business.financialpost.com/2012/08/02/cnoocs-nexen-bid-fuels-foreign-holding-debate/