The proposed takeover of Canada’s Nexen
(NYSE:NXY) by the state-owned China National Offshore Oil Corporation
(NYSE:CEO), or CNOOC, hit a major roadblock after the Canadian government unexpectedly blocked a $5.17 billion takeover of Progress Energy Resources
(TSE:PRQ) by Malaysia’s state-owned Petronas energy company.
On Friday, Canadian Industry Minister Christian Paradis said that Petronas’ attempted acquisition of Progress would not provide the “net benefit” for the country required by Canada’s foreign investment laws.
Alarms bells regard the CNOOC-Nexen deal immediately went off after, especially since CNOOC’s $15.1 billion takeover of Nexen is much larger in size compared to the Petrona-Progress deal, and CNOOC, unless Petronas, is thought to be intrinsically linked to the state.
Investors have reacted negatively to the news as well. Shares of Nexen, which had surged over 40% since the CNOOC takeover was announced in July, were down more than 4% in late Monday trading.
In spite of the Petronas-Progress development, Wall Street analysts do not think that the CNOOC-Nexen deal will be blocked. Credit Suisse explained in a note that it believed the Petronas-Progress deal was blocked only because “the government felt it had not yet obtained a clear undertaking from Petronas on the net benefits of the transaction
and specifically a mechanism to ensure the undertakings were fulfilled.”
With Petronas having been given 30 days to submit any further undertakings, the implication is that the denial could be reversed. Thus, Credit Suisse wrote that “it remains our view that the Nexen acquisition will proceed as proposed.”
Meanwhile, in a report released Monday, Bernstein Research warned that though the decision to block the Petronas-Progress deal “has increased the probability that the CNOOC/Nexen deal will not be approved and sends a clear signal that Canada is not as open to oil and gas M&As as it has appeared,” the odds remain in CNOOC's favor because of several reasons.
Firstly, while 100% of Progress’s assets are located in Canada, only 32% of Nexen’s production capacities are located domestically. Unlike Petronas, CNOOC has also made stronger overtures to the Canadian government to ensure that there is a “net benefit” for the country, such as guaranteeing that it will keep exisitnig Canadian staff, make Calgary its North American headquarters, and offer a secondary listing in Toronto. Also, “Nexen is more international and does not have the same conflict of interest with LNG sales to Asia as Petronas would have with Progress," wrote Berstein.
“We believe CNOOC has been quite proactive in its commitments toward ensuring the net benefit of the transaction to Canada,” UBS also noted, adding that CNOOC is more transparent than Petronas because it is publicly-traded.
The Canadian government’s decision on the CNOOC-Nexen deal is expected to arrive on November 12, according to Paradis.
No positions in stocks mentioned.
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