(By Mani) Shares of Nexen, Inc. (NYSE: NXY) (TSX:NXY) plunged after the Canadian Federal Government made a surprise move to block Petronas's $6 billion acquisition of Progress Energy Resources Corp. (TSX:PRQ) two minutes before a midnight deadline on Friday.
Canadian industry minister Christian Paradis stated that the Government "was not satisfied that the proposed investment is likely to be of net benefit to Canada". On the news, shares of Progress Energy fell 13 percent on the Toronto Stock Exchange.
In addition, Nexen shares took a hit after investors became concerned that the $15.1 billion deal by CNOOC (China National Offshore Oil Corp.) Ltd. (NYSE:CEO) to acquire Canadian oil & gas producer Nexen may have the same fate. Calgary-based Nexen shares fell as much as 13 percent on the NYSE and 7 percent in the Toronto Stock Exchange.
iStock had reported in late July about the regulatoryconcerns surrounding the Nexen deal. Skeptics feel that if China got hold of major assets in North America, then the nation's corporate sector may face excessive interference from Beijing. However, the main criteria for approval of any deal is whether such a deal presents a "net benefit" to Canada.
Moreover, Canadian Security Intelligence Service (CSIS) had warned that foreign investment in the country could be a security issue. While the vast majority of foreign investment in Canada is carried out in an open and transparent manner, certain state-owned enterprises (SOEs) and private firms with close ties to their home governments have pursued opaque agendas or received clandestine intelligence support for their pursuits here.
"When foreign companies with ties to foreign intelligence agencies or hostile governments seek to acquire control over strategic sectors of the Canadian economy, it can represent a threat to Canadian security interests," CSIC said in its annual report.
The foreign entities might well exploit that control in an effort to facilitate illegal transfers of technology or to engage in other espionage and other foreign interference activities. CSIS expects that national security concerns related to foreign investment in Canada will continue to materialize, owing to the increasingly prominent role that SOEs are playing in the economic strategies of some foreign governments.
Meanwhile, the government has not yet provided any indication as to what its main concern was with the proposed Petronas - Progress deal. Malaysian state-owned Petronas has 30 days to amend the bid , which still means the deal is still possible, but investors will likely take a cautious view on Progress Energy, Nexen and Celtic Exploration, Inc. (TSX:CLT) and any other deal speculated names.
"While an amendment is still possible , we believe, investors will take a very negative view of this move," CIBC analyst Jeremy Kaliel wrote in a note to clients.
Print media has provided color on how the Government's refusal may have evolved. The Globe and Mail Saturday cited three unknown sources close to the negotiations who stated that "Petronas refused a last-minute request by the Federal Government for more time to consider the state -owned energy producer's proposed $6-billion acquisition" forcing Ottawa to block the deal.
Petronas was reportedly frustrated after weeks of already-extended negotiations over concessions needed to meet Investment Canada's "net benefit" test, and so declined when the government asked to extend negotiations again.
Sources to the Globe and Mail suggested that "Petronas had made offers of concessions but was getting little feedback on what it would take to get the deal done", and hence tried to force the government to make a decision.
It is also possible that inter-party politics have come into play. The New Democratic Party, the official opposition to the Conservatives, has been increasingly vocal in its opposition to the CNOOC/Nexen takeout. As reported by Bloomberg news, NDP member of parliament Peter Julian offered his view that the Government may have used Petronas to "look tough" before accepting CNOOC's bid, while in the past the Government has "rubber stamped" other investments.
Ottawa has promised that its decision on China's bid for Calgary- based Nexen (expected in mid-November) will provide a framework for how future takeover bids from state-owned companies will be reviewed.
In the past, the Canadian government has blocked some bigger overseas takeover attempts in the country. In 2010, Canadian government blocked mining firm BHP Billiton's (NYSE: BHP) $39 billion attempt to make a hostile takeover of fertilizer firm Potash Corp. (NYSE: POT) (TSX: POT). Even, CNOOC had faced a political backlash in 2005 resulting in a failure of its attempt to buy US-based Unocal.
If CNOOC, which would pay US$27.50 per Nexen share in an all-cash deal, wins the regulatory battle, it would the third largest Chinese acquisition on record and the largest since China Unicom Ltd acquired China Netcom Group Corp Ltd for $22.8 billion in 2008. The deal, upon approval, is the fifth largest foreign takeover of a Canadian company on record and the largest since Rio Tinto plc acquired Alcan Inc for $43.0 billion in 2007, according to Dealogic.