Analysts: Petronas Rejection Has Implications for CNOOC, C$

The Canadian government's announcement Friday, rejecting a C$5.2 billion takeover bid of Canadian oil and gas company Progress Energy Resources from Malaysia's state-owned Petronas, may have ramifications for other M&A deals, analysts said.

The Petronas decision has cast doubt about whether the C$15.1 billion bid for Canadian oil and gas firm Nexen by Chinese state-owned oil producer CNOOC will also be nixed, they said.

In a statement late Friday, Christian Paradis, Canada's Minister of Industry, offered insight into the decision regarding the proposed acquisition of Progress Energy Resources Corp by PETRONA Carigali Canada Ltd (Petronas)

"I can confirm that I have sent a notice letter to Petronas indicating that I am not satisfied that the proposed investment is likely to be of net benefit to Canada," he said.

"I came to this decision after a careful and thorough review of the proposed transaction. Under the Investment Canada Act, Petronas now has up to 30 days to make any additional representations and submit any further undertakings, which can be extended with my agreement and that of the investor. Subsequently, I will either confirm this initial decision or approve the acquisition," he said.

Paradis concluded by noting that "The Government of Canada remains committed to maintaining an open climate for investment."

Analysts expressed doubt about whether indeed there was an "open climate" for all countries who want to invest in Canada.

"This refusal follows a rejection two years ago for the acquisition of Potash Corp by BHP Billiton and we think it casts some doubts about the C$15.1 billion deal by China's CNOOC to buy Nexen and the openness of Canada to foreign takeovers for which a decision is expected mid-November (no official date)," said Charles St. Arnaud, strategist at Nomura.

He reminded that "under the Canada Investment Act every significant acquisition of a Canadian firm (C$330 million or more) by a non-Canadian entity needs to be reviewed to ensure that the transaction benefits Canada, and has to be approved by the Minister of Industry."

The Minister considers a multitude of factors ("the impact on the economy, Canadian participation, competition, etc" ) and then determines whether or not the deal is of "net benefit" to Canada," St. Arnaud said.

In the wake of the rejection of the Potash-BHP Billiton deal two years ago, "the industry minister at the time Tony Clements said that Industry Canada would release a document providing background to the government's decision," he noted.

"This document has yet to be published, which we think suggests that the decision process remains a 'black box' and is very hard to evaluate," St. Arnaud said.

With each project under review evaluated separately, the Petronas - Progress deal should not influence the CNOOC-Nexen deal, he said.

"However, the fact the Petronas is state-owned may have been an important reason for the rejection and could mean that the CNOOC-Nexen deal goes into the review process at a disadvantage," St. Arnaud said.

RBC Capital Market strategists called the Minister of Industry's decision "unexpected," but not protectionistic.

"While the news may raise doubt about the fate of pending transactions, our energy analysts are reluctant to suggest that Canada has embraced a protectionist stance on resources, consistent with comments from the CA International Trade Minister, Ed Fast, that the blocked Petronas bid is not necessarily a precedent for the CNOOC-Nexen deal (decision expected mid November)," they said.

Brown Brothers Harriman strategists said the decision "injects an element of uncertainty in China's CNOOC's C$15.1 billion offer for Canada's Nexen."

In addition, "this may have broader implications on the premium some analysts see in Canada's resource sector due to the underlying foreign interest," they said.

In terms of currency effect, the Petronas deal rejection comes "at the same time that the Bank of Canada has signaled it is in less of a hurry to 'remove accommodation' and the Finance Minister indicated that enough has been done to cool the housing market," the strategists said.

"This points to less fundamental support for the Canadian dollar, which dovetails nicely with the deterioration in the technical outlook," they said.

Dollar-Canada was trading at C$0.9947 Monday afternoon, in the middle of a tight C$0.9915 to C$0.9964 range.

Earlier, the pair broke above important resistance at C$0.9945-50, highs seen from late August and appeared to be on track to test its 200-day moving average, in place currently at C$0.9998.

Dollar-Canada last traded above its 200-day moving average in late July.

Even if Canada does allow the CNOOC/Nexen acquistion to go through come November, the deal will also have to be approved by the United States.

Nexen holds the rights to U.S. offshore oil exploration in the Gulf of Mexico and therefore a deal would also be subject to CFIUS approval.

In a July 27 letter to U.S. Treasury Secretary Timothy Geithner, Senator Charles Schumer (D-NY) urged Geithner in his capacity as Chairman of the Committee on Foreign Investment in the United States (CFIUS), to prevent China's CNOOC, from buying Canada's Nexen Inc. until the Chinese government takes "concrete, enforceable steps to open that country's markets to foreign investment and level the playing field in international trade." (Schumer website release)

"It is rare that we have so much leverage to exert upon China. We should not let this window of opportunity pass us by. At some point, we have to put our foot down over China's refusal to play by the rules of free trade," Schumer said.

The sale of Nexen Inc to China, valued at over $15 billion, would be the largest-ever foreign acquisition by a Chinese company," he noted.