“Is everything sacred in Canada? At first it was a hole in the ground. Then it was the stock exchange and a DIY chain. This week, regulators blocked two more big deals, including a $5.2 billion bid for Progress Energy by Petronas of Malaysia. Taken as a whole, these actions signal the market for corporate control in Canada – especially when it comes to foreign buyers – is effectively closed.”
(Slate)
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“Sources say Ottawa asked Petronas at the eleventh-hour for a delay to rule on its bid to take over Progress until Dec. 7, so it can finalize its new policy. Industry Canada, which is reviewing the transaction, had already delayed its decision once and had promised to produce a ruling by Friday.”
(Financial Post)
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“The lack of transparency is starting to reach new heights. Who releases such an important decision at midnight on a Friday? Someone who has something to hide and no way to explain.”
(NDP leader Thomas Mulcair)
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In a week of surprises that included the CRTC denying BCE’s BCE’s acquisition of Astral, late on Friday night the Minister of Industry announced that he was not satisfied that Petronas’ proposed acquisition of Progress Energy Resources was likely to be of net benefit to Canada:
“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. 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.”
While the Minister reiterated similar earlier statements by the Prime Minister and other Government officials that Canada remained open to investment (saying that the Government remained “committed to maintaining an open climate for investment”), this decision casts those statements further in doubt and, while statistically absolutely true, raises again the question of the applicable rules investors and in particular SOEs must meet.
On Sunday, on CTV’s Question Period, Canada’s Finance Minister Jim Flaherty also said that Canada “welcomes foreign direct investment” but that Petronas type bids must ultimately be “correct”.
The Petronas/Progress deal had received some, but by no means as much, attention as the pending CNOOC/Nexen deal, which has recently been extended until November to allow for a national security review.
According to media reports, Petronas refused the Government’s request for more time to review its proposed bid to acquire Progress, had grown frustrated with negotiations attempting to satisfy the Investment Canada Act’s (ICA) net benefit to Canada test and according to media sources was getting little Government input on required commitments. On October 5th the initial ICA review period had been extended (see: here).
The Minister has an initial 45 days to review proposed investments under the Investment Canada Act, which can be unilaterally extended another 30 days (with further extensions with consent of an investor). Where an investment is opposed, investors may make further submissions in an attempt to clear a transaction with further undertakings.
In a brief news release issued by Progress on Saturday, it said:
“The Board of Directors, management and employees of Progress are disappointed in the announcement. ‘Progress will be working over the next 30 days to determine the nature of the issues and the potential remedies’ said Michael Culbert, President and Chief Executive Officer of Progress. ‘The long-term health of the natural gas industry in Canada and the development of a new LNG export industry are dependent on international investments such as PETRONAS’”.
This decision is rather surprising, although it is always difficult to predict whether transactions will receive ICA clearance based on the opaque political nature of the ICA net benefit criteria and fact-specific nature of every transaction and related undertakings.
State-owned enterprises are subject to an additional layer of review in Canada under Investment Canada’s SOE Guidelines that set out additional factors (relating to the corporate governance and commercial orientation of the SOE) in addition to the general net benefit to Canada factors in section 20 of the ICA. SOEs may also be required, as is being illustrated in this case, to provide more stringent undertakings than private investors – for example, undertakings for the complete duration of a proposed investment.
This decision also creates further uncertainty about the Government’s approach to ICA reviewable investments in general, and oil industry and state-owned-enterprise investments in particular (although as is well known, only a miniscule percentage of transactions have been blocked under the ICA – three in the past four years).
It will also likely provide much fuel for the opposition who continue to call for greater clarity and transparency around the ICA process (and likely also increased private sector criticism relating to the freedom for companies to raise capital and transfer ownership).
On the other hand, given the desirability of Canada’s oil production assets and the seemingly large number of private and state-owned investors interested in acquisitions or joint ventures, concerns that the Government’s decision to block (or attempt to extract more significant concessions) transactions like the Petronas/Progress deal seem a little hollow.
The Government’s determination to drive a good deal for Canada generally, including in relation to employment and capital investment, may in fact be a positive trend. On the other hand, there is nothing more markets dislike than uncertainty, which the current Investment Canada process has in spades. Whether, however, this most recent decision leads to ICA reform and greater transparency remains to be seen.
For some of the media coverage over the weekend see: How Malaysia’s oil-patch bid ‘came unglued’ after Ottawa pressed to extend talks, Canada rejects $5.9-billion Petronas bid for Progress Energy, Ottawa blocks bid for Calgary natural gas company, Petronas rejection shows little progress in policy-making since Potash, Canada takes hard line on natural resources, no matter the cost, Is Everything Sacred in Canada? A Protectionist Country Blocks Two More Big Deals, Petronas Rejection Casts Doubt on CNOOC $15.1 Billion Bid, Market braces for Petronas fallout, Mulcair Slams Feds on Handling of Petronas Deal, Petronas Deal on Hold Not Dead.
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