Canada has sent a positive message to investors that our nation’s businesses are open to foreign capital by approving the takeover bid by CNOOC (China National Offshore Oil Corp.) for Calgary-based Nexen Inc. The $15.1-billion takeover is quite a feather in China’s foreign investment cap – it is the largest single foreign investment by a Chinese firm.
Setting a Precedent
Canada has been under a lot of pressure from investors as of late due to the recent refusals of takeovers. BCE’s takeover bid for Astral Media was recently nixed by the CTRC and Petronas of Malaysia’s initial bid for Progress Energy Resources Corp. was rejected. While the Nexen takeover is a victory for the Chinese SOE (state-owned enterprise), it came at a cost. Prime Minister Stephen Harper muddied the foreign investment waters by insisting a future deal like this is extremely unlikely.
CNOOC-Nexen Takeover Timeline
CNOOC shareholders had been waiting patiently since July for a decision regarding the proposed takeover of Nexen. Nexen shareholders made it clear they wanted the deal to go through – they unanimously voted in favour of the takeover bid, which paid them a handsome 60 per cent share price premium.
After two 30-day extensions, the federal government finally gave the deal the green light. The takeover bid was subject to the net benefit test, which in layman’s terms gives the government the discretion to forbid foreign investments if they do not provide a net benefit to Canada.
A History of Turning Away Takeovers
It has been anything but smooth sailing for foreign investors under the Harper government. The Conservatives have already used the Investment Canada Act to reject three takeover bids –Potash Corp, MacDonald, Dettwiler and Associates Ltd.’s (MDA) space division and recently the initial bid for Progress Energy Resources.
Why This Takeover?
Although Nexen isn’t a major player in the oil industry like Suncor, it’s no secret that the oil sands are a key Canadian resource. Harper said it best during his press conference, “To be blunt, Canadians have not spent years reducing ownership of sectors of the economy by our own governments only to see them bought and controlled by foreign governments instead.”
It’s no secret that China’s communist government has a spotty record at best when it comes to human and economic rights. Canada embracing government-owned CNOOC’s takeover bid is seen by many as a threat against Canada’s market-based capitalist economy.
What About Future Foreign Investment in Canada?
SOEs looking to follow in the footsteps of the Nexen takeover should think twice. The Harper government made it clear it would only consider future takeovers of the oil sands under exceptional circumstances. The feds have gone as far as rewriting the Investment Canada Act to make it more difficult for SOEs to buy controlling stakes of Canadian firms.
That isn’t to say the Harper government is against foreign investment. Although Harper has capped the threshold at $330 million for SOE takeovers, he is raising the threshold to $1 billion over the next four years for all other takeover bids. Harper hasn’t completely slammed the door on SOEs – they can still own non-controlling shares of Canadian companies. For investors this is a good sign, but until there is clearer framework the net benefit test creates uncertainty for foreign investors.
Foreign Investment is Vital to our Growth
Many investors argue approving the Nexen takeover was a no-brainer. Foreign investment is vital to our growth as it promotes free trade. China is growing rapidly and is in need of oil and gas, while Canada remains a net energy exporter with energy to spare.
The oil sands remain one of Canada’s greatest assets – they will remain untapped without billions of dollars of foreign investments. This is beneficial to Canada, as it allows us to be able to develop our oil sands and supply oil to global markets. Foreign investments benefit our economy in many ways – job creation, better service and improved productivity.
Foreign Takeovers: Are They a Threat?
Many Canadians were upset with the Nexen takeover. SOEs play by their own rules – they are funded and priced differently. SOEs look after their government’s interests first, putting the foreign country’s interest secondary.
Canada is losing control of key sectors of the economy by allowing foreign investment in the oil sands. The federal government is worried that if SOEs go after bigger players like Canadian Natural Resources Ltd. and TransCanada PipeLines Ltd. it could put our free-market economy in jeopardy. Foreign-owned players could become so big it would be difficult for smaller companies to compete.
Concern also exists over the lack of investment reciprocity – SOEs are allowed to buy controlling stakes of Canadian companies, but are protected from takeovers at home.
The bottom line is foreign takeovers can be good for the Canadian economy – but only under the right circumstances. Whether this particular takeover will prove to be a boon for the economy, or pose a risk for one of the country’s key sectors, remains to be seen.