China launches biggest foreign takeover
State-controlled CNOOC launched China's richest foreign takeover bid yet on Monday by agreeing to buy Canadian oil producer Nexen for US$15.1 billion ($19.1 billion), forcing Ottawa to decide whether security concerns outweigh its desire for foreign investment in its energy resources.
CNOOC, China's third-largest oil company, hopes to sell the deal to shareholders and the government with a hefty 61 per cent premium to Nexen's Friday stock price. It promised to retain all employees and to make Canada home base for its Western Hemisphere operations.
CNOOC is offering US$27.50 cash a share for Nexen, which has oil sands operations in the Canadian province of Alberta, shale gas in the province of British Columbia and extensive exploration and production holdings in the North Sea, Gulf of Mexico and offshore West Africa.
The initial shareholder reaction was enthusiastic. Shares of Nexen, whose board unanimously approved the deal, surged C$9.06, or 52 per cent, to C$26.35 in Toronto on Monday.
"You won't find a single shareholder on the entire planet, or in the solar system, who is unhappy with this deal," said David Taylor, president and chief investment officer of Taylor Asset Management.
The move is the most ambitious foray by resource-hungry China into North American energy since a 2005 attempt to buy US-based Unocal for US$18.5b was thwarted by a political backlash there.
Chinese companies have been among the most aggressive in targeting assets around the globe to help feed demand in the world's second-biggest economy.
As for Canada, Prime Minister Stephen Harper has pushed to attract more energy investments from China. The CNOOC deal shows his efforts are bearing fruit, and Canada has more reasons to accept the deal than to veto it.
"For Canada, this agreement provides a stable source of investment for the many projects that Nexen operates, which includes the exploitation of bitumen in Alberta," CNOOC chief executive Li Fanrong said in a conference call.
"Because we intend to be a local company as much as a global one, we also intend to seek a listing for CNOOC Ltd on the Toronto Stock Exchange."
The deal is subject to a review by the Industry Ministry, which by law must decide if the takeover would bring a "net benefit" to Canada.
In its favour is both CNOOC's commitments to Canada, and the fact that Nexen's operations are mostly outside Canada.
CNOOC has only nine years worth of reserves based on its current production - one of the lowest ratios among major oil companies worldwide. It said the deal would increase its proven reserves by 30 per cent.
"CNOOC has been seeking overseas acquisitions, as the domestic reserves are limited. But there has been many limits, things like foreign companies (being) reluctant to sell, price too high. This deal would be quite a success," said Yan Shi, an oil analyst at brokerage UOB Kay Hian in Shanghai.
The move was quickly followed by another Chinese play for Canadian-owned oil assets, as Sinopec Corp said it would buy 49 percent of Talisman Energy's British unit for US$1.5b.
CNOOC already has partnerships with Nexen, once a unit of Occidental Petroleum. The Canadian company recently underwent a management shake-up and has been seen for years as a potential target.
Analysts had talked of Nexen as a turnaround story since Kevin Reinhart took over as interim CEO early this year. He won kudos for improving the reliability of such projects as the huge Buzzard oil field in the North Sea after years of missed production targets.
"I've watched this company try to turn itself around for so long," Taylor said. "I'm not saying they couldn't have done it this time, I'm just saying that some of their assets are extremely tricky and complicated and there are a lot of unknowns."
Taylor said a rival bid is unlikely to emerge, given the huge premium and the fact that CNOOC is offering all cash.
Nexen is one of his top 10 holdings in the IA Clarington Focused Canadian Equity Class and Focused Balanced Fund.
Yet Nexen's C$6.1b Long Lake oil-sands development, for example, is several years behind schedule in reaching capacity production.
Such persistent problems have kept the stock well below the company's net asset value, said Norman MacDonald, vice president and portfolio manager at Invesco Trimark.
CNOOC made its first, tentative Canadian investment in 2005, paying C$122 million for a 16.7 per cent share of the then-private oil sand developer MEG Energy Corp.
It completed a C$2.1b acquisition of Opti Canada in November, winning a second stake in a Canadian oil sands company and a share in Long Lake.
The Canadian deals have not yet stirred the political opposition that killed CNOOC's US$18.5b Unocal bid.
Still, Canada must review any foreign investments worth more than C$330m and can block them if it thinks a deal is not in the country's best interests. It exercised that right in 2010 when it blocked Anglo-Australian miner BHP Billiton's US$39b hostile takeover of Potash Corp, the world's top fertilizer producer.
Canada's industry minister confirmed he will conduct a review, focusing on such aspects as the effect of the deal on economic activity, the degree of participation by Canadians in the business and the impact on competition.
That said, only 28 per cent of Nexen's production and 11 per cent of its cash flow are derived from Canadian operations, CIBC World Markets analyst Andrew Potter said. That may help CNOOC pass muster with Investment Canada.
In addition, it would be difficult for Harper to quash the deal after touting investment opportunities throughout Asia.
Still, Ottawa must consider the precedent such a pricey deal will set, said Gordon Houlden, head of the University of Alberta's China Institute and a former diplomat in China.
"I do not believe the government would contemplate, let's say, 10 purchases of this order, which would be well within China's means," Houlden said.
"If you (spent) US$30 to US$50b you could take out almost all of the largest Canadian energy companies, and I don't think that it would be the government's plan to have a wholesale transfer of ownership from Canada to China of those assets."
REASONABLE PRICE FOR CNOOC
According to Thomson Reuters data, the takeover would be bigger than any foreign deal completed to date by a Chinese company.
Buying Nexen also would make CNOOC the operator of Buzzard, the largest oil field in the UK and the biggest contributor to Forties Blend crude.
Forties is the largest of the four North Sea crude oils that form the Brent oil benchmark, and the crude that usually sets the value of dated Brent, the benchmark for pricing more than half of the world's oil.
BMO Capital Markets and Citigroup Global Markets Inc advised CNOOC, while Nexen was advised by Goldman Sachs and RBC Capital Markets.
CNOOC said Nexen's debts of about US$4.3b would remain outstanding and it hoped to complete the deal by the fourth quarter of 2012.