Cnooc, Petronas’s lessons for SOE investment in Canada

Author: Ashley Lee | Published: 15 Nov 2012
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Since Canada’s government blocked the takeover of Progress Energy Resources by Malaysian state oil company Petronas last month, there have been concerns it would do the same for the China National Offshore Oil Corporation’s (Cnooc) bid for Nexen.

This is despite the government’s explicit intent to increase inbound Chinese investment.

However, the two state-owned enterprises (SOEs) handled the Investment Canada Act (ICA) approval process very differently. Cnooc agreed publicly to a longer review period and made public concessions, such as keeping its target’s management in Canada and committing to register shares on Canadian exchange.

Petronas, on the other hand, has not agreed publicly to either.

Industry Canada, the department responsible for approving foreign investments under the net-benefit to Canada test, extended its review of Cnooc’s bid for Nexen for the second time on November 2. A decision is expected by December 10. That would mark a total review period of 104 days since the authority began its initial review on August 29.

Petronas received a request from Industry Canada to extend review of its transaction for the second time on October 19, minutes before midnight. Petronas denied the request, and Industry Canada blocked the deal after considering it for 89 days.

“Ninety days is actually a pretty short period of time to get approval for an SOE transaction,” Peter Glossop, a partner with Osler Hoskin & Harcourt, said. “We normally advise clients to expect the process to take at least 75 days for a regular transaction and longer for an SOE transaction.”

Petronas is offering to appoint independent directors to the Progress board of directors to entice government approval, the Financial Times reported. Independent directors are a major component of the ICA’s state-owned enterprise guidelines.

Another major consideration under the state-owned enterprise guidelines is public company transparency. Cnooc has stated publicly its intent to list on the Toronto Stock Exchange upon closing its purchase of Nexen. Petronas has not stated such intent, and while Progress is publicly traded in Canada, it’s not clear that would remain the case.

Glossop said there are ways outside of listing on a Canadian exchange to guarantee transparency to the Canadian government. Further, an SOE like Petronas could instead list the target’s securities.

“If you have the target listed, you’re not so much getting a picture of the buyer,” Glossop said. “You are able to see how the business is managed going forward. I think that is quite valuable. You see whether the target is being operated in a commercial fashion.”

Calculating net-benefit

Industry Canada considers six criteria when calculating net-benefit to Canada: impact on economic measures like employment; Canadian participation in the business; impact on productivity and technology; effect on competition; compatibility of investment with national industrial, economic and cultural policies; and, the contribution to Canada’s ability to compete on a global level.

Steven Globerman, a professor at the Western Washington University College of Business and Economics (and who has commissioned research for Industry Canada’s competition policy review center) said there is not much of an economic argument to be made under the Investment Canada Act.

“If the assets are worth a certain dollar value to the foreign investor, Canadians are not going to be able to extract more than those assets are worth,” he said.

It is irrelevant if, for example, an SOE sells natural resources to its own government at subsidised prices instead of to Canadians because the company already paid market value for the Canadian assets, he added.

Globerman said there is one economic consideration that could be used to justify blocking takeovers by state-owned enterprises under the ICA. Namely, SOEs may be less efficient than privately-owned companies, meaning efficiencies in Canadian markets may be weakened as SOEs become larger participants. But Globerman added: “We don’t have a whole lot of evidence to say whether that concern is valid.”

Cross-border chilling

If the Cnooc deal is blocked and Petronas is unable to sway the government decision in its favour, it could damage cross-border M&A between Canada and Southeast Asia.

“While I don’t have any statistics, I sense that there are some transactions that are kind of on hold until these two are resolved,” Glossop said. “You could imagine that if that’s the case then those transactions may well not proceed. “

This would come months after the Canada-China Foreign Investment Protection and Promotion Agreement became effective. That agreement does not address the ICA, though.

“I think there is a certain frustration on the part of the Canadian government that China simply hasn’t been as cooperative in its trade and investment dealings with Canada as Canada expected it to be,” Globerman said. “Even if Cnooc is finally allowed, it’s not going to be the end of the story.”

Corporate culture

Counsel must also consider the geopolitical positions of both China and Malaysia.

Cnooc’s ostensible purpose is to bring resources back to China. But Dr Tom Pepinsky, assistant professor in Cornell’s Department of Government and a faculty affiliate of the Southeast Asia Program, said he doesn’t believe Petronas is a mercantilist corporation looking for oil for Malaysian use.

No one should be concerned that it will take Canada’s oil and export it back to Malaysia. “There’s not enough demand there,” he added.

Instead Pepinsky said that Petronas’s role is that it is a showpiece of what corporate Malaysia can achieve.

“Few Malaysian multinationals are as high-profile as Petronas,” he said. “It’s allegedly an ace in the whole for the Malaysian government: it’s big, well-capitalised, politically valuable...and active in CSR activities.”

Conversely, Cnooc’s influence is frequently leveraged to demonstrate China’s state power. An example of its involvement in foreign policy, is its offering of oil and gas blocks near the disputed Diaoyu (Senkaku) islands during heated discussions between China and Japan over the islands’ ownership.

While Petronas is ultimately seen as a model for Malaysian corporations looking to gain an international foothold, China’s SOEs reflect the state’s power and prestige. Whereas Petronas represents Malaysia’s opportunity to boast a well-managed, world-class and government-owned company, China’s SOEs reflect state interests.

Related articles:

‘How Cnooc’s bid was structured for foreign investment approval’

‘How to obtain ChinaCo/US merger approval’

‘Analysis of Canada’s reformed merger review process’

See also:

‘How Cnooc’s bid was structured for foreign investment approval’

‘How to obtain ChinaCo/US merger approval’

‘Analysis of Canada’s reformed merger review process’