The path to making Nexen / CNOOC deal of "net benefit"

Four years have probably passed since I joined BNN Television Anchor Kim Parlee on her old Squeeze Play set to warn about the recent spate of takeovers in the resources industry, particularly from nation state-backed agencies in China. In 2010, on the heels of the announcement that China Investment Corp. was going to acquire a 45 per cent stake in Penn West assets, I suggested that the time had come for some critical decisions in Ottawa (see prior post “Where is China’s oil patch pacman strategy headed?” May 13-10):

The question is simple: the Chinese government has sufficient foreign currency reserves to acquire the core of the Canadian energy industry in the space of a few short days. If that wouldn’t be permitted by Ottawa, then the government needs to put out some goalposts very soon. How much is allowed; how much is too much? Has anyone within the public service determined yet what those numbers are? Has the federal cabinet’s Priorities & Planning Committee signed off on that figure?

The horse hasn’t yet the barn just yet, but the shoes are definitely fastened. The time has come for a national debate about how liberal our nation wants to be when it comes to which of our national champions has yet to be acquired by foreign nations and their economic development arms. The time may be nigh when the discussion will be academic.

Two years later, the day has finally arrived. Just as predicted. The Chinese State oil patch bids are no longer $800 million or $3.4 billion, they’re in the $15 billion range. Will the next one be $40 billion, in the form of a 33% premium for Canadian Natural Resources?

Without a doubt (if this deal is approved, that is).

Having been one of first out of the gate to oppose the Potash and LSE/TSX takeovers, making my Ottawa friends think I was a Tory Maude Barlow, there’s pressure to keep up the walls. But I see this deal differently. Both Potash and TSX were essential to key elements of our economy (food, raising capital), a test that Nexen on its own doesn’t meet. It’s that simple.

Which doesn’t mean the Investment Canada Act doesn’t kick in, and the “Net Benefit” test shouldn’t apply to the proposed transaction. That’s the point. The pending Nexen takeover presents a great opportunity for the Federal government to negotiate terms that will truly be of net benefit to Canada.

The first thing I would do is appoint a negotiating team of the Hon. David Emerson, former Ambassador Derek Burney and Sam Duboc to assist Industry Canada and the PCO on the file. This file is too important to not call in the Dream Team.

Mr. Emerson brings his standing as a former trade minister and elected representative of the Canadian province most aware of the economic importance of the Asia Pacific region. Mr. Burney’s time in the bunker during the U.S. Free Trade negotiations, plus his acute awareness of the delicate nature of Canada’s standing globally, seems like a natural fit. Mr. Duboc, of Edgestone Capital Partners, has already been appointed as an Advisor to Finance Minister Jim Flaherty on the venture capital file and is one of the Canadian PE world’s most renowned negotiators — a toughness that’s needed on this topic. PMO Chief of Staff Nigel Wright should also be deeply involved, just as was the case when Stanley Hartt or Senator Hugh Segal served their PM as CoS on key international files 20+ years ago.

Industry Minister Christian Paradis has a formal, almost quasi-judicial, role to play under the Act when it comes to the ultimate approval process, but that doesn’t mean we can’t cut a great deal for Canada before the file hits his desk.

The negotiating team’s mandate is simple: generate a package of benefits to Canada. Don’t let the public servants and their lawyers merely analyze CNOOC’s capex promises (versus the Nexen status quo) and the allure of some new white collar headquarters jobs in Calgary. Do a real deal.

First up should be earning Canada some form of a “Most Favoured Nation” status within China. Many industrialized nations are far more closed to Chinese investment than Canada. Australia and the United States stand out for sure. It is one thing for the Chinese government to quietly acknowledge that they’re being received differently in Canada than elsewhere; but let’s codify that standing with a gold star. The MFN status need not be exclusive, at the expense of China’s other trusted trading partners. But for a nation that appropriately recognizes the importance of optics, China might even be pleased that we care enough about the next 100 years of commerce between the two nations to ask for special status.

Second, it should be easy to negotiate a five year moratorium on CNOOC and its cousins making any additional acquisitions of a meaty size. Let’s see what kind of partners they are, what commitments they keep, how Canadian companies are being received in China, before CNOOC tucks Nexen away and follows-up with a 2014 bid for Encana, too.

Third, perhaps CNOOC should provide a $500 million commitment to enhance Minister Flaherty’s $400 million 2012 budget allocation to reinvigourate Canada’s Innovation Economy and VC sector? Pratt & Whitney must provide industrial offset investment to Canadian businesses when the Feds acquire aircraft from a U.S. manufacturer. In Kuwait, for example, the U.S. put $120 million into a local VC fund as an offset to a fighter jet contract. What’s the difference here?

This $500 million of additional cash would provide the necessary critical mass to the Fund of Fund concept that Minister Flaherty is considering, plus create an endowment for half a dozen new incubators across Canada. The template is Kitchener-Waterloo’s Communitech Hub, and the Feds could use perhaps 25% of CNOOC’s $500 million to repeat Iain Klugman’s success in places like Vancouver, Calgary, Kanata, Montreal, Halifax and St. John’s. There’s an elegance to using the bounty of a “hewers of wood, drawers of water” deal to fund Canada’s future job market.

Best of all, I think they’d agree to these three simple asks. It’s just business in China’s view, and they’ll respect us all the more if we treat it that way. Canadians should recognize that our large public companies are already owned and dominated by funds the world over; but that’s a touch sell for any government.

If Ottawa actually cut a deal that had both immediate and long term benefits for folks other than Nexen shareholders, Canadians would likely support the transaction. As with the Roman Army returning from a conquered land with statues, precious gems and casks of wine in tow, the public needs to see visible evidence of the fruits of such missions.

MRM
(disclosure: this blog, as always, reflects a personal view and is not meant to represent the views of the TPA, its Board/Staff or the federal government)