A Petronas station in Putrajaya, Malaysia.BAZUKI MUHAMMAD/Reuters
Canada is still more than open for business; foreign acquirers just have to know how to do business here.
The unexpected decision by the federal government to block a takeover bid by Malaysia's state-controlled energy producer, Petronas, for Canadian natural gas producer Progress Energy Resources has started another circle of hand-wringing that the Stephen Harper government is ruining Canada's reputation as a place to invest. First the government stopped the purchase of part of MacDonald Dettwiler & Associates. Then Potash Corp. of Saskatchewan. Now this, a third deal nixed. The borders are closed! Capital will flee! Canadian stocks will trade at a discount! Don't believe the hype.
The midnight announcement Friday that Canada was saying no to Petronas was not the result of a foreign investment policy that is significantly hardening, so much as the unfortunate outcome of a series of fumbles on both sides. Ottawa is hardly blameless, but Petronas gave the government little choice but to say no, at least for now.
International acquirers should not be much more scared of Canada today than they were last week, but they would do well to avoid a couple key mistakes that Petronas made. A buyer who played Ottawa's game correctly would have a very good chance of getting a deal for a smallish natural gas producer such as Progress done, and almost certainly would have sidestepped Friday night's debacle.
Want proof? Markets don't seem to be applying any so-called Canadian discount. The country's benchmark stock index barely budged Monday, trading largely in line with the U.S. Standard & Poor's 500 index. Stocks here fell less than in Europe or Australia.
That said, nothing in this looks very good on either side. Ottawa behaved arrogantly and Petronas responded mystifyingly.
The government, after sending signals that those close to Petronas interpreted as tacit support for the takeover, turned at the last moment and demanded an extension on the net benefit talks. The belief is that the Harper brain trust balked at final approval on Friday because it wanted to synchronize the decision with that on CNOOC Ltd. and its offer for Nexen Inc., and with the release of new guidelines on bids by state-owned enterprises for Canadian companies.
A request for an extension is absolutely within the government's rights, and the government should take as much time as it needs to ensure Canada's interests are protected. Buyers must respect that.
But doing it with so little notice – on the final day – is a high-handed way to treat a big investor from a nation that has caused Canada no trouble. That's doubly true when time zones mean that a decision in business hours here means dragging executives in Asia out of bed with only a short period to respond.
Why would the government think it could ask for an extension so late in the game? Because it's an offer a buyer can't refuse. When the government says it needs more time, the implicit message is the deal is not done and the answer at this moment must be no.
For that reason, Petronas's decision to rebuff the government's extension request last week is confounding. It appears a wager that Ottawa would rather change its answer to yes than be seen to block another transaction, with the tide of bad publicity that would follow. If so, it was foolish.
What Petronas missed is that the alternative for Canada would be at least as bad. When word leaked that Canada could be bullied into a yes at the deadline, this country's negotiating position in every future net benefits discussion would be undermined. And word would certainly filter out, through the legions of lawyers, bankers, lobbyists and hopefully, reporters, following this saga.
So, the block came, three minutes before the deadline. How Petronas could have miscalculated so badly is unclear. Part of the issue may be that the Malaysian company did not enlist the services of a plugged-in government-relations firm that would have a sense of how the Harper government would react to a perceived ultimatum.
Now the parties are trying to get back to the table. Petronas is said to be looking for government-relations help. Everybody is learning from their mistakes. Progress stock is pricing in a better-than-50-per-cent chance that the takeover is saved.
To be sure, none of this changes the need for more clarity from the government on just what it takes for a foreign buyer to get a deal done in Canada. Nor does it minimize the public relations nightmare.
But laying Friday's mess entirely at the foot of Ottawa is not fair, and suggesting that the decision signals Canada is closing its doors to foreign investment is off base.