BAY STREET-Canada: Picky, but far from protectionist

Sun Apr 10, 2011 10:30am EDT

* Canada still seen open to foreign takeovers

* Resource sector merger approvals seen as key

By Euan Rocha and Pav Jordan

TORONTO, April 10 (Reuters) - Two blocked foreign takeover deals and the possibility of a third do not mean that Canada is closed for business, with the real test coming in how it responds to would-be deals in the crucial resource sector.

Bankers said the two deals that Canada vetoed -- an attempt to buy fertilizer giant Potash Corp (POT.TO) and a bid for the satellite technology unit of Macdonald Dettwiler (MDA.TO) -- were rejected for very specific reasons.

And there's no reason for major concern even if Canada blocks a third big deal, the proposed C$3 billion ($3.1 billion) takeover of Canada's leading exchange operator, TMX Group (X.TO), by the London Stock Exchange (LSE.L).

"We've had two transactions turned down, MacDonald Dettwiler and Potash Corp, and they were very fact specific," Scotia Capital's head of M&A John Tuer told Reuters. "I don't see it as a trend."

"The TMX-LSE transaction, obviously there are some issues," he added. "There are financial infrastructure considerations and regulations considerations, and whether or not that deal gets approved I don't see it as a longer or broader trend toward protectionism."

The deal would create a $7 billion transatlantic exchange trading $4 trillion a year, but critics say it would shift control of Canada's capital markets to a holding company in London.

Analysts give the deal less than a 50 percent chance of passing regulatory muster in a complicated approval process that will also involve Canadian provinces and regulators.

NET BENEFIT

Canadian law gives the federal government the right to veto foreign bids over a certain size they are not of net benefit to Canada, a term that has not yet been clearly defined.

And with a stock market that's heavily weighted toward resource companies, bankers say the test of Canada's pro-business mettle will come in how it deals with foreign bids for domestic natural resource companies

Resource-heavy Canada is home to almost 60 percent of the world's publicly listed mining companies, with more than 1,500 mining firms listed on the Toronto Stock Exchange and the TSX Venture Exchange.

Many of those companies have assets across the globe. That is the case with Equinox Minerals EQN.TO, which faces an unsolicited C$6.3 billion takeover bid from Chinese metals trading firm Minmetals (1208.HK).

The majority of Equinox's board is based in Canada, but its chief executive is based in Australia and its assets are spread across Africa and the Middle East.

"I don't think they could have picked a better target, or timing to try a hostile bid and see what the reaction is," said Scotia's Tuer. "As a test case for them, it's about as good a fact-set as you could have," he said.

The bid is unlikely to face major regulatory hurdles, given the fact that Equinox doesn't actually operate in Canada.

Investment Canada is reviewing PetroChina's (PTR.N) $5.4 billion acquisition of half of Encana Corp's (ECA.TO) Cutbank Ridge shale gas properties in British Columbia, the biggest foreign gas deal yet for a state-controlled Chinese company.

The 45-day review period was to expire this week, but has been extended for another 30 days.

Canadian Prime Minister Stephen Harper set the cat among the pigeons last week, when he said he would be worried if a Chinese state-owned enterprise bid for a Canadian resource company and the offer did not appear to have commercial aims.

Harper, speaking on the campaign trail ahead of the May 2 federal election, said he was not referring to any particular transaction, and he did not say what he meant by non-commercial activities.

"To the extent that certain jurisdictions are protectionist, it may come to pass that Canada looks more carefully at investments, or bids by companies from that jurisdiction," said Andre Hidi, M&A head at BMO Capital Markets.

Other experts also caution that protectionism in Canada and elsewhere could provoke protectionist reaction.

"Until the Potash deal came up, Canada could always say, hey, we don't turn down transactions, we allow globalization, we allow free trade," said John Gravelle, national mining leader at PwC.

"Now, I think, other countries can look at Canada and they can say, 'who are you to tell me that I can't stop a transaction in my country, look at what Canada just did'." ($1=$0.96 Canadian) (Additional reporting by Jeffrey Jones and Solarina Ho; editing by Peter Galloway)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.