October 22, 2012 / 3:51 PM / 5 years ago

WRAPUP 3-Petronas, Progress not giving up after Ottawa balks

* Petronas, Progress extend deal deadline
    * Shares fall after surprise rejection of takeover
    * Malaysian energy minister won't give away next move

 (Adds details on talks, "net benefit", updates stock moves)
    By Jeffrey Jones and Euan Rocha
    CALGARY/TORONTO, Oct 22 (Reuters) - Canada's Progress Energy
Resources Corp sought to reassure investors on Monday
that its proposed takeover by Malaysia's Petronas was
not dead in the water, saying the two companies would start new
talks this week to address the Canadian government's concerns.
    Progress Chief Executive Michael Culbert blamed a
"communications breakdown" for Canada's surprise rejection of
the $5.2 billion deal late on Friday night, and said he was
optimistic that the deal could get back on track.
    Canadian Prime Minister Stephen Harper also appeared to
soften the government's stance on Monday, saying Industry
Minister Christian Paradis had simply not been in a position to
decide if the deal was of "net benefit" to Canada. That was a
softer line than Paradis' comment on Friday that the deal did
not meet the "net benefit" test.
    "I think in a lot of cases ... like this, it's a
communications breakdown," Culbert told Reuters in an interview,
adding that he had received no indication from officials prior
to the 11th-hour rejection that the government had any concerns.
    Culbert offered no details on what caused the communications
breakdown but said both sides were ready to talk. Paradis gave 
the companies 30 days to make their offer more palatable but
declined to specify what his concerns were.
    "What I'm hoping is that bridge can be rebuilt here this
week and we can actually have some good effective discussions
and move this along," Culbert said, adding that talks aimed at
assuaging government concerns would start on Tuesday.
 
    In a conciliatory move, Petronas extended its deadline by up
to 90 days to close the acquisition of Progress, one of the
largest owners of exploration lands in the gas-rich Montney
shale region of British Columbia.
    That would give Canada more time to develop a set of
long-promised guidelines on foreign investment, especially by
state-owned enterprises such as Petronas, as Ottawa also
scrutinizes a much larger and more contentious transaction, the
$15.1 billion takeover of Nexen Inc by China's CNOOC
Ltd. 
    Paradis' rejection of the Progress deal sparked uncertainty
about whether Canada is really open to foreign business as the
government frequently insists. Progress shares skidded 9 percent
to C$19.64 on the Toronto Stock Exchange, Nexen sank 4 percent
to C$24.04 and the Canadian dollar fell to a two-month
low.
    Still, the fall in Progress shares was not as severe as some
analysts had expected, pointing to hopes that the deal would be
revived in some form.
    "I don't actually think it's that terrible a decision," said
Jim Hall, chief investment officer at Mawer Investment
Management Ltd. "It does seem a bit amateurish to do it at the
last minute - it seems like they were panicking. But I'm not
seeing huge downside. The downside would be if they deny
everything and don't explain why. Then projects wouldn't get
built or they take a very long time."
    
    OILPATCH INVESTMENTS
    The rejection comes at an awkward time for Canada as it
seeks foreign capital to help fund an estimated C$630 billion
needed to develop the energy sector over the next decade. 
    Petronas and Progress are planning a multibillion-dollar
liquefied natural gas plant on Canada's West Coast. Harper's 
Conservative government has been highly supportive of such
projects as a way to wrest more value of Western Canada's
massive gas reserves.    
    A rejection of the CNOOC bid would likely damage trade ties
Canada has been trying to build with China, underlining the
political sensitivity to Chinese corporate expansion in North
America.
    Harper said the government aims to provide guidelines for
foreign buyers "fairly shortly." Investors have complained that
the process is far too murky.
    "Let me be clear. As we said repeatedly, our view is that
foreign investment, generally speaking, is a benefit to the
Canadian economy and as a general rule we obviously welcome
interest in the Canadian economy," Harper told reporters.
    "At the same time, we are committed to the Investment Canada
Act, which requires us to evaluate whether individual
transactions are of net benefit to Canada, and this government
has, as you know, in certain cases decided that this is not the
case."
    The Investment Canada Act lists several factors the
government can take into account when determining net benefit,
including jobs, innovation, and the compatibility of a deal with
"national industrial, economic and cultural policies."
    But there's no explanation and little detail about these,
about a different national security clause or about the existing
rules dealing with state-owned enterprises.
    "Canada on the one hand says it needs to have more
investment in its commodities, especially its shale and oil
industries, then when a company tries to (invest), it looks like
they might send them away," said Marc Chandler, the global head
of currency strategy at Brown Brothers Harriman in New York.
    "Some people will say there is protectionism in Canada." 
    Canada dented its free-market credentials two years ago when
Paradis' predecessor vetoed a bid for fertilizer giant Potash
Corp in the face of stiff opposition from the company's
home province of Saskatchewan.
    Earlier this year, Lowes Companies Inc, the U.S.
home improvement chain, pulled back from bidding for
Quebec-based Rona Inc after that government complained.
    Blocking the deal "means government meddling and restriction
of free markets. It's just not positive in general for the
markets," said Levente Mady, vice president and senior portfolio
manager PI Financial Corp.      
    The Progress decision was a blow to Petronas, whose domestic
oil supplies are shrinking. The company has been looking to
boost oil and gas resources beyond Malaysia and volatile areas
such as Sudan. 
    ($1=$0.99 Canadian)

 (Additional reporting by Scott Haggett in Calgary, John Tilak
in Toronto, Seng Li Peng and Luke Pachymuthu in Singapore;
Editing by Janet Guttsman, Andrew Hay and Steve Orlofsky)

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