December 7, 2012 9:01 am

Chinese groups await Cnooc-Nexen verdict

Chinese resources companies are awaiting the outcome of a Canadian regulatory decision on an $18bn deal that could determine whether Chinese energy groups will pursue Canada’s energy resources or steer clear.

Canadian regulators are expected to issue a verdict by Monday on the proposed acquisition of Toronto-listed Nexen, a global oil and gas company, by China’s Cnooc, a state-owned oil group.

In the run-up to Ottawa’s decision, Chinese regulators finally gave their approval to the merger of Viterra, a Canadian grain trader, with Glencore.

The two companies said that they had received the approval from China’s Ministry of Commerce (Mofcom) on Friday, after a delay that has pushed back completion of the deal by several months. It is now expected to close on December 17. Glencore’s acquisition of Xstrata is also awaiting approval from Mofcom.

The Cnooc-Nexen agreement is seen in China as a litmus test for whether Canada is open to Chinese investment, particularly from state-owned companies and those in the resources sector.

Regulators already postponed an earlier deadline while they wrangled with Cnooc over the conditions for approval of the deal, such as employment and investment guarantees, according to people familiar with the matter.

As they expand round the world, China’s energy companies have ruffled feathers before with some of their overseas investments, such as Cnooc’s attempted acquisition of Unocal in 2005, which sparked vociferous political opposition in the US.

Ahead of the final outcome of the Cnooc-Nexen agreement, some Chinese resources companies are delaying potential investment decisions in Canada as they wait to take a cue from regulators’ verdict. “No one is going to be giving the green light to do anything in the oil patch or elsewhere until this deal gets approved,” said a resources banker in Hong Kong, who believes approval is likely.

Canada is rich in natural resources, which has made it a natural draw for Chinese companies that have invested tens of billion of dollars in the Canadian resources sector over the past decade.

Chinese mining companies in particular have been circling Canada for its wealth of deposits in potash, metals, iron ore and coal. Frank Zhang, head of the China Mining Club, a group of private mining companies, said “everyone is paying attention to” the Cnooc-Nexen decision.

“Rejecting the deal would put a very serious crimp in the Canada-China relationship . . . and could be quite negative for future Chinese investments in Canada,” said Edward Goldenberg, head of government affairs at Bennett Jones, a large Canadian law firm that is not involved in the Cnooc-Nexen transaction, during a trip to Beijing. “People are waiting almost with bated breath for the decision.”

Na Liu, China strategy adviser to Scotia Capital and founder of CNC Asset Management in Vancouver, said potential investors were not only watching the government decision, but also following public opinion in an effort to “understand whether they are welcome”.

“The concern for the Chinese companies is whether they can run their takeover targets successfully for Canadian operations,” he said, using the example of how a hypothetical labour strike at a Canadian mine owned by a Chinese company might be viewed.

The Canadian public has been hotly debating the role of foreign investment in the economy, and polls show some public opposition to the Cnooc-Nexen agreement. Canadian regulators have not been afraid to turn away foreign investors before, such as when they rejected BHP Billiton’s $39bn takeover bid for PotashCorp of Saskatchewan in 2010.

Cnooc’s bid, announced in July, had the support of Nexen’s board, and to sweeten the deal Cnooc promised to move its North American headquarters to Calgary and consider listing in Toronto.

Additional reporting by Jack Farchy in London

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