China Seeks Foothold into North American Oil

on Aug 30, 2012

On July 23rd, CNOOC (CEO:NYSE), one of China’s largest state oil firms, made an acquisition offer of $15.1bn (£9.55bn) for Nexen (NXY:US), a Canadian oil firm with operations all around the world. If completed, it would be the highest value foreign takeover ever made by a Chinese company and underline China’s determination to employ its large foreign reserves in the expansion of its asset ownership around the globe. Nexen’s shareholders will meet in Calgary on September 20th to vote on the proposed offer. If they approve the deal, the Chinese company has agreed to pay $27.50(£17.39)-per-share, a 61 per cent premium over the current stock price.

Nexen said it first became aware that a Chinese state-controlled oil firm was looking to buy out the company in February. CNOOC made two previous offers on May 17th and July 3rd which Nexen rebuffed as too far away from a tempting valuation. Nevertheless, they did serve the purpose of establishing the company’s openness to the right bid. The company went as far as to make a presentation to CNOOC’s management detailing its assets and prospects in order to convince the Chinese firm to offer a better deal.

“The Board determined that it would not support a transaction with CNOOC at the price specified in CNOOC’s July 3, 2012 letter but would consider supporting a transaction if a higher price was offered,” Nexen said via its proxy.
After the announcement on July 23rd of a possible future acquisition, the company’s share price rose 52 per cent with trading volumes reaching 141m. Only a few days later, the Securities and Exchange Commission spoiled the bullish moods with accusations of insider trading. The SEC froze £38m in assets that belonged to traders who allegedly used accounts in Singapore and Hong Kong to make more than $13m (£8.22m) in illegal profits by dealing in Nexen stocks before the official acquisition announcement. What will most concern Chinese officials is the fact that one of those embroiled in the accusations is Zhang Zhirong, the Chinese billionaire who is well connected with many Chinese politicians and with CNOOC via his shipbuilding firm – China Rongsheng Heavy Industries. He used another company of his, Well Advantage, to purchase 831,033 shares in Nexen through his accounts at UBS Securities and Citigroup Global Markets on July 19, four days before the announcement of the takeover was made. One week later, on July 26th, Well Advantage placed an order to sell all of its Nexen holdings for a profit of $7.1m (£4.5m). Other unknown individuals strongly suspected of insider trading also made gains of around $5.8m (£3.67m) through accounts in Singapore. !m[](/uploads/story/302/thumbs/pic1_inline.png)

“Well Advantage and these other traders engaged in an all too familiar pattern of misusing insider information to place extremely timely trades and profit handsomely from their illegal acts,” said Sanjay Wadhwa of the SEC.
CNOOC president Wang Yilin said he did not expect the case to have a major impact on the purchase of Nexen, which will be a purely commercial transaction. Some analysts think otherwise, including Lian Yu. “The insider trading case may have nothing to do with CNOOC but it will become a bargaining chip for American congressmen seeking to block the deal,” said Lian for the Beijing News. The takeover can only be completed after the approval of Chinese, Canadian and US governments. A previous attempt by CNOOC to buy US based Unocal for $18.5bn (£11.7bn) was thwarted by political resistance in the United States.

There is a growing suspicion in the Hong Kong market that many Chinese firms are under surveillance by US regulators with diplomatic relations between Washington and Beijing turning cold. Meanwhile, China has invoked strict laws on state secrecy, barring auditors from disclosing information on companies to American regulators.
In Canada, Prime Minister Stephen Harper said his priorities are to welcome foreign investments, which will benefit the country, and to win reciprocal benefits for Canadian companies, such as better trade conditions with China. He also said Canada is looking to sell more energy to Asia as a whole, in order to cut its dependence on America.

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