The sale of Nova Chemicals announced Monday to the International Petroleum Investment Co. of Abu Dhabi for a total of $2.3 billion US (including debt) is a sign of things to come as the global economic slowdown settles in for the long haul.
Simply put, those that don’t have money will be looking for those that do. And vice versa.
For long-suffering Nova shareholders, the deal undoubtedly comes as a relief. Nova Chemicals, which began life as a public company in July 1998 with a share price of $31.75 after being spun out of the merger between Nova Corp. and TransCanada Pipelines, never quite achieved the heights many thought it should. It was back in 1999, when TD Securities issued a research report with a target share price of $105 by 2001. It was not to be.
After hitting an all-time high of $63.77 in 2005, Nova’s shares have been on a steady, downward decline that was exacerbated by the slowdown in the global economy and frozen credit markets. The company’s shares, on fears it could run afoul of its debt covenants, had sunk to a low of $1.38 earlier this month.
News of the takeover deal sent the shares soaring $4.83 to $6.49 on the TSX.
Nova was clearly in a situation where it had to do something.
And it’s more than a bit interesting that a sovereign wealth fund has stepped up to buy it.
This is the fourth time IPIC has laid down some coin in Alberta to gain exposure to the commodity cycle. In 2007 one of its affiliated companies, TAQA, it bought North Sea assets from Talisman Energy, tucked away Northrock Resources for $2 billion in cash, paid $4.6 billion for PrimeWest Energy Trust and $540 million for the Canadian subsidiary of Pioneer Natural Resources for $540 million.
Of course, the question on the minds of many is why none of Nova’s competitors–or for that matter Canadian-based private equity funds–weren’t interested in buying the company. After all, Nova has long touted one of its key advantages as being its location right next door to its feedstock, which has helped keep costs under control.
The issue is that the entire petrochemical industry is reeling; Lyondell is in Chapter 11 bankruptcy proceedings and Dow Chemical– which is a key customer buying olefins used in the production of plastic products and from Nova’s Joffre plant–is in no position to make a bid. If the credit markets had been functioning properly, things might have been different.
As to whether a private equity firm could have come forward and bought a majority stake in the company, which was once touted as the key to Alberta’s economic diversification, the fact is a $6 per share price would not have been in the cards The private equity players like to buy things as cheaply as possible, which would have meant an “at-market” deal that was dilutive to existing shareholders.
The sale of Nova will be the first to be reviewed by the newly passed Investment Canada Act, which stipulates the transaction must be of net benefit to Canada; when IPIC bought PrimeWest, it was still a work in process.
And whatever Investment Canada decides will set an important precedent.
That’s because the move by IPIC is unlikely to be the last by sovereign wealth funds in the context of Canada’s resource sector.
As energy prices have sunk, the focus has turned toward the companies that have cash on their balance sheets and are able to make acquisitions.
No surprise, then, that the same names keep showing up: ExxonMobil, BP, Total, Chevron, Royal Dutch Shell. But that list should also include the national oil companies and the sovereign wealth funds from Asia and the Middle East.
In the last two weeks, China has inked deals with Russia and Brazil to secure access to oil. It has also been active on the mining side, recently announcing a $19.5-billion cash infusion by Chinalco to Rio Tinto. The fact that there were more cars sold in China in January than there were in the United States suggests that this trend, while possibly slowing in the near-term, will continue to trend upward and mean a need to gain access to more energy.
And when you have cash and someone else needs it–like Russia’s Rozneft– there are deals to be had. And so it will be in Canada, too.
As the Nova deal shows, these organizations are not hostage to the short-term tyranny of the public markets. They are investing for the future, not for the next quarter’s earnings.
And for companies whose assets are “out of the money” in the context of the current environment, not having to deal with the slings and arrows of the stock market, not to mention having an owner with deep pockets, is becoming increasingly appealing.
The point is, we have only begun to see the emergence of the sovereign/national company player in Canada’s oilpatch.
TAQA’s goal is to build a Canadian portfolio of assets valued at $20 billion in the next five years. And it’s a safe bet that it’s not the only outfit to be eyeing Canada’s resource companies–energy, mining and forestry–as commodity plumb new lows and stock prices sit at rock bottom values.
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