Cnooc to pay $19.4B for Nexen

China's Cnooc Ltd. has agreed to buy Nexen Inc., its partner in a Canada's Long Lake oil sands project, for an enterprise value of $19.4 billion, setting up the largest ever foreign acquisition by a Chinese company. State-owned Cnooc said Monday, July 23, it will pay $27.50 per share for NYSE- and Toronto-listed Nexen, equal to an about 61% premium to Nexen's closing price on Friday. The offer values the target's equity at about $15.1 billion. Nexen has about $4.3 billion of debt.

Cnooc is paying about 8.8 times Nexen's 2011 Ebitda. The transaction values Nexen's oil at about $17.29 per barrel based on its enterprise value and its proven reserves of 1,122 million barrels of oil equivalent at the end of December 2011.

"This is an exciting opportunity for us to build on our existing joint venture relationship with Nexen in Canada, and to acquire a leading international platform in the process," said Cnooc chairman Wang Yillin in a statement.

Calgary-based Nexen owns oil sands and shale gas assets in western Canada and offshore oil assets in the North Sea, West Africa and the Gulf of Mexico. It produced and average of 207 million barrels of oil equivalent per day in the second quarter of 2012.

Cnooc has worked with Nexen since 2011 when it paid $2.1 billion for the bankrupt Opti Canada Inc., which was Nexen's partner in its Long Lake oil sands project located in Northern Alberta, Canada. The two companies also operate a Gulf of Mexico JV in which Cnooc has a 20% stake.

Nexen's has been seen as a potential target for some time as its shares lagged its rivals, principally because of problems at the Long Lake JV. Speculation that it could be taken out gained momentum earlier this year after the January departure of CEO Marvin Romanow and executive VP of Canada Gary Nieuwenburg, the two men most closely associated with Long Lake project. Romanow was replaced by Kevin J. Reinhart, who was CFO at the time and whose position as CEO never shed its "interim" tag.

Beijing-based Cnooc's deal for Nexen ends something of a slump in China's foreign energy asset acquisitions, which had dipped to under $5 billion in the first half of this year after peaking at more than $32 billion in 2010. The drop off in deals had been blamed on a combination of uncertain markets, the pending change of leadership in Beijing and the need among China's biggest energy spenders to pause to digest businesses and technology.

The acquisition requires approval from Canadian, U.S. and Chinese authorities and Cnooc will be primed to avoid the defeat it suffered in 2005, when it abandoned a $18.5 billion bid for Unocal Corp. amid strong political opposition to the deal.

An acquisition of Nexen would be far and away the biggest foreign company takeover by a Chinese company. It would also rank as China's biggest single foreign acquisition of any sort, topping Aluminum Corp. of China's $14 billion deal for a 9% stake in Rio Tinto Group.

Chinese companies have often shied away from outright takeovers because of fear that the combination of China's own prohibitive inward foreign investment rules and their state-owned status would lead to harsh treatment by regulators.

On the Nexen deal, regulatory scrutiny is likely to be fiercest in Canada, where the bulk of Nexen's assets are located. Ottawa requires that foreign investors prove that a deal will provide a "net benefit" to the Canadian economy. Cnooc on Monday rolled off a list of initiatives aimed at soothing potential concerns, including the nomination of Calgary as the head of its North and Central American operations, an accelerated investment schedule and the intention to list Cnooc shares on the Toronto Stock Exchange. Cnooc also said it would retain Nexen's management and place its North American and Caribbean assets under their control once the deal closes.

Completion of the deal is subject to the support of two-thirds of the votes cast by Nexen shareholders. Cnooc has agreed to pay Nexen $425 million if Chinese regulators block the deal. Nexen will pay the same sum to Cnooc if its directors withdraw their recommendation for the deal.

Nexen said last week that Ebitda for the second quarter had risen 6% to $707 million over the same period a year earlier. Second-quarter profit fell 57% to C$109 million after it booked costs associated with an unsuccessful well in the Gulf of Mexico.

Shares in Nexen traded on the Monday morning premarket at $26.53, up $9.47, or 56%, on their Friday close of $17.06. Based on the Friday closing price, Nexen shares were down 31% over the past 12 months and almost 50% over the past five years.

Cnooc is taking financial advice from BMO Capital Markets and Citigroup Global Markets Inc. Cnooc legal advisers are Stikeman Elliott LLP and Davis Polk & Wardwell LLP.

Nexen's financial advisers are Goldman, Sachs & Co. and RBC Capital Markets and its legal advisers are Blake Cassels & Graydon LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP.

The Nexen board is taking advice from Richard A. Shaw Professional Corp. and Burnet, Duckworth & Palmer LLP.