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Rumors of CFIUS snag drive down Nexen shares

by Scott Stuart  |  Published November 27, 2012 at 4:03 PM
Shares of Canadian oil producer Nexen Inc. slumped Tuesday, Nov. 27, on rumblings that its acquirer Cnooc Ltd. has refiled for its U.S. national security review.

Cnooc, controlled by the People's Republic of China, has been trying to acquire Nexen and its oil sands and shale gas assets since July for $27.50 per share in cash, or $3.2 million. The deal is valued at $19.4 billion.

The transaction was cleared by U.S. antitrust regulators in early September and Nexen shareholders approved the merger Sept. 20. The European Union competition review is scheduled to close Dec. 17.

The merger has yet to clear its review by Industry Canada under the Investment Canada Act. That review has been pushed in to an extended phase that is set to end Dec. 10. Under Investment Canada, an acquisition by a foreign entity must produce a net benefit to Canada. The Harper government has been reworking the terms of what constitutes a net benefit and that revision of the Investment Canada code has been anticipated for weeks. Observers expect that the revisions will precede a final approval of the Cnooc-Nexen combination.

There have been gestures from Nexen's provincial base, Alberta, suggesting the Cnooc deal is heading for approval, according to an attorney tracking the matter. Canada has sought conditions for the approval and Cnooc has reluctantly consented, he said.

Cnooc announced the transaction with promises to maintain Canadian headquarters, employees and community investment.

An initial 30-day review by the Committee on Foreign Investment in the United States, which oversees the national security implications of foreign acquisitions of U.S. assets, was extended past an initial 30-day review to a 45 day analysis last month. That review should end by this week.

Neither Cnooc nor Nexen responded to calls about the status of the CFIUS review.

Market rumor, emanating from Citibank NA according to one arb, suggests that the companies refiled their CFIUS application.

Citi is a Cnooc adviser on the merger. The bank does not appear to have active sell-side coverage of Nexen. Citibank did not respond to a call for comment.

About 10% of Nexen's assets are related to oil properties in the Gulf of Mexico, so the bulk of the deal involves the Canadian assets.

Pulling and refiling the CFIUS review is sensible given that Investment Canada has yet to conclude their process, an attorney said. There is no reason for either Cnooc or the CFIUS to take an action until it is clear that the deal will get Canadian approval, he said.

A refiling could mean the CFIUS review is extended only another 30 days, which puts the end of that process more or less in line with other regulatory reviews and still would allow the deal to close before the end of the year.

Nexen shares traded down about $1 before regaining some of that loss to trade for $24.15 at a spread of $3.35, or 14%. If the deal closes Dec. 20, that spread represented an annualized return of 165%.

Tags: CFIUS | China | Citibank NA | Cnooc Ltd. | Committee on Foreign Investment in the United States | Investment Canada Act | Nexen Inc.

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Scott Stuart

Senior Writer: Arbitrage

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