CALGARY/TORONTO (Reuters) - Canada's Progress Energy Resources Corp sought to reassure investors on Monday that its proposed takeover by Malaysia's Petronas was not dead in the water, saying the two companies would start new talks this week to address the Canadian government's concerns.
Progress Chief Executive Michael Culbert blamed a "communications breakdown" for Canada's surprise rejection of the $5.2 billion deal late on Friday night, and said he was optimistic that the deal could get back on track.
Canadian Prime Minister Stephen Harper also appeared to soften the government's stance on Monday, saying Industry Minister Christian Paradis had simply not been in a position to decide if the deal was of "net benefit" to Canada. That was a softer line than Paradis' comment on Friday that the deal did not meet the "net benefit" test.
"I think in a lot of cases ... like this, it's a communications breakdown," Culbert told Reuters in an interview, adding that he had received no indication from officials prior to the 11th-hour rejection that the government had any concerns.
Culbert offered no details on what caused the communications breakdown but said both sides were ready to talk. Paradis gave the companies 30 days to make their offer more palatable but declined to specify what his concerns were.
"What I'm hoping is that bridge can be rebuilt here this week and we can actually have some good effective discussions and move this along," Culbert said, adding that talks aimed at assuaging government concerns would start on Tuesday.
In a conciliatory move, Petronas extended its deadline by up to 90 days to close the acquisition of Progress, one of the largest owners of exploration lands in the gas-rich Montney shale region of British Columbia.
That would give Canada more time to develop a set of long-promised guidelines on foreign investment, especially by state-owned enterprises such as Petronas, as Ottawa also scrutinizes a much larger and more contentious transaction, the $15.1 billion takeover of Nexen Inc by China's CNOOC Ltd.
Paradis' rejection of the Progress deal sparked uncertainty about whether Canada is really open to foreign business as the government frequently insists. Progress shares skidded 9 percent to C$19.64 on the Toronto Stock Exchange, Nexen sank 4 percent to C$24.04 and the Canadian dollar fell to a two-month low.
Still, the fall in Progress shares was not as severe as some analysts had expected, pointing to hopes that the deal would be revived in some form.
"I don't actually think it's that terrible a decision," said Jim Hall, chief investment officer at Mawer Investment Management Ltd. "It does seem a bit amateurish to do it at the last minute - it seems like they were panicking. But I'm not seeing huge downside. The downside would be if they deny everything and don't explain why. Then projects wouldn't get built or they take a very long time."
The rejection comes at an awkward time for Canada as it seeks foreign capital to help fund an estimated C$630 billion needed to develop the energy sector over the next decade.
Petronas and Progress are planning a multibillion-dollar liquefied natural gas plant on Canada's West Coast. Harper's Conservative government has been highly supportive of such projects as a way to wrest more value of Western Canada's massive gas reserves.
A rejection of the CNOOC bid would likely damage trade ties Canada has been trying to build with China, underlining the political sensitivity to Chinese corporate expansion in North America.
Harper said the government aims to provide guidelines for foreign buyers "fairly shortly." Investors have complained that the process is far too murky.
"Let me be clear. As we said repeatedly, our view is that foreign investment, generally speaking, is a benefit to the Canadian economy and as a general rule we obviously welcome interest in the Canadian economy," Harper told reporters.
"At the same time, we are committed to the Investment Canada Act, which requires us to evaluate whether individual transactions are of net benefit to Canada, and this government has, as you know, in certain cases decided that this is not the case."
The Investment Canada Act lists several factors the government can take into account when determining net benefit, including jobs, innovation, and the compatibility of a deal with "national industrial, economic and cultural policies."
But there's no explanation and little detail about these, about a different national security clause or about the existing rules dealing with state-owned enterprises.
"Canada on the one hand says it needs to have more investment in its commodities, especially its shale and oil industries, then when a company tries to (invest), it looks like they might send them away," said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman in New York.
"Some people will say there is protectionism in Canada."
Canada dented its free-market credentials two years ago when Paradis' predecessor vetoed a bid for fertilizer giant Potash Corp in the face of stiff opposition from the company's home province of Saskatchewan.
Earlier this year, Lowes Companies Inc, the U.S. home improvement chain, pulled back from bidding for Quebec-based Rona Inc after that government complained.
Blocking the deal "means government meddling and restriction of free markets. It's just not positive in general for the markets," said Levente Mady, vice president and senior portfolio manager PI Financial Corp.
The Progress decision was a blow to Petronas, whose domestic oil supplies are shrinking. The company has been looking to boost oil and gas resources beyond Malaysia and volatile areas such as Sudan.
Additional reporting by Scott Haggett in Calgary, John Tilak in Toronto, Seng Li Peng and Luke Pachymuthu in Singapore; Editing by Janet Guttsman, Andrew Hay and Steve Orlofsky