OTTAWA/CALGARY (Reuters) - Suncor Energy Inc and Petro-Canada will ask the Canadian government to repeal a law that protected Petro-Canada from any unwanted takeovers but left its stock depressed, according to documents filed with regulators.
Suncor agreed on Monday to buy Petro-Canada in an all-share deal, initially valued at $18.4 billion ($15 billion), to create Canada’s largest oil company and the dominant player in the country’s vast oil sands.
The companies say that once the takeover is complete, the deal is structured so that Suncor will be extended the same protection of shareholder limits that were set up in the 1991 Petro-Canada Public Participation Act.
Petro-Canada was founded as a government-owned company in 1975, and the act was put in place as Ottawa started to issue shares in the firm, to ensure a diversified ownership.
However, according to the merger agreement, Suncor doesn’t want the shelter of the act, which limits individual investors to a 20 percent stake. It and Petro-Canada have both pledged to seek a repeal of the law.
“The parties ... shall co-operate and use their reasonable commercial efforts to obtain a commitment from the government of Canada to support a repeal of the Petro-Canada Act,” they said in a filing dated March 22.
The act is widely seen as a brake on any gains by Petro-Canada stock, which has traded lower than that of its rivals because of the reduced chances of a takeover.
“Petro-Canada has always been undervalued in terms of the additional value the market gives for takeovers,” said Pat Magee, a portfolio manager with Leon Frazer & Associates, which manages the IA Clarington Canadian Conservative Equity Fund, controlling about 175,000 Petro-Canada shares. “The ownership cap has limited (the stock) to some extent.”
Indeed, the same handicap could now apply to the merged company unless it is removed. Suncor’s move to repeal the act is being welcomed because it will keep a takeover premium on its shares.
“I’d rather the act not be in place on the company,” said Lanny Pendill, an analyst with Edward Jones. Other companies “carry some type of a takeover premium. If you’re in safety-land you no longer have that. And it helps keep management on its toes.”
Suncor is offering 1.28 of its shares for each Petro-Canada share. The merger will create a company with 100 years worth of reserves, the largest oil sands operations, four refineries in Canada and the United States, a chain of retail gasoline stations and more than 680,000 barrels a day of oil and gas production.
Canada’s minority Conservative government has not said if it will listen to the two companies and repeal the act. However Finance Minister Jim Flaherty said on Tuesday morning that the deal was a “good thing” that was important for Canada overall.
Even if the government were persuaded to support repeal of the act, it would still have to get the support of at least one of the three opposition parties -- all to the left of the Conservatives -- to do so.
Michael Ignatieff, leader of the main opposition Liberal party, said he supports the deal as long as the new entity is controlled in Canada.
“We want a Canadian champion in this industry. That is the justification for this merger,” he told reporters. “We will support the mergers of these companies on that basis.”
However Ignatieff declined to say if he would support a repeal of the act.
Shares in both Suncor and Petro-Canada fell on Tuesday. Suncor’s stock dropped C$2.24, or 7.3 percent, to C$28.50 while Petro-Canada fell C$1.69, or 4.7 percent, to C$34.01.
Analysts said the drop came as some investors questioned whether the deal would be approved by regulators.
“The market clearly believes there is some risk associated with closing the transaction,” said Menno Hulshof, an analyst with Dundee Securities. “But I think the government is going to do everything in its power to approve this deal.”
Editing by Rob Wilson