Canada buyouts, plant closures accelerate

11 May 2007 20:31  [Source: ICIS news]

By Stefan Baumgarten

TORONTO (ICIS news)--The current wave of takeovers and buyouts in Canada, along with plant closures, is set to continue as the government is unlikely to intervene, a top Canadian petrochemicals analyst said on Friday.

The takeovers reflected a broad, worldwide trend that was affecting chemicals, along with many other sectors, said independent Toronto-based petrochemicals analyst John Cummings.

In the case of resource-rich Canada, the trend was accelerated by high commodity prices and demand, as well as Canada’s access to the vast US market.

Canada, unlike other nations, did not reserve its large mining, metals and oil and gas sectors for national companies, Cummings said.

At the same time, its anti-monopoly regulations were weak, and the ruling Conservative government has shown no sign of intervening, Cummings said.

The country never had a consistent policy with regard to takeovers, and this was not likely to change, he added.

“The trend will continue … it is probably too late now for Canada to move to protect its core industries,” he said.

As for Canada’s chemicals and petrochemicals, the industry is already largely owned by foreign companies.

Cummings pointed to the big roles in Canada of ExxonMobil, which controls Imperial Oil, a major Canadian energy and petrochemicals firm; Lanxess, the country’s only rubber maker; Basell, the former BASF/Shell joint venture, which is Canada’s only polypropylene (PP) producer; and, last but not least, Dow Chemical, which became itself the target of takeover speculation in past weeks.

Recent takeovers in Canada’s chemicals sector include Balchem’s acquisition of Chinook, a Canadian chlorine maker, along with the closure of a plant. Chinook had earlier sold its amines operations to DuPont.

Private equity firm Littlejohn said earlier this month it planned to take over Intertape, a Montreal-based maker of polyolefins products.

Last year, Georgia Gulf acquired Royal Group, a Canadian maker of polyvinyl chloride (PVC) and polymer-based building products.

Earlier, Acetex, a vinyl acetate monomer (VAM) firm, had purchased AT Plastics. Acetex was then bought by Celanese, which itself had been acquired by private equity firm Blackstone, Cummings said.

Much of DuPont Canada’s business was acquired by Koch Industries to become Invista, and a much smaller DuPont Canada was de-listed from the Toronto Stock Exchange and taken private.

There were, however, also two deals that led to Canadian chemicals assets being repatriated, rather than sold to foreigners, Cummings said.

In November, Ontario’s teacher’s pension fund bought Dynea’s North American business and took it private, and in 2005, Petro-Canada bought the Coastal petrochemicals plant in Montreal from El Paso.

Along with takeovers, the multinationals have been closing many smaller, noncompetitive chemical plants in Canada, and would continue to do so, Cummings said.

Recent examples include plans by Solutia and Huntsman to shut production facilities in Quebec.

But perhaps the biggest blow to Canada’s chemicals industry came in August when Dow said it would close all its manufacturing plants at Sarnia, Ontario, by 2008 because of lack of feedstock there after ethylene shipments from Alberta on the Cochin pipeline were stopped.

The cluster of petrochemicals firms at Sarnia in southwest Ontario, near the US border at Michigan, is the birthplace of Canada’s modern petrochemicals industry.

As for Canada’s remaining chemicals firms, NOVA Chemicals appears to be the last major left standing, Cummings said.

However, NOVA was an obvious takeover target, especially after the hive-off of its North American STYRENIX business into a joint venture with INEOS, he said.

NOVA’s low-cost production assets in Alberta could be attractive to Saudi Arabia’s Sabic or India’s Reliance, or any other global ethylene/polyethylene (PE) producer like ExxonMobil or Dow Chemical, Cummings said.

And while based in Calgary, NOVA’s administrative headquarters are already in Pittsburgh, Pennsylvania, he added.

Methanex, based in Vancouver, no longer has any manufacturing plants in Canada and may eventually be taken private, Cummings said.

The world’s largest methanol last month briefly became the target of takeover speculation as well.

Recent tax changes may have made Canadian firms even more attractive to foreigners, especially to cash-rich private equity funds.

A government tax plan, announced last November, to start taxing distributions by income trusts to investors effective 2011, would put an end to that form of business organisation in Canada, Cummings said.

The trust sector has seen a number of buyouts since the tax announcement, which created uncertainty and may have made it hard for trusts to raise funds to grow their businesses.

The trust concept is particularly widespread in Alberta’s oil and gas sector but some chemical firms, including Chemtrade, Superior Plus/Erco and Canexus, are also organised as trusts.

Another recent government tax plan would bar companies from deducting interest expenses incurred on their foreign investments and expansions, putting Canadian firms at a disadvantage to foreign competitors.

That plan was “clearly a mistake” and the government would likely backtrack, Cummings said.

Canada’s takeover flurry seemed to have reached a temporary peak earlier this week with Alcoa’s $33bn (€24bn) bid for Montreal-based aluminium giant Alcan.

That deal would, if realised, have direct impacts on the chemicals industry as Alcan is a large buyer of caustic soda and a processor of chemicals and plastics in its packaging division.

It remains unclear if Alcoa’s can persuade shareholders and regulators.

One factor helping Alcan would be the big role of plastics in packaging, at the expense of aluminium. This could make a joint Alcoa-Alcan entity much less of a competitive threat in the eyes of anti-trust authorities.

Large recent takeovers of Canadian firms that succeeded include deals for mining and metals icons Falconbridge, Noranda and Inco. All ended up in foreign hands.

Likewise, foreign investors snapped up steel makers Dofasco and Algoma, hotel chains Fairmont and Four Seasons, and department store major Hudson’s Bay.

Canadian landmarks Tim Hortons, a coffee shop chain, and Shoppers, the country’s largest drug retailer, are also under foreign control.

Up untill now, Canada’s ruling Conservatives have not explained what they may be prepared to do to stem the tide, if anything.

Prime Minister Stephen Harper, a trained economist who took over in early 2006, is averse to interventionist, protectionist measures. He has repeatedly criticised what he what he terms corporate welfare; that is, corporate subsidies and tax breaks.

It remains to be seen how long his government, which has only a minority in Parliament and faces three opposition parties, can afford to stand by as large parts of the country’s resources and corporations end up in foreign ownership.

Previous Liberal governments were less willing to accept foreign takeovers, and the US, for its part, was quick to thwart some  high-profile takeover attempts of its firms, Canadian political commentators noted this week.

US politicians raised national interest and security objections to stall attempts by a state-controlled Chinese oil firm to acquire Unocal, and by a Dubai-based firm to buy US port facilities.

In Canada, the previous Liberal government voiced concerns in 2005 when China’s Minmetals tried to take over Noranda. The bid failed but Noranda, along with Falconbridge, were later acquired by Xstrata, a Switzerland-based mining group. 

Earlier Liberal governments openly protected Canada's firms and resources. In the 1970s, then-Prime Minister Pierre Trudeau set up Petro-Canada as a state oil and gas major and launched a national energy programme to help cut back foreign ownership of Canadian oil and gas assets.

Although the government sold off Toronto-listed Petro-Canada in several phases in past years, ownership remains restricted under the Petro-Canada Public Participation Act. The law bars any single investor from controlling more than 20% of the company's voting shares.

The only sectors that have been spared from takeovers are Canada’s media, banks and insurance firm, sectors that enjoy high levels of protection under the law.

Industry group Canadian Chemical Producers Association said it had, at this time, no position on the flurry of takeover activity in Canada.

($1.00 = €0.74)

By: Stefan Baumgarten
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