Because last year's bombshell that Canada would change the way it treated royalty trusts was fraught with political risks, not only did the country's ruling conservatives pull it off with surprising ease at the time, they've dodged all the bullets since. This latest one, however -- the announced takeover of PrimeWest Energy Trust by Abu Dhabi's national oil company -- may be a tougher bullet to dodge. Here's why:
The Political Problem: shortly after the Conservatives announced their proposed change to the royalty trusts and the stocks got clobbered as a result, energy trust CEOs warned that they had been made sitting ducks for acquisition by foreign buyers. At the time, Finance Minister Flaherty brushed off the claims as self-serving propaganda on the part of the energy trust CEOs who opposed the tax change proposal, but TAQA's bid for PrimeWest -- at a 30% premium -- proved the trust CEOs correct. The Conservatives' tax law change had perhaps set the stage for the selling of Canada's vital natural resources to foreign buyers.
The Political Solution: this one clearly has the Conservatives in a quandary. At first, Prime Minister Harper reacted swiftly, using the Middle-Eastern origin of the buyer to float the idea of blocking the deal on national security grounds. However, this deal was TAQA's 3rd takeover of the year in Canada, and one of those purchases has already closed; if it wasn't a national security issue then, why would it be now? Since that wouldn't make sense, he then backed off and said such protectionist legislation would be coming soon, but that the TAQA deal would be reviewed based on existing laws, preserving its ability to complete the PrimeWest deal. Even this solution wasn't ideal however, as it would keep the topic of the TAQA deal in the news, reminding Canadians that the energy trusts were indeed trading at fire-sale prices as a direct result of the change in their tax status.
Ultimately, there has been no political solution to the PrimeWest takeover, and this week's announcement by Canada's Conservatives that no such national security takeover legislation would be crafted until next year shows clearly they don't quite know how to make this problem go away. They must be hoping the topic will die down, that they'll have time to quietly pass such legislation at some point in the future.
Will this work? Maybe, but the fact still remains that the TAQA takeover of PrimeWest signaled clearly that Canadian energy trust assets are very inexpensive. In reality, a foreign acquirer might actually step up any similar plans in hopes of getting a deal done now, before any new legislation that would block such foreign buyers is tabled next year.
Regardless, the royalty trust tax change was a huge mistake, and the lack of any clever political play in the aftermath of the PrimeWest takeover shows that Harper, Flaherty and their team will have an increasingly difficult time covering up that fact.
*Note: readers can click here to listen to my podcast interview with Roger Conrad about current energy trust valuations in general and the PrimeWest takeover, in particular.
