BUSINESS/ECONOMY

Nova Corp.’s ‘hobnailed boots’

BRIAN BURTON March 28 1988
BUSINESS/ECONOMY

Nova Corp.’s ‘hobnailed boots’

BRIAN BURTON March 28 1988

Nova Corp.’s ‘hobnailed boots’

BUSINESS/ECONOMY

Alberta-based Nova Corp.’s $200-million bid for Polysar Energy and Chemical Corp. of Toronto has forced Ontario and Alberta into a tug-of-war over the future direction of the entire Canadian petrochemical industry. The federal government, which must ultimately decide whether Nova succeeds, will have to weigh the two provinces’ interests against the strategic value of allowing Nova to become an industry giant capable of thriving under a free trade agreement with the United States. Last week a team of experts from the Ontario government was in Sarnia, where much of the province’s petrochemical industry is centred, assessing the potential impact of a Nova takeover. Said Barry Bower, a senior adviser to Ontario Energy Minister Robert Wong: “Ontario has a lot to lose if Nova comes in here with its hobnailed boots on.” Meanwhile, Alberta officials, who indirectly helped finance Nova’s gamble with a $150million cash injection, are still considering the firm’s demands for assured supplies of ethane—the industry’s linchpin commodity.

Nova chairman Robert Blair tried to mollify Wong’s concerns during a Toronto meeting on Feb. 24, but was apparently unsuccessful. Said Bower: “We are worried about an Alberta company with such close ties to the Alberta government having such a large chunk of the Ontario petrochemical industry.” At the same time, Alberta government officials say that they are concerned about the future of their province’s own petrochemical sector, located primarily at Joffre, 145 km south of Edmonton. Alberta Liberal Leader Nicholas Taylor, a former oil company owner who has closely watched Nova for two decades, said that if Nova does not get the ethane assurances that it wants, it could expand in Sarnia. And executives with Du Pont Canada Inc. of Montreal say that if Nova’s takeover run is successful, Nova will have a stranglehold on all the ethylene supplies in Ontario—

giving it the power to control the sector’s growth.

In Alberta, Nova wants the right to continue extracting ethane from Alberta’s vast natural gas supplies. Under agreements with the province, Nova converts ethane, extracted from natural gas pipelines, into ethylene at its massive refining complex at Joffre. The ethylene is then used to manufacture a range of other chemicals and plastics. Nova is proposing to build a $600-million ethylene plant at Joffre, but only if it can get assurances of additional low-cost ethane for the project. But a group of major natural gas producers in Alberta has launched a fierce lobby against Nova’s ethane agreements. And if the company’s ethane supplies dry up or become more expensive, Taylor said, Nova will claim that market conditions forced it to exercise its Ontario option and build its new plant in Sarnia.

Taylor added that Nova’s Polysar takeover attempt was actually financed in part by the Alberta gov-

ernment last Dec. 16, when it agreed to purchase $150 million in Nova debentures. He says that Nova later used the cash to help increase its stake in Polysar. Said Taylor: “Blair has outsmarted a not-so-swift cabinet.” Some analysts say that the Alberta cabinet is indeed afraid of Nova’s Polysar threat and will ensure that cheap and plentiful ethane supplies continue. The Nova gambit, said Patrick Baggett, a vice-president of Chemical Market Associates Inc. of Houston, “is a good lever and not a bad move. It is like selling the judge an interest in the plaintiff’s case.”

While the Alberta Energy Resources Conservation Board was weighing concessions on the ethane front last week, the quickly assembled team of Ontario government advisers was quietly visiting the Sarnia offices of one petrochemical company after another. They said that they were told jobs might depend on the outcome of the takeover bid—and that Polysar executives, concerned about a Nova victory, were already preparing boardroom arguments to explain why Ontario rather than Alberta is the best location for the new ethylene plant.

Some industry analysts say that there is little doubt that Nova’s first choice will be Alberta. They point out

seats on the Nova board of directors, and that its $150-million debenture purchase, financed through the Alberta Heritage Savings Trust Fund, gives it a vested interest in ensuring that the plant is located in that province.

Ontario officials say that they are angry over the damage that Bower claims Nova has already inflicted on Polysar. Bower explained that to keep its shareholders loyal during its takeover struggle with Nova, Polysar has proposed a corporate restructuring that would involve handing over $900 million in cash and securities to investors by 1993. Such payouts will aggravate Polysar’s $2.5-billion debt, and that, said Bower, has the Ontario government concerned over Polysar’s long-term corporate health. He recalled that, during the recession in the early 1980s, Polysar came “cap in hand” seeking financial aid from the Ontario government. Now, he said, Ontario would be much happier to see

the $900 million used to reduce Polysar’s debt.

Ontario officials have also expressed concern that Nova’s expansion plans could pre-empt the Ontario operations not only of Polysar but of other petrochemical firms, particularly Du Pont. With polyethylene prices rising sharply, Du Pont could see the door for polyethylene expansion suddenly slammed shut by a Nova-Polysar merger. By taking control of the ethylene supplies that Du Pont gets from Polysar, the Alberta firm would dramatically control competition in the industry.

The battle between the two provinces is taking place just as the sector was beginning to make a profit after nearly six years of losses. Indeed, after a tidal wave of red ink brought on by the petrochemical price crash in the early 1980s, which severely shook the world petrochemical industry, the current recovery in industry revenues has raised both Ontario’s and Alberta’s hopes for expan-

sion. Polysar has rebounded to an operating profit of $119.3 million last year from 1986 losses of $237 million. And Nova’s petrochemical arm has been the chief source of its profits, which soared by 79 per cent last year to $179 million.

But two serious obstacles still hinder Nova’s takeover bid. The first is a rule preventing any single shareholder from voting more than 25 per cent of Polysar’s common shares, a vestige of the days before the government privatized Polysar, a former Crown corporation. Nova will now have to petition the federal government to remove the 25-per-cent clause from Polysar’s charter and then convince the firm’s board of directors to agree to the change. As well, Nova must convince federal anticombines officials that its proposed takeover will not substantially restrict competition in the industry.

For his part, James Butler, chairman of Nova’s petrochemical subsidiary, Novacor Chemicals Ltd., said that Nova would like to own all of Polysar. Butler, a soft-spoken American, said that Ontario’s concerns are exaggerated. He added that Nova divides the petrochemical world in half at the Mississippi River, and that, ultimately, Nova would like to build one ethylene plant in Joffre to serve the western U.S. markets and the Pacific Rim, while a Sarnia plant would serve Ontario and the eastern United States.

Butler said that both he and Blair have tried to keep Ontario’s Wong abreast of their intentions and to allay any concerns. And he added that he personally assured Du Pont executives that they can continue to receive Polysar ethylene on current terms until the year 2012. Du Pont would have an option to cancel at any time, but Nova would not. Said Butler: “I don’t know what more you could want.”

Indeed, some industry analysts say that the country will be better off if a new and larger Nova emerges from the battle. Mississauga, Ont., analyst James Smeltzer of J. E. Smeltzer and Associates Inc. says that, under a free trade deal, Canada needs a giant corporation in the petrochemical industry to compete against such huge U.S.-based multinationals as Dow Chemical Co. and Shell Oil Co. And Nova’s Butler said that Canada’s petrochemical future also depends on secure ethane supplies in Alberta. He added that unless gas continues to flow at economical rates, Nova could potentially supply the booming Pacific Rim market from a new plant in Houston—forsaking Joffre. Most analysts agree that, no matter which way Nova jumps, it will leave large footprints.

— BRIAN BURTON in Calgary

BRIAN BURTON