BUSINESS

Nova’s sell-off

An Alberta-based giant is forced to retreat

JOHN DeMONT July 10 1989
BUSINESS

Nova’s sell-off

An Alberta-based giant is forced to retreat

JOHN DeMONT July 10 1989

Nova’s sell-off

An Alberta-based giant is forced to retreat

Robert Blair, the grizzled chairman of Calgary-based petrochemical and pipeline giant Nova Corp., rarely minces his words. His message last week to a roomful of financial analysts and journalists in Toronto’s elegant King Edward Hotel was straightforward: Nova’s profit for 1989 is expected to be sharply less than forecast. As well, he announced plans to auction off four subsidiaries to help pay the $2.9 billion in debt that Nova incurred to take over Polysar Energy & Chemical Corp. in 1988. Blair added that Nova’s remaining pipeline, petrochemical and oil and gas businesses should translate into “rising asset value, earnings growth and dividend growth.” Despite that reassuring message, Blair’s statement sent Nova’s stock price below $10 for the first time since 1987, before it recovered to $10.50 by week’s end.

Nova’s sell-off is a dramatic departure for Blair, a corporate visionary whose appetite for acquisitions has transformed a small provincial natural-gas pipeline company into an international energy and petrochemical conglomerate. Last year’s $2.3-billion buyout of Polysar was Blair’s biggest prize and one of the largest energy takeovers in Canadian history. But last week’s announcement may have been the first tangible evidence that financing the Polysar purchase has not gone according to plan. Still, Blair told Maclean’s that he had wanted to sell Nova assets well before the Polysar purchase—and that the company’s financial foundations remain rock solid. He added: “There’s nothing shaky about this company. The Polysar deal left us with more debt than we had intended to hold. But we will meet—and perhaps even exceed—our goal of cutting $1 billion by year-end.”

Even so, Blair had to auction off some assets to enable Nova to meet its ambitious target. When Nova bought Polysar, petrochemical prices were soaring because of short supply and a strong economy. Nova executives say that, at the time, they expected the increased Polysar cash flow would enable them to pay off a huge part of the debt from the takeover soon after it had been completed. The Polysar purchase was the main reason that net income for the first quarter of 1989 jumped by 55 per cent from the same period during the previous year.

But Blair had to contend with a sharp drop in prices for polyethylene—used to make garbage bags and other plastic products—which Nova produces at its Joffre, Alta., petrochemical plants 120 km north of Calgary. As a result, Nova officials now estimate that the company will make only $370 million during 1989 instead of the $540 million that they had forecast at the start of the year.

Blair said that he can raise as much as $500 million by selling “nonessential assets.” Offi-

dally for sale are wholly owned subsidiaries Grove Italia SpA, an Italian pipeline valvemaker, and Novalta Resources Ltd., a Calgarybased oil and gas company. Also up for auction are Western Star Trucks Inc. and Trans Quebec & Maritimes Pipeline Inc., which are both 50-per-cent owned. Said Blair: “These are good assets. But they are businesses which have not been growing.” Nova officials say that they hope to have buyers by year-end. But Blair said that if sales cannot be made, Nova could use its $1-billion line of credit to reduce its debt load.

Still, Blair said that Nova’s 43-per-cent stake in Husky Oil Ltd., jointly owned with billionaire

Hong Kong financier Li Ka-shing, is not for sale. At the same time, Blair did not rule out further smaller acquisitions if tempting targets emerge. Said Blair: “We will continue to be aggressive.”

Blair’s decision to reduce Nova’s debt should strengthen the company by enabling it to concentrate on its core petrochemical, pipeline and oil and gas assets. Although petrochemical prices have weakened recently, the outlook for the natural gas business remains bright—particularly as U.S. demand for Canadian gas continues to grow.

Nova, which plans to spend $3 billion to expand its Alberta natural gas pipeline system over the next six years, could be a prime beneficiary of the increase in U.S. gas consumption. Said David Stenason, an analyst with Montreal-based Lévesque Beaubien Geoffrion Inc.: “The result will be a purer company with fewer peripheral businesses. And investors like pure companies.”

Members of the investment community generally trust Blair, who has had a number of dramatic successes as the chairman of Nova. Since taking over at the Calgary firm in 1970, the Trinidad-born chemical engineer who was educated at Queen’s University in Kingston, later gained control of a 57-share position in Husky Oil after outmanoeuvring Petro-Canada chairman Wilbert Hopper in 1978. While Hopper was negotiating with Husky’s owners, the Nielson family of Cody, Wyo., Blair purchased 35 per cent of the company’s stock from New York City investment dealers.

But Blair suffered setbacks. Nova was severely damaged by the recession of the early 1980s. It was saved by its ethylene and gastransmission revenues.

A year ago, Nova’s bid for Polysar triggered one of the most acri¡2 monious takeover feuds in Canadi5 an business history. Nova started 3 buying shares in the company back “■ in 1987 after the federal government decided to privatize Poly~ sar—formerly a part of the Cana-

dian Development Corp. But Blair soon became interested in acquiring the company and its lucrative Sarnia, Ont., ethylene plant. And the courtship was a stormy one. Polysar turned down several different bids by Nova before accepting a price of $20.31 a share—up dramatically from the original offer of $14— ending the bitter eight-month fight. Said Blair: “We paid handsomely for Polysar. But we are happy about what it adds to the company.” Now, the Calgary businessman must prove that he knows how to sell assets as well as buy them.

JOHN DeMONT