BUSINESS

A billionaire’s bargain

Hong Kong’s Li Ka-shing snaps up Husky Oil

DEIRDRE McMURDY November 4 1991
BUSINESS

A billionaire’s bargain

Hong Kong’s Li Ka-shing snaps up Husky Oil

DEIRDRE McMURDY November 4 1991

A billionaire’s bargain

BUSINESS

Hong Kong’s Li Ka-shing snaps up Husky Oil

Hong Kong billionaire Li Ka-shing stayed at home last week, but his influence on high-level negotiations in a Calgary boardroom was unmistakable. Amid sleek modem furnishings on the top floor of troubled Nova Corp.’s downtown headquarters, representatives of the publicity-shy tycoon agreed to buy Nova’s 43-per-cent stake in oil-and-gas producer Husky Oil Ltd. for $325 million. As well, Li promised to pump an additional $300 million in cash into Husky if Investment Canada approves the deal. Li, 63, already owned a 43-per-cent stake in Husky that he purchased in 1987. Last week’s agreement will make him the first in the growing ranks of Hong Kong-based investors active in Canada to purchase outright control of an operating company in the volatile energy sector. According to Michael Goldberg, dean of the business faculty at the University of British Columbia in Vancouver, the deal is a major departure from Li’s and other Hong Kong financiers’ standard practice of making passive, income-generating investments outside the colony. Said Goldberg: “Li has bought into something that is already established, but it’s hardly a passive investment. He clearly will exercise control.” Indeed, with the 1997 deadline for China’s takeover of Hong Kong approaching, Li is becoming more aggressive and ambitious in his North American business dealings. And Nova and Husky, which are both struggling in the midst of an oil industry slump, are only the latest in a series of Canadian companies to benefit from Li’s appetite for expansion. A week before the Husky deal was announced, Li agreed to lend Toronto’s Reichmann brothers up to $65 million to renovate an office tower in the financial district of New York City. In return, Li will receive a 49-per-cent interest in the building. It is his first excursion into the often fickle New York real estate market and his first partnership with the Reichmanns. Li also departed from his traditional base of conservative real estate and shipping investments last year when he joined the aggressive and secretive Toronto-based investment dealer Gordon Capital Inc. in an unsuccessful attempt to gain control of a highly speculative portfolio of so-called junk bonds owned by a bankrupt U.S. savings and loan company.

Li, whose estimated personal fortune of $3 billion ranks him 53rd on Fortune magazine’s fist of the world’s wealthiest people, has been investing in Canada for more than two decades. He acquired his first shopping centre in Vancouver in 1969. In the early 1970s, he formed a partnership with the Canadian Imperial Bank of Commerce to establish a Hong Kong-based merchant bank, Canadian Eastern Finance Ltd., and his relationship with the bank has

endured. He is now the bank’s single largest shareholder. In 1988, Li added the former site of Expo 86 in Vancouver to his list of Canadian holdings when he paid $320 million for the 203acre area and agreed to spend about $2 billion over 15 years to redevelop it as a commercial and residential complex, to be called Pacific Place. In addition to buying property in Canada,

Li has laid down personal roots as well. His two sons, Victor, 27, and Richard, 25, are both Canadian citizens and have already played active roles in several Canadian transactions backed by their father.

Li, however, is just one of many wealthy Hong Kong tycoons whose affinity for Canada appears to be growing. According to figures collected by Investment Canada, the total amount of investment by citizens of Hong Kong has increased to $1.04 billion in 1989 from $168 million in 1984. Like Li, most Hong Kong financiers are primarily attracted to real estate.

But Canadian government officials and corporate executives alike are encouraging Hong

Kong-based investors to put some of their money into operating companies. In fact, in 1986, then-Nova chairman Robert Blair was among the first Canadian businessmen to travel to Hong Kong to ask Li about injecting muchneeded cash into a major operating company. After meeting with Blair, Li agreed to purchase his first investment in Husky for about $600 million—much less than he has now agreed to pay for another 43 per cent.

That money and the relationship with Li proved to be an important source of stability for Nova during its aggressive and turbulent expansion in the late 1980s. Blair was the architect of that expansion, which culminated in its contentious $ 1.9-billion takeover of the Sarnia, Ont., petrochemical producer Polysar Energy

& Chemical Corp. in 1988. Since then, however, Nova has been squeezed by high debt levels, persistent losses in its global petrochemical operations and massive capital-spending requirements. Last September, Blair, 62, retired as chairman of the company that he guided for 22 years.

The sale of Husky fits with the company’s plan to reorganize itself and reduce its $814million long-term debt. As part of that plan, Nova’s management announced in July that it planned to split its pipeline and chemical businesses into two separate public companies in an attempt to make it easier to raise money from investors and finance the expansion of Nova’s Alberta-based pipeline. The asset split, accord-

ing to company executives, would appeal to the current preference of investors for companies that have only one line of business. Currently, Nova’s assets are split between the extremes of the fluctuating international petrochemical market and the steady and predictable Albertabased natural-gas pipeline utility.

Husky, which owns 344 service stations from British Columbia to Quebec and has large reserves of natural gas and heavy oil, did not fit in with plans to streamline the sprawling conglomerate. Heavy oil is more viscous than conventional oil and, as a result, is more costly to extract. Heavy oil is currently worth as much as $15 (U.S.) a barrel less than lighter grades of oil, now selling internationally for $23 (U.S.) a barrel. As well, natural-gas prices

are near record lows, and energy analysts are not predicting any improvement in the coming months.

Still, Husky president Arthur Price appears determined to expand the company’s production capacity. But his efforts have been hampered by Nova’s inability to provide the necessary financial support. Under the terms of last week’s agreement, however, Li will inject $300 million in new equity into Husky. That money is earmarked for Husky’s portions of the $ 1.3-billion heavy-oil upgrader in Lloydminster, Sask., and the Caroline natural-gas project in northwestern Alberta.

Nova’s financial troubles also forced the company to sell its remaining Husky stake to Li

at what many analysts say is a bargain-basement price. Nova valued its interest in Husky in its books at $614 million. But the $325-million bargain that Nova struck with Li will force the company to record a $265-million paper loss after taxes on the sale in its third-quarter results. “The sale price is definitely a massive disappointment for Nova,” said Eleanor Barker, an energy analyst with the investment dealer Sanwa McCarthy Securities Ltd. in Toronto. But she added that “the company is in such a dire financial position that it has to take what it gets—and like it.”

Nova’s cash proceeds from the sale to Li will be used to reduce Nova’s debt to $500 million. Analysts say that the company’s crushing debt was the principal reason for the delay in imple-

menting its restructuring plan, which was due to be completed at the end of October. The other main reason for the delay is the arrival of a new management team. Following Blair’s retirement, Edward Newall, a former chairman of DuPont Canada Inc., was appointed president and chief executive officer. Company executives say privately that Newall, who is still studying the complicated plan in detail, has slowed down the restructuring process even further.

Last week’s deal is by no means the first time that Nova, which frequently emphasizes its Alberta roots in its advertising and promotions, has turned to foreign investors to help the company overcome its difficulties. In 1990,

after repeatedly pledging Nova’s commitment to keeping its Canadian assets out of foreign hands, company executives sold its Sarniabased rubber division to Bayer AG of Germany for $1.3 billion.

But even though Investment Canada has to approve Li’s purchase of Husky, oil executives and federal opposition politicians predict that there will be few complications. Under Investment Canada guidelines, foreign investors are almost completely free to purchase control of troubled companies in the resources sector. Even Liberal energy critic David Kilgour is firmly in favor of the sale to Li. Said Kilgour: “There are an awful lot of people whose jobs would be endangered if this deal doesn’t go through. It would be a tragedy if Husky expired

and hurt Nova further in the process.” For his part, Marcel Tremblay, president of Enerplus Energy Services Ltd. of Calgary, said that it is “hogwash” to raise the issue of foreign control of resources when the oil industry is in such a deep slump. Added Tremblay: “This sale removes one casualty and clears a bed in the hospital for another patient.”

For foreign investors like Li, who are looking for bargain-priced North American assets, the growing list of recession-battered Canadian companies may bring new meaning to the term “cross-border shopping.”

DEIRDRE McMURDY

BARBARA WICKENS