The death of free-market capitalism, loudly declared by economic conservatives, is greatly exaggerated. Sure, the U.S. government has taken control of its largest insurer, its largest commercial bank, and its largest mortgage companies, and President Barack Obama just fired the CEO of General Motors. But that's America.
There are still places where the philosophy of Adam Smith lives on, where even a modest foray by some distant arm of the state into one of the nation's boardrooms is met with shrieks of horror, followed by outrage. That's Alberta.
The surprising thing isn't that a few of Precision Drilling's competitors would be jealous of the $280-million the company just got from Alberta Investment Management Corp. (AIMCo)., the provincial government's shiny new money manager. It's that the jealousy morphed into a display of public whining, and that the sour grapes were taken so seriously by the locals.
An oil services executive, quoted in a front page story in the Calgary Herald, called the investment "a pretty dark day for free enterprise in Alberta," as though the hammer and sickle had just been raised over the provincial legislature or, worse yet, another Trudeau had been elected prime minister. The newspaper's veteran business columnist, Deborah Yedlin, claimed the Alberta government was "back in the business of being in business" and called it "anathema to conservative political philosophy" - strong words in a province that accepts no other political philosophy.
All this because AIMCo, which exists to manage about $70-billion of Alberta's vast wealth, bought bonds and equity from an Alberta company that needed money. Quel scandale .
Precision is not just any local business, clearly. It's the largest energy services company in Canada and an employer of some 7,000 people to boot, only a few thousand less than Chrysler Canada. Like that enfeebled auto maker, Precision has been in a heap of trouble since the financial crisis, thanks to money it borrowed for last year's $2-billion acquisition of Grey Wolf, a U.S. competitor.
That's where the comparison ends, though. Chrysler is a bad business that has now flopped in three different forms (public company, unit of Daimler, private company). Precision's a good business, one that makes cash instead of burning it. All had a refinancing problem. When the federal and Ontario governments agreed in December to give General Motors and Chrysler an emergency $4-billion (money Chrysler has used to meet payroll), they attached a modest floating interest rate, currently just above 4 per cent. That's a bailout. AIMCo is getting 10 per cent from Precision's hide for lending it $175-million for the eight years.
But it's still not enough for the critics, who say competing drillers would never be able to borrow so, um, cheaply. Strictly speaking, that may be true. But then, 10 per cent is not really 10 per cent.
AIMCo extracted another couple of pounds of flesh. First, it bought 35 million units of the company at $3 apiece. (Less than a year ago, remember, this was a $28 stock.) But the real juice is in the form of warrants, which give AIMCo the right to buy another 15 million shares, also at a low price ($3.22).
Here's the key wrinkle: The warrants last for five years, not one or two. God himself couldn't tell you what the world economy will look like in two years. Heck, not even Mark Carney can. But in five? Unless this really is the Great Depression, The Sequel, it's going to be a world that uses more energy, is paying higher prices for it, and is spending more to get the stuff out of the ground. Assuming Precision survives the downturn, it could easily be a $28 stock again at some point.
But suppose that's far too optimistic. Suppose it rebounds to half that - $14. Do the math: AIMCo would make more on the warrants than it would collecting interest on the bonds. This ain't no bailout because it's potentially way too lucrative.
"In a bailout, you're putting your money in and you hope you'll get it back," says Leo de Bever, AIMCo's new chief. "But our expected rate of return on this deal is 20 per cent," compounded annually. If this really were a dark political scheme to stuff a major Alberta business with some cheap government money, let's just say the politicians botched the job.
But the biggest misunderstanding is that AIMCo is playing with "government money." Like the CPP Investment Board or Ontario Teachers' Pension Plan, AIMCo is largely a giant public pension fund, though it also runs some endowments and the province's $14.5-billion Heritage Fund (which would be at least $60-billion if it hadn't been squandered by the self-described fiscal conservatives who've governed the province for nearly 40 years).
But when Teachers sought to acquire BCE, no one accused the Ontario government of buying a phone company. When CPP buys an office tower, nobody says it was the Finance Minister's idea. Mr. de Bever, a Teachers alumnus, says AIMCo can and will establish that it's every bit as independent from politics. "It is, in some ways, part of growing up for Alberta," he says.
Finally, Alberta may be figuring out a constructive way to handle its oil wealth. Now if only the complainers would figure it out.