The Baron talks up China and energy

By ERIC REGULY
Globe and Mail
Thursday, November 17

The Rothschilds have been in business for about 220 years, and every century or so investment banking's royals haul out the yellowed charts and realize the empire has a presence in Upper and Lower Canada. As a courtesy, they pay a visit, shiver in the cold, recoil at the wine -- the family gave Bordeaux snobs Mouton and Lafite -- and politely scurry back to Paris or London or New York.

This week, the Rothschilds' gilded airborne carriage took the dapper Baron David de Rothschild and his entourage to Toronto and Montreal. Mr. Rothschild's first official visit to Canada was a courtesy call. But it was also recognition that the small Canadian offices, formally known as N.M. Rothschild & Sons Canada, probably will take on a more prominent role in the family wealth creation machine.

That's because Canada has a lot of what the world covets -- energy and metals. Mr. Rothschild thinks the Chinese are about to emerge as voracious buyers of not just the commodities, but the companies that produce the commodities. The firm, with its presence in Canada and connections to China, might be in a good position to broker some of these deals.

"The Chinese want to demonstrate that they are starting to do what most big companies in the world do when they are national champions, which is look at opportunities everywhere," he says in an interview.

Ray Smith, chairman of Rothschild North America and former CEO of Bell Atlantic (now Verizon), who joined Mr. Rothschild on the Canadian foray, thinks China will be especially aggressive in oil. "The one thing they do not have is oil. [They] also want a seat at the table when the great energy decisions are made. The ones today are minor compared to what they will be 10 years from now."

Mr. Rothschild says the firm's long history of independence has made it especially attractive to the Chinese. This allowed Rothschild to emerge this year as the adviser to the non-executive directors of China National Offshore Oil Corp.

China National Offshore Oil (CNOOC), made an audacious bid for Unocal last summer but Chevron took the prize.

For that, Chevron can thank the political hysteria set off by various politicians. The Chinese bid was a national security threat, they said, even though CNOOC is publicly traded and promised not to remove oil from American soil and export it to China. Congress threatened to delay any decision to approve the merger for months.

The conventional wisdom is that that the Chinese vastly underestimated the political backlash. Not exactly true, Mr. Rothschild says. "We knew our chances were slim. I think the Chinese wanted to register the fact they are players."

CNOOC or other Chinese oil companies probably will make more acquisition attempts, although unlikely in the United States. The American energy press has speculated that Canada's Talisman or Husky Energy might become targets (China Minmetals last year went after Noranda, now part of Falconbridge, and then mysteriously lost interest).

Mr. Rothschild and Mr. Smith both agree that, in 10 years or so, China's pursuit of big resource companies will be an unexceptional aspect of the global M&A scene.

While the Rothschilds are probably best known among mere commoners for setting gold prices in the London gold market (a business they abandoned last year), the CNOOC adventure shows they have a fondness for grubbier industries. The family has a lot of experience in commodities and resources, especially in mining -- Mr. Rothschild started his career at a family-controlled mine in the 1960s -- and in infrastructure and utility plays.

Thanks to the commodities boom, Canada is back on the resources map, which means Rothschild Canada might be, too. Rothschild hasn't been a big name in Canada since 1953, when it led the syndicate to develop Newfoundland's Churchill Falls hydroelectric project, which wasn't finished until the early 1970s.

Mr. Rothschild, 63, has been chairman of Rothschild Continuation Holdings AG, the top company in the empire, since 2003, when Sir Evelyn de Rothschild, the dominant figure on the British side of the business, retired. The firm is fairly small; it has about 2,500 employees in 30 offices in 20 countries. But it has the distinction of being the only privately held global investment bank and one of the few independent names of any size. Most of its European rivals, including Schroders, Flemings and Casenove, were poached in the past decade or so by the big American banks. Another rival, Lazard, recently went public.

Independence and connections to governments and industries that might go back to the era when Napoleon was in diapers allow Rothschild to snag M&A advisory work, which accounts for three-quarters of its income, from varied and surprising quarters. But Mr. Rothschild knows that the firm can go only so far in a land of Wall Street giants. If nothing else, Rothschild, unlike the J.P. Morgans and Citigroups of the world, can't use its balance sheet to attract clients with loans.

Mr. Rothschild and Daniel Labrecque, the CEO of Rothschild Canada, insist the firm is not working on a transborder deal involving a Canadian company, although the rumours say it has teamed up with a Canadian investment bank on a potential resources company sale. But making a splash in the Canadian market seems only a matter of time as Rothschild thumbs through its fat Rolodex. "The ambition is to become a quality player in Canada," the baron says.