Husky Energy Inc. has launched a $3.3-billion hostile takeover offer for MEG Energy Corp. in a bid to bolster its oil sands holdings with prices for the heavy crude in a slump.
Husky said on Sunday that it would pay $11 in cash or 0.485 of a Husky share for each MEG share, a premium of 37 per cent over MEG’s closing price on Friday of $8.03 on the Toronto Stock Exchange. It would also assume MEG’s $3.1-billion debt.
MEG, known for its Christina Lake steam-driven oil-sands development south of Fort McMurray, Alta., has been in the midst of a transition after the departure of founder Bill McCaffrey as chief executive in May. His resignation had prompted some speculation of a takeover.
MEG issued a statement, telling shareholders it would respond to the Husky offer after the would-be acquirer releases its formal circular on Tuesday.
Mr. McCaffrey’s successor, Derek Evans, wrote a letter to shareholders in early September laying out his vision for the company. It included plans to reduce its sizable debt, expand markets and boost production to 113,000 barrels a day by 2020, up from 98,000 in July.
Husky’s chief executive Rob Peabody said the offer would immediately achieve all of MEG’s financial goals and benefit shareholders in both companies.
“We just believe this is a real compelling offer,” Mr. Peabody said in a conference call with analysts Monday. “This is a real hand-in-glove sort of deal – it just fits together very well.”
MEG’s $8.03 share price represents a gain of about 50 per cent year to date. It has weakened since the summer, however, as the discount on Canadian heavy crude has widened against light U.S. oil grades to levels not seen in five years. The wide difference is due to tight export pipeline capacity and rising industry-wide output.
Husky, part of the global empire of Hong Kong billionaire Li Ka-shing, said it had attempted to persuade MEG’s board of the benefits of a deal, but was rebuffed, prompting it to take its offer directly to shareholders.
Mr. Peabody said the combination would be positive for MEG shareholders and the Alberta industry, as it provides a stronger company with links to company-owned refineries and transportation capacity in Canada and the United States.
“MEG − and we’ve looked at this quite a while − is a compelling company in that it’s got great assets, and it’s got great people,” Mr. Peabody said in an interview Sunday. “We actually would really look forward to welcoming those people into Husky. We need their operations staff, the vast majority of their technical staff and some of their corporate staff, I’m sure, as we go through this.”
He told analysts Monday there would be some “synergies” in eliminating duplication of corporate staff in Calgary, but that over time, the combined company would employ more people than the two firms separately would.
In the meantime, Mr. Peabody plans to meet with MEG shareholders over the next week. Husky has planned a conference call before markets open on Monday.
MEG had little to say in reaction to the unsolicited offer. It said its board and management would review it to determine if it is in shareholders' best interests. “We do acknowledge that Husky had stated there had been discussions, however we will comment on our take on all matters pertaining to this unsolicited bid when we formally respond,” MEG vice-president John Rogers said in an e-mail.
Husky has other northern Alberta oil sands holdings, including the Sunrise project, a joint venture with BP PLC that started production in 2015. It was not immediately known if there is a rival suitor waiting in the wings. Other companies with bitumen operations close to MEG’s include Cenovus Energy Inc. and Canadian Natural Resources Ltd. Canadian Natural has been an active buyer of oil sands operations in the past two years. Cenovus is still working to restore market favour after its difficult $17.7-billion takeover of ConocoPhillips’s oil sands holdings in 2017.
Oil sands heavyweights Suncor Energy Inc. and Imperial Oil Ltd. could also have a look at MEG, Phil Skolnick, analyst at Eight Capital, said in a note to clients. However, Mr. Peabody said Monday that he does not believe other companies would gain the same benefits from a acquisition of MEG.
Analyst Michael Dunn at GMP First Energy Inc. said Monday that he expects Husky will raise its offer but is not anticipating other bidders.
A combined Husky and MEG would have total production of more than 410,000 barrels of oil equivalent a day and refining and upgrading capacity of approximately 400,000 barrels a day. The company said it could achieve $200-million in savings, half of that from its ability to refinance MEG’s debt and provide other financial benefits.
Husky is focused on heavy-oil production in Western Canada but is also a partner in offshore projects off Newfoundland and Labrador.
In July, Daniel Farb, a representative of Highfields Capital Management, which owned 9.9 per cent of MEG at the time, resigned as a director. Mr. Farb said in a statement at the time that he had been pleased with recent asset sales and debt reduction, but he complained that MEG had gone back to a practice of “failing to put the best interests of the company and shareholders first.”
Mr. Skolnick said in August that Mr. Farb’s departure could be the start of a shareholder activist move that could eventually lead to the sale of the company.
Mr. Peabody declined to say if Husky had been in discussions with Highfields since Mr. Farb’s departure from the board. “You know that Highfields has been fairly vocal themselves, feeling that this company needed to think about a different approach to the future,” he said.
Jeffrey Jones