Husky’s $2.6 Hostile MEG Offer Seen Sparking Bidding War

Husky Energy Inc.’’s C$3.3 billion ($2.6 billion) hostile bid for MEG Energy Corp. may start a bidding war for the oil-sands company, possibly drawing in other Canadian energy giants.

MEG rose as much as 46 percent to C$11.70 in Toronto on Monday, above Husky’s per-share offer price of C$11, signaling investors expect a higher bid. Husky could increase its proposal to C$15 a share before the deal hurts it financially, or companies including Suncor Energy Inc., Imperial Oil Ltd. and Canadian Natural Resources Ltd. may emerge as rival suitors, said Phil Skolnick, an analyst at Eight Capital.

“MEG’s board of directors has its back against the wall, and really their only option, in our view, is to try to either find a White Knight or to negotiate for a higher bid,” Skolnick said in a note.

An Imperial representative didn’t immediately return a message seeking comment while Canadian Natural Resources declined to comment on a potential MEG bid. Suncor hasn’t made an offer but looks at all acquisition opportunities in the market, said Sneh Seetal, a spokeswoman.

Husky says its offer would improve MEG’s results by linking the target’s production in northwest Alberta’s oil sands with its own refining system. The combined company would produce more than 410,000 barrels of oil equivalent a day and have an almost equal amount of refining capacity, shielding it from the steep discount that Canadian oil has been selling for.

“These companies fit hand-in-glove,” Husky Chief Executive Officer Rob Peabody said in an interview. “This deal would create a stronger Canadian energy company with more capital to invest.”

Husky’s offer is fair in the current environment, but doesn’t reflect the benefits of potential improvements in Canada’s pipeline situation, said Benny Wong, an analyst at Morgan Stanley. TransCanada Corp.’s Keystone XL pipeline, which could begin construction next year, would reduce transportation costs to refiners on the U.S. Gulf Coast, diluting the benefit of integrating MEG’s production with Husky’s refining, he said in a note.

The deal would also include Husky assuming C$3.1 billion of MEG’s debt. Much of the savings from the deal would come from Husky refinancing MEG’s borrowings at lower rates. That prospect prompted a surge in MEG’s bonds, with its $1 billion in unsecured notes due 2024 trading at the highest since October 2014.

Husky’s Hostile Bid Is a Rarely Used or Successful Tactic in Oil

Peabody says he’s taking the cash and stock proposal directly to shareholders after MEG’s board spurned an earlier offer and that his company remains prepared to speak with directors. MEG said in a statement on Monday that no formal offer has been made and the board will evaluate it if and when the offer is received.

MEG investors would get C$11 a share, or 0.485 of a Husky share, equivalent to a 37 percent premium over their stock’s previous close, Calgary-based Husky said in a statement Sunday. Including debt, the deal has an enterprise value of about C$6.4 billion.