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It seems unlikely MEG Energy will remain a stand-alone company, but experts say it’s not an impossibility
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A few weeks ago, MEG Energy investors were contemplating the prospect of two competing takeover bids for the oilsands company.
Less than 10 days from now, will there be any offers on the table — or will the long-running pursuit of MEG Energy finally be over with an accepted bid?
It seems unlikely MEG Energy will remain a stand-alone company, but experts say it’s not an impossibility after a special shareholder meeting to consider a friendly $8.5-billion takeover offer by integrated producer Cenovus Energy was postponed from Wednesday to Oct. 30.
In a news release, Cenovus said Tuesday its offer was expected to secure about 63 per cent of all shares voting in favour of its takeover offer — falling below the two-thirds approval it required — and the acquirer exercised its right to postpone the meeting.
This development comes less than two weeks after Strathcona Resources, which put MEG Energy in play with a hostile offer in May, announced it was terminating its latest bid. The company said at the time it believed that the “conditions to its offer, or any reasonably improved offer, are no longer capable of being satisfied.”
Now, industry experts, analysts and investors are waiting to see what will happen at the meeting scheduled for later this month.
“It caught most people by surprise because, traditionally, when you get to the stage that this transaction is in, where you have one remaining bidder with a current live bid, it usually just moves toward approval,” said Michael Tims, vice-chair of Matco Investments in Calgary.
“Traditionally, the deal would close and everybody would get their proceeds . . . I think the chance of there being no deal is low. But it is hard to say that definitively.”
“We figured that Cenovus is going to go ahead with bagging MEG, but this is a strange turn of events,” added Ayisha Zia, a senior research analyst at Wood Mackenzie.
“They should be able to convince the shareholders. And I think that the likelihood of MEG continuing as a stand-alone company are low.”
Strathcona, led by executive chair Adam Waterous, initially made an unsolicited bid for MEG in the spring, offering 0.62 of a common share and $4.10 in cash for each MEG share.
At the time, the offer was valued at more than $6 billion, but was later rejected by MEG’s board. After a search for a friendly suitor by MEG’s board, Cenovus agreed to acquire the company, valued at $27.25 per share, reflecting a $7.9-billion enterprise value for MEG.
Calgary-based Cenovus operates properties adjacent to MEG’s Christina Lake property in northern Alberta. The company said it anticipated finding $150 million in annual synergies next year, rising to $400 million a year by 2028.
Strathcona wasn’t dissuaded and came back with an improved bid, as did Cenovus in early October. It offered an implied value of $29.52 per share, which values MEG at about $8.5 billion, including assumed debt.
Strathcona said in September it owned about 14.2 per cent of MEG common shares.
In withdrawing from its pursuit of MEG earlier this month, Strathcona said it concluded that the “MEG Board’s ability to continuously extend the Cenovus meeting date, and continuously allow Cenovus to purchase and vote additional shares, makes an improved offer for MEG impractical.”
MEG’s board had amended the previous terms of a standstill agreement and allowed Cenovus to acquire up to 9.9 per cent of MEG shares, which later prompted some investors to complain to the Alberta Securities Commission, the Financial Post reported last week.
(Last week, Cenovus said it had acquired 9.8 per cent of MEG’s common shares.)
On Tuesday, Cenovus said about 63 per cent of MEG common shares are expected to vote for the transaction — and more than 75 per cent, excluding the Strathcona shares, assuming they are voted against its offer.
“Cenovus would like to reiterate that the transaction terms represent Cenovus’s best and final offer, and is the only corporate transaction currently available to MEG shareholders,” it said Tuesday.
Eric Nuttall, a senior portfolio manager with Ninepoint Partners, which owns shares in Cenovus and previously was an investor in MEG, said this week’s news was largely unexpected.
“They’ve got to find another three per cent . . . What we know today is they’re falling short with a week and a bit to go,” he said.
“If that bid fails, I would expect the (MEG) stock to sell off, and then perhaps the ball is back in Adam Waterous’ court.”
Strathcona did not comment Tuesday.
Shares in MEG dropped 29 cents to close at $28.98 on the Toronto Stock Exchange on Tuesday.
Former MEG vice-president Duane Monea, who remains a small investor in the company and sent a complaint to the ASC, said he intends to vote against the takeover offer.
Monea, who worked at the company for a decade and left in 2019, said MEG has a lot of potential to increase its production and operates excellent thermal oilsands assets, but feels the previous offers from both bidders undervalues the firm.
“Anybody who wants to purchase MEG should pay the strategic premium,” he said.
“The company can stand on its own . . . It would be great to see.”
Another industry investor pointed out Husky Energy attempted to complete a $6.4-billion hostile offer against MEG in 2018, but failed to attract the two-thirds of the shares it was seeking, and walked away from the offer as oil prices fell in early 2019.
What happens to MEG if the bid by Cenovus, a friendly suitor, isn’t able to get across the line?
“Once the genie is unleashed from the bottle, it’s tough to get it back in. However, perhaps this is a circumstance,” added Nuttall.
“Hostiles are very rare in Canada, so the outcomes can be rare as well. But the ending to this could be unusual . . . I think they will be able to find three per cent somewhere.”
Chris Varcoe is a Calgary Herald columnist.
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