Strathcona Resources also has a standing offer to acquire MEG Energy, and has opposed the proposed sale to Cenovus Energy.Todd Korol/Reuters
Multiple MEG Energy Corp. MEG-T investors are planning to vote against the company’s proposed $7-billion sale to Cenovus Energy Inc. CVE-T, according to two sources familiar with the matter.
Shareholders of MEG, Canada’s last pure-play oil sands producer, will meet Thursday to decide the fate of the transaction, which requires at least two-thirds voting support for the deal to proceed. Strathcona Resources Ltd., which recently boosted its stake in MEG to 14.2 per cent and also has a standing offer to acquire the company, has ardently opposed the Cenovus bid.
Several of MEG’s largest shareholders held meetings with Cenovus chief financial officer Kam Sandhar in New York last month, the sources said, asking for a higher price in exchange for their support. The Globe and Mail is not identifying the sources because they are not authorized to discuss the contents of private conversations.
The New York meetings occurred roughly two weeks after Cenovus chief executive officer Jon McKenzie told The Globe he had no plans to offer more money for MEG and that the Strathcona offer “isn’t credible.”
MEG Energy urges shareholders to reject takeover offer from Strathcona
Cenovus is offering 75 per cent cash and 25 per cent stock for MEG and has set aside $5.2-billion and approximately 84.3 million shares for the transaction. When the deal was announced on Aug. 22, the offer valued MEG at $27.25 per share or roughly $7-billion when excluding MEG’s existing debt.
Strathcona initially launched a hostile bid for MEG in May. That offer was also for a mix of cash and stock: 0.62 Strathcona shares and $4.10 in cash per MEG share, which at the time was worth $23.27 per MEG share or nearly $6-billion before debt.
Two weeks after Cenovus announced that the MEG board had unanimously endorsed its takeover proposal, Strathcona launched an amended hostile takeover bid composed entirely of stock. That offer is for 0.8 Strathcona shares per MEG share, valuing the company as of the Sept. 8 offer date at roughly $30.86 per share, or approximately $7.85-billion before debt.
Strathcona’s promised fourth-quarter special dividend of $5.22 a share (if the MEG deal gets done, rising to $10 a share if not) means the actual value of the offer could be considered even higher to some investors. But Cenovus contends Strathcona’s share price will fall in direct proportion to the value of the dividend, erasing any benefits for MEG shareholders.
Adam Waterous, who heads the private equity firm that owns Strathcona and is also the oil producer’s executive chair, has consistently argued his offer represents the most value for MEG shareholders.
The reality for MEG investors, however, is not so easily determined. Because both offers include a stock component, their relative value is in a state of constant flux.
Strathcona shares have increased in price by more than 50 per cent over the past six months, although Mr. McKenzie previously told The Globe that is more a result of limited liquidity than genuine value creation.
An average of roughly 100,000 Strathcona shares have traded per day over the past three months. The latest three-month average daily trading volume for Cenovus shares, by comparison, is more than 10 million.
“There is nothing that should tell you that the Strathcona assets should trade at a significant premium to MEG and a significant premium to the industry,” Mr. McKenzie said.
“Adam’s bid is just an air bid, it is a paper bid. … It doesn’t have any validity.”
Mr. Waterous has responded to that argument by saying that the Cenovus bid, by offering mostly cash, denies MEG shareholders the opportunity to participate in future upside.
Two highly influential proxy advisory firms – Institutional Shareholder Services Inc. and Glass Lewis & Co. – have both endorsed the Cenovus bid over Strathcona. However, the ISS endorsement was tepid, offering “cautionary support” for a deal it described as “neither compelling nor opportunistic.”
MEG and Cenovus have neighbouring operations in the Christina Lake region of Northern Alberta that are so proximate, Mr. McKenzie argues that combining the two assets will generate operational savings, or synergies, of more than $400-million per year by 2028.
Mr. Waterous argues that Strathcona – which also has operations in the region – would be able to generate similar savings. But Mr. McKenzie said investors should be skeptical of that assertion given Strathcona has significantly higher operating costs than both MEG and Cenovus.
At least one other MEG shareholder has publicly criticized the Cenovus offer. Cole Smead, CEO and portfolio manager of Smead Capital Management Inc., which owns more than 1.1 million MEG shares, previously told The Globe that the overarching reaction to the Cenovus offer among MEG investors was disappointment.