A Cenovus oil facility near Fort McMurray in 2023. Advisory firm Institutional Shareholder Services gave a lukewarm endorsement to Cenovus’s $7-billion bid for MEG Energy.Victor R. Caivano/The Associated Press
Advisory firm Institutional Shareholder Services Inc. is giving a lukewarm endorsement to Cenovus Energy Inc.’s CVE-T $7-billion bid for MEG Energy Corp. MEG-T, a decision that will influence shareholders set to decide the battle for the oil sands company.
On Friday, ISS said Cenovus’s cash-and-shares offer deserves “cautionary support” from MEG shareholders at a vote scheduled for Oct. 9. The proxy advisory firm favoured Cenovus’s bid over a hostile, all-share takeover proposal from Strathcona Resources Ltd. SCR-T
ISS and rival Glass Lewis & Co. have significant influence with index funds and other passive investors. These shareholders rely on the adviser firms’ voting recommendations and sometimes determine the winners of contested takeovers. Glass Lewis is also expected to release a recommendation to MEG shareholders by early next week.
Cenovus to buy MEG Energy in nearly $7-billion deal
MEG’s board and Cenovus executives have been in a war of words with Strathcona’s leaders for the past two months, taking aim at the way the takeover played out and the value of the competing offers.
Earlier this month, MEG’s board of directors backed the Cenovus offer over an improved bid from Strathcona. Cenovus is offering $27.25 in cash and 1.325 of its own shares for each MEG share, while Strathcona is offering 0.8 of its shares for each MEG share.
“MEG shareholders will have an opportunity to participate in the upside potential of the combined company, albeit only partially, and there appears to be downside risk of non-approval,” ISS said of the Cenovus bid.
The advisory firm said if MEG shareholders turn down Cenovus, there is a significant risk that the company will fail to reach a deal with Strathcona.
The Cenovus bid requires approval from a two-thirds majority of MEG shareholders.
ISS said MEG shareholders “find themselves in a dilemma, as the Cenovus offer is neither compelling nor opportunistic. However, it is difficult to conclude with certainty there is a more compelling offer available, or that one will emerge.”
Cenovus and MEG operate neighbouring oil sands properties at Christina Lake, south of Fort McMurray, Alta. Strathcona also owns oil sands projects in the region. All three companies are based in Calgary.
In May, Strathcona put MEG in play by making a hostile bid and revealing it owned 9.2 per cent of the company.
MEG’s board responded by running a sale process that drew 15 suitors, and resulted in non-binding bids from three companies. In August, MEG announced an agreement with Cenovus.
Strathcona, run by executive chairman Adam Waterous, declined to sign a standstill agreement with MEG. As a result, MEG’s board refused to negotiate with Strathcona.
In late August, Strathcona increased its stake in MEG to 14 per cent and said it would vote against the Cenovus offer. Mr. Waterous accused the MEG board of making “false and misleading claims” about his company’s bid and of defusing the competitive tensions in the bidding process by refusing to negotiate.
On Friday, ISS said MEG’s board was justified in declining to engage with Strathcona after the company refused a standstill agreement other bidders signed. The advisory firm said: “Even under the most cynical interpretation, it is difficult to conclude that sufficient competitive tension did not exist during the sale process.”
If MEG shareholders turn down the Cenovus offer, ISS said, “there appears to be a measure of downside risk to MEG’s share price.”
“Although the existence of Strathcona’s outstanding bid may seem to offset these concerns, there are a separate host of risks behind the bid that MEG shareholders may not find tolerable,” said the proxy adviser.
So far this year, MEG’s share price is up by 19.5 per cent. In the same period, Strathcona shares rose by 19.7 per cent and Cenovus stock price climbed 12.6 per cent.