Cenovus’ Sunrise oil facility northeast of Fort McMurray in 2023.Victor R. Caivano/The Associated Press
The battle to buy MEG Energy Corp. MEG-T has finally been won.
After a bidding war that spanned five months and saw the price on the table for the last of Canada’s pure-play oil sands producers rise by roughly $2.7-billion to $30 a share, Cenovus Energy Inc. CVE-T gathered enough support as of Monday to move forward with the acquisition.
In the two months since it first struck a friendly $7-billion white-knight deal with MEG to best a hostile $5.9-billion bid from Strathcona Resources Ltd. SCR-T, Cenovus has twice been forced to raise its offer in order to win over enough MEG investors, eventually exceeding $8.6-billion.
Strathcona, which owns 14.2 per cent of MEG and previously had fiercely opposed selling to Cenovus, agreed Monday to support the latest offer. Cenovus now has support from approximately 79 per cent of MEG shareholders, the company said, far more than the two-thirds majority needed to vote in favour of the transaction at a special meeting on Thursday in order for the deal to proceed.
“This looks to be a done deal,” TD Cowen analyst Menno Hulshof said in a note to clients on Monday. “We now see effectively no deal risk.”
Bank of Nova Scotia analyst Kevin Fisk, in his own note to clients on Monday, declared an end to one of the most dramatic takeover battles in Canadian corporate history.
“Cenovus will be able to complete the MEG acquisition,” Mr. Fisk said. “The company no longer faces the risk of an unsuccessful shareholder vote.”
MEG shareholders were originally scheduled to vote on a sale to Cenovus on Oct. 8, but that meeting was delayed to Oct. 22 after Cenovus improved its original offer. It raised the stakes two days after The Globe and Mail reported that several large MEG shareholders planned to vote against the transaction.
The meeting was delayed a second time last week when Cenovus disclosed it still lacked sufficient shareholder support. Fund management giant Fidelity Investments, which owns 9.5 per cent of MEG, was among the holdouts, The Globe reported at the time.
A bidding war for MEG is exactly what Cenovus chief executive officer Jon McKenzie was hoping to avoid when he told The Globe in September that his original offer was “the only viable bid” for the company and the Strathcona bid was “not credible.” His comments were made just two days after Strathcona attempted to counter Cenovus with a revised, all-stock bid, but that company ultimately abandoned its pursuit of MEG after Cenovus made its initial sweetener, which consisted of both a larger stock component and a higher overall price.
The first Cenovus proposal was worth the equivalent of $27.25 per MEG share as of Aug. 22, composed of 75 per cent cash and 25 per cent stock.
That deal equated to $5.2-billion in cash and approximately 84.3 million Cenovus shares. The deal set to receive MEG shareholders’ blessing on Thursday is evenly split between cash and stock, pro-rated to a maximum of $3.8-billion in cash and 159.6 million Cenovus shares.
Cenovus and MEG have neighbouring operations in the Christina Lake region of Northeastern Alberta that are so near each other, Mr. McKenzie previously told The Globe that “you can really throw a rock from our plant to their plant.”
He expects that merging the two assets will lead to operational savings, or synergies, of at least $400-million a year by 2028. The combined company is estimated to be producing more than 850,000 barrels a day from Alberta’s oil sands by that time, which would put Cenovus in a position to potentially unseat long-time industry leader Suncor Energy Inc. SU-T as the single largest producer in the region.
Strathcona, which is owned by a private equity firm headed by veteran investment manager Adam Waterous, is not the only MEG shareholder to be won over by the latest sweetener from Cenovus. Cole Smead, CEO and portfolio manager of Smead Capital, which owns more than 1.1 million MEG shares and had previously supported Strathcona over Cenovus, said via e-mail he now plans on voting yes at Thursday’s meeting.
In addition to winning a slightly higher price for its MEG stake, Strathcona also received something of a consolation prize from Cenovus. The company agreed to acquire one producing asset and several undeveloped properties in Saskatchewan and Alberta from Cenovus for $75-million on Monday, with the total price rising to $150-million if certain conditions are met.
TD Cowen’s Mr. Hulshof described the transaction as an “interesting wrinkle” and suggested Cenovus was giving Strathcona a bargain.
“Whichever way you slice it, these metrics are low when compared to current heavy oil trading multiples,” he said.