Husky’s Hostile Bid For MEG A ‘Compelling Offer’: Peabody
Husky Energy Inc.’s top executive says the company’s $6.4 billion hostile bid for oilsands rival MEG Energy Corp. is a “compelling offer that will result in a stronger Canadian energy company with unmatched resilience to market conditions.”
Husky chief executive Rob Peabody told a conference call this morning that despite having top quality assets and demonstrated production growth, MEG has not performed to the level it should aspire to.
“Despite top-quality assets and strong production growth, MEG has failed to deliver value to shareholders. Its total shareholder returns have greatly underperformed the index and commodity prices,” he said.
Peabody said Husky, which has traditionally been a cautious acquirer, decided to launch the hostile bid because the deal fits his company’s criteria for deal making.
“We have always said that any acquisition we consider has to meet three criteria. First, it has to be on strategy. Second, it needs to be accretive to funds flow from operations and earnings while maintaining or enhancing free cash flow. And third, it must preserve the strength of our balance sheet,” he said.
“This deal ticks all three boxes.”
As currently structured, the deal offers MEG shareholders an implied total equity consideration of approximately $3.3 billion and also includes the assumption of approximately $3.1 billion of net debt.
Under the terms of Husky’s proposal, each MEG shareholder will have the option to choose to receive consideration per MEG share of $11 in cash or 0.485 of a Husky share, subject to maximum aggregate cash consideration of $1 billion and a maximum aggregate number of Husky shares issued of approximately 107 million.
“Just to put our offer in context, the $11 represents a 71 per cent premium to MEG’s average share price over the last two years. It’s difficult to see this pattern of performance changing anytime soon given their limited financial flexibility and exposure to heavy oil differentials. MEG’s highly stressed balance sheet leaves them with few options,” Peabody told analysts.
Peabody added that the combination of MEG's top-quality assets and staff with its own production and downstream network would allow MEG to circumvent some of the effects from the Canadian crude discount, and provide benefits for both sets of shareholders.
“MEG has limited transportation and processing options and significant exposure to heavy oil differentials. Their constrained market access and high-risk of apportionment have exposed their single revenue stream to significant risk,” he said.
“Husky has learned some important and sometimes tough lessons over its past 80 years of operations. One is that if you’re going to be a heavy oil or bitumen producer in Canada you need to have a high level of integration in order to survive over the long haul. The business model of being a pure upstream heavy oil producer in Canada has seldom worked.”
The Husky offer comes early into the tenure of Derek Evans, who took over as chief executive of MEG in August.
"We acknowledge that we have received an unsolicited offer from Husky," John Rogers, vice-president of investor relations and external communications at MEG, said in a statement.
"The management and board will be reviewing the offer in due course and make a [determination] if it is in the best interest of shareholders."
The combined company will have total upstream production of more than 410,000 boe/d and downstream refining and upgrading capacity of approximately 400,000 bbls/d, providing for increased free cash flow per share, production growth and a basis for potential future dividend increases.
“In addition, we will have seven million barrels of storage capacity. Moving our own crude through our own dedicated logistics assets and into our own refinery maximizes the value we receive for our barrels and it mitigates the risk from volatile quality and location differentials, as well as the impacts of the upcoming IMO 2020 implementation,” Peabody said.
“Once joined with MEG, about 90 per cent of our combined heavy oil production will be able to receive global pricing.”
The deal, which data compiled by Bloomberg shows would be Husky’s largest-ever takeover, pits Husky’s owner, Hong Kong billionaire Li Ka-shing, against CNOOC Ltd., which owns about 12 per cent of MEG. While Li retired from active management of his globe-spanning conglomerate earlier this year, his son Victor sits on Husky’s board, which unanimously approved making the MEG offer. Peabody downplayed any outside influence on the proposal.
“This is driven, frankly, by me,” Peabody told Bloomberg in an interview Sunday. “I see tremendous benefits for both companies.”
Data courtesy CanOils.
Synergies a positive
Husky said there would be about $100 million per year of expected financial synergies, including debt refinancing with more favourable terms
Of that total, the company expects about $70 million per year of operational synergies, including additional margin capture through Husky’s midstream and downstream infrastructure and transportation commitments.
An additional $30 million per year in other synergies is expected, including a reduction in combined corporate overhead and procurement savings.
Husky said longer-term synergies include optimization of the combined capital spending program, deployment of technologies across the combined organization, combining best practices and operating expertise across a much larger asset base, and future investments to enhance downstream integration.
“The bottom line is these synergies will drive significant value creation,” Peabody said.
Structure of the deal
The share exchange ratio has been calculated based on Husky’s closing share price of $22.68 as of Friday, Sept. 28, 2018, the last trading day prior to this proposal, implying a mix of $3.21 in cash plus 0.344 of a Husky share per MEG share on a fully pro-rated basis.
Husky said its proposal delivers an “immediate” 44 per cent premium to the 10-day volume-weighted average MEG share price of $7.62 as of Sept. 28, 2018, and a 37 per cent premium to MEG’s closing price of $8.03 as of that date.
Husky said the transaction will be accretive to the company’s free cash flow, funds from operations, earnings and production on a per share basis.
The proposal has been unanimously approved by Husky’s board. It is not subject to any due diligence, financing or Husky shareholder approval conditions. Husky expects that the proposed transaction will be completed in the first quarter of 2019, subject to receipt of all necessary regulatory approvals, including under the Investment Canada Act and the Competition Act.
Details of the offer
Full details of the offer will be set out in the formal bid circular, which is expected to be filed on Tuesday, Oct. 2, 2018, with the Canadian securities regulators, a copy of which will then be available at SEDAR. The offer will be open for acceptance until 5 p.m. Eastern Time on Wednesday, Jan. 16, 2019.
The offer will be subject to certain conditions, including that the MEG shares tendered under the offer constitute more than 66 2/3 per cent of the shares of MEG then outstanding, on a fully-diluted basis.
The offer will also be conditional upon receipt of all necessary regulatory approvals, confirmation that the MEG shareholder rights plan will not adversely affect the offer, no material adverse effect at MEG, and other customary conditions.
The offer will not be subject to any financing conditions, and the cash component of the offer will be financed through Husky’s existing cash resources.
Goldman Sachs Canada Inc. is acting as financial advisor and Osler, Hoskin & Harcourt LLP is acting as lead legal advisor to Husky.
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