Cenovus Energy Inc. agreed to buy MEG Energy Corp. for C$6.93 billion ($5 billion), topping a rival offer from Strathcona Resources Ltd. in a bid to boost its position among Canada’s largest oil producers.
The deal values MEG at C$27.25 a share and calls for Cenovus to pay three-quarters in cash and a quarter in stock, according to a statement Friday. Cenovus expects the acquisition to close in the fourth quarter, subject to regulatory and shareholder approvals. The total value of the deal is C$7.9 billion, including debt.
The agreement caps a three-month battle for control of MEG triggered when oil tycoon Adam Waterous’ Strathcona Resources made an unsolicited cash-an-stock bid. MEG’s board had spurned Strathcona’s approaches before it took the proposal public. Once disclosed, some MEG investors panned the roughly C$6 billion proposal as too low. The board started a strategic review to seek other offers.
Cenovus’ offer still is about 1 percent below MEG’s closing price of C$27.53 on Thursday. MEG shares were little changed in Toronto on Friday, while Cenovus rose 3.6 percent.
“MEG shareholders will be disappointed across the board,” said Cole Smead, chief executive officer of Smead Capital Management, which owns shares in both Cenovus and MEG. “They’re the biggest loser in this.”
MEG, which pumps about 100,000 barrels of crude a day, is one of the last companies in the industry small enough to be a manageable takeover candidate, but large enough to vault the acquirer up in the ranks of the country’s major producers.
Cenovus is the third-largest Canadian crude producer by stock-market value, producing the equivalent of about 800,000 barrels of oil a day last year - mostly bitumen, along with natural gas liquids and some conventional oil and gas.
Royal Bank of Canada analyst Greg Pardy said in May that Cenovus was “the most logical fit” to take over MEG because it also operates in Christina Lake, offering greater potential operating synergies than other possible buyers.
The Cenovus takeover would unite two Calgary-based firms with significant operations in the oil-sands region of northeastern Alberta. MEG’s Christina Lake project includes 200 square kilometers (77 square miles) of leases in the oil-rich area, and the company has regulatory approvals to produce around 210,000 barrels a day.
Cenovus sees the opportunity to generate C$150 million in near-term annual savings, with that figure rising to more than C$400 million per year in 2028 and beyond.
Cenovus plans to invest C$400 million of capital above MEG’s current plans to boost production at its site to 150,000 barrels a day by the end of 2028 while reducing the amount of steam required to extract each barrel of crude, Cenovus Chief Executive Officer Jonathan McKenzie said on an investor call.
Details on a fee that would have to be paid to break the deal between Cenovus and MEG will be released in due course, Cenovus executives said on the call.
Cenovus is financing the deal with a C$2.7 billion term loan and a C$2.5 billion bridge facility, which will be used to fund the cash part of the transaction. The term loan and bridge facilities were provided by Canadian Imperial Bank of Commerce and JPMorgan Chase & Co.
McKenzie reiterated Cenovus’ commitment to its long-standing net debt target of C$4 billion - the level at which the company will return all of its excess free funds flow to shareholders via buybacks and dividends - calling it a key pillar of the company’s financial framework. Executives also signaled Cenovus might divest some assets to accelerate debt reduction.
“Nobody should be surprised if we do find a way to reduce debt more quickly and get back to 100 percent shareholder returns a lot sooner than just organically deleveraging,” McKenzie said in response to a question about non-core asset sales. He added that the company continuously evaluates its portfolio and that the MEG acquisition adds more emphasis on optimizing the asset base.
Goldman Sachs Group Inc. and CIBC were the financial advisers to Cenovus, while McCarthy Tetrault LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP were its legal advisers.