Waterous fund would own more than half of company formed from Strathcona's takeover of MEG Energy
An investment fund led by Strathcona Resources Ltd.'s SCR-T executive chairman will control more than half of the shares of the oil company that would result from Strathcona's $5.9-billion takeover of MEG Energy Corp. MEG-T
If Strathcona's hostile bid for the rival oil sands producer is successful, Adam Waterous's Waterous Energy Fund will acquire $662-million of stock in the combined company to put its stake at 51 per cent, according to details of the offer released in the formal bid document on Friday. WEF currently owns 79.6 per cent of Strathcona shares.
Strathcona announced its unsolicited cash-and-stock offer for MEG on May 15, saying the two oil sands-producing entities are highly complementary in geography, operations, reserve-life indexes and profit margins.
Why Canadian energy is a secret bargain, spurring a hostile takeover bid in the oil sands
Mr. Waterous said MEG shareholders would benefit in three ways: through a 9 per cent premium over the value of their shares, as measured when the deal was announced, higher earnings and cash flow per share and an improvement in credit rating to investment-grade status, which will reduce the cost of capital.
'This is the financial Abominable Snowman – often talked about but never seen,' he said in an interview.
He pointed out that WEF's participation in the deal, at a cost of $30.92 a share, would represent the largest equity investment in the Canadian oil patch in more than a decade. 'And we think we're going to get private-equity rates of return on that,' he said.
Strathcona is offering MEG shareholders 0.62 of a Strathcona share and $4.10 in cash for each MEG share. The bid will remain open until Sept. 15.
MEG shares were down 2 per cent at $24.11 on the Toronto Stock Exchange on Friday. Strathcona was up 2 per cent at $29.49, putting the value of its offer at $22.38, suggesting investors are still wagering on a higher offer. Analysts have speculated some of the country's large established oil sands companies may consider riding in as white knights.
In a statement on Friday, MEG urged its shareholders not to tender to the Strathcona bid. The takeover target said it had formed a special committee of its board, which will evaluate the offer with the company's financial advisers. It plans to respond by June 16 days with a recommendation.
It said it remains committed to its long-term strategy and is confident that it will create value. Officials declined to comment further.
According to the bid circular, Strathcona amassed a 9.2 per cent interest in MEG through share purchases in the first and second quarters of this year. Mr. Waterous approached MEG director Jeff McCaig on April 10 to discuss the merits of a potential deal, and on April 28, sent a formal proposal outlining terms and conditions, including the price.
On May 13, MEG Chairman Jim McFarland wrote back to say the company was not interested. Strathcona went public with its bid two days later.
When they rejected the friendly approach, MEG's directors did not know that Strathcona was close to announcing a series of asset sales to focus its operations on heavy oil and reduce its debt, Mr. Waterous said. Just before announcing its bid, it sold Montney natural gas assets in two deals for total proceeds of $2.84-billion.
'MEG has not yet had the opportunity to evaluate our offer. So this is the first time. Now that they see we are such a lookalike business to them, a bigger look alike business, I think it will be much more straightforward for the board to be able to see the merits of the financial triple-jump,' he said.
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