(Bloomberg) — Cenovus Energy Inc.’s top executive said the company doesn’t plan to increase its takeover offer for oil sands producer MEG Energy Corp., despite a higher rival bid from Strathcona Resources Ltd.
Image: Cenovus Energy
“We’re paying at the highest end of the range. And you know, we are in a world where we think we’ve got the only viable bid going forward,” Chief Executive Officer Jon McKenzie said in an interview. “We are closing the door” on making a higher bid, he said.
Cenovus announced a cash-and-stock offer last month that values MEG at just over C$28 a share. But MEG’s stock has been trading well above that, closing at C$29.12 in Toronto on Tuesday after Strathcona announced its all-stock competing offer the previous day.
Strathcona’s bid “doesn’t have any credibility to it,” McKenzie said, arguing that the company’s controlling shareholder, Adam Waterous, is using overvalued stock to try to capture what is effectively a majority stake in MEG’s prized oil sands assets in northeastern Alberta.
“It is the oldest trick in the M&A book to try to talk down the share price of a competing bidder,” Waterous said in an email. “The reality is the share exchange ratio offered by Strathcona gives MEG shareholders more production, cash flow and net asset value in Strathcona per share than they are contributing. That’s what matters in an all-share deal and is irrespective of the buyer’s share price.”
Shares of Calgary-based MEG fell Wednesday after Bloomberg News reported McKenzie’s comments. The stock declined 1.6% to C$28.65 at 1 p.m. in Toronto. Cenovus shares rose as much as 3.7%, and Strathcona shares fell as much as 1%.
To close the deal, Cenovus needs approval from at least two-thirds of the votes cast by MEG shareholders at a meeting scheduled in October. Strathcona owns 14% of MEG and intends to vote against it, so Cenovus needs to get an even higher percentage from other shareholders.
“We need to get the vote out for sure,” McKenzie said. “So part of what we need to do is continue to talk to the MEG shareholders, continue to make sure that they understand our deal and the merits of the deal.”
Representatives for MEG and Waterous didn’t immediately respond to requests for comment.
Cenovus is offering to pay C$27.25 in cash or 1.325 of its shares for each MEG share. Investors can choose, but the company is limiting the total amount of cash to C$5.2 billion to minimize its debts.
On a full pro-rated basis, MEG holders would get C$20.44 in cash and 0.33125 of a Cenovus share.
Waterous has argued that by putting in so much cash, Cenovus shareholders are capping future gains for MEG investors as its assets become more productive.
Strathcona’s all-stock offer, if successful, would give existing MEG shareholders 43% of the merged company. “Why that ends up being really important is that this deal has a huge amount of economic upside,” Waterous said Tuesday on BNN Bloomberg Television.
McKenzie dismissed that line of attack. “There’s nothing to stop any of these shareholders from using their cash to buy Cenovus stock. And that’s kind of a silly argument.”
