Strathcona Initiates Formal Offer to Acquire MEG

Strathcona Resources Ltd. has formally started its offer to acquire all of the issued and outstanding common shares of MEG Energy Corp. it does not already own in a cash-and-stock transaction.

The offer is for 0.62 of a Strathcona common share and $4.10 in cash per common share of MEG, the company said in a news release. The offer is open for acceptance until 5 p.m., Mountain Time, on September 15.

The offer is not subject to any due diligence or financing conditions, with the cash consideration payable under the offer to be funded under a bridge financing commitment from a syndicate of lenders, Strathcona said.

Strathcona said it expects to issue up to around 145 million of its shares under the offer, consisting of 143 million shares issuable for MEG shares deposited pursuant to the offer and 2 million Strathcona shares issuable for the MEG Shares issued upon settlement of certain security-based compensation awards of MEG, representing approximately 68 percent of the approximately 214 million Strathcona shares issued and outstanding currently.

Strathcona also announced the execution of an equity commitment letter with Waterous Energy Fund (WEF), the holder of 79.6 percent of its outstanding shares, through certain limited partnerships comprising Waterous Energy Fund III (WEF III), under which WEF III has committed to purchase an additional 21.4 million Strathcona shares through subscription receipts, conditional upon completion of the offer.

Under the terms of the equity commitment letter, the investment will be completed at a subscription price of $30.92 per subscription receipt, equating to an incremental investment by WEF in Strathcona of approximately $662 million, according to the release.

Strathcona Executive Chairman Adam Waterous, who is also CEO of WEF, said, “WEF’s major further investment in Strathcona reflects our view that more than eight years into building Strathcona our best years are in front of us. As part of the offer, we are asking MEG shareholders to join us as fellow shareholders in Strathcona and trust the Strathcona team as stewards of their capital. We therefore believe it is important that we eat our own cooking, ensuring no one will be more focused on increasing Strathcona’s value beyond current levels than WEF. We firmly believe Strathcona represents compelling value at this price with a large margin of safety, and that we and the partners in our fund will do very well over the long run”.

Assuming acquisition of all MEG Shares under the offer and any second stage transaction, and upon completion of the WEF III Equity Investment, WEF is expected to own approximately 51 percent of the then issued and outstanding Strathcona shares, according to the release.

Strathcona announced its intention to acquire MEG on May 15. In an earlier statement, it said the combination of the two companies would unify two heavy oil “pure plays” with near identical netbacks and reserve life indexes, both focused on steam-assisted gravity drainage (SAGD) oil sands development.

The combination “would create Canada’s fifth largest oil producer and fourth largest SAGD producer, with among the largest proved oil reserves in North America,” Strathcona said, adding that the combined business “is expected to possess the scale and balance sheet metrics required to achieve an investment grade credit rating”.

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