Adam Waterous is adamant that he is offering the most value for MEG Energy MEG-T shareholders.
The executive chair of Calgary-based Strathcona Resources SCR-T and head of the Waterous Energy Fund – which owns Strathcona – launched an amended hostile takeover bid on Monday for the last of Canada’s pure-play oil sands producers. His all-stock proposal of 0.8 Strathcona shares per MEG share equates to $30.86 a share or roughly $7.85-billion for the entire company, not including MEG’s debt.
That bests a friendly $7-billion deal that Calgary-based Cenovus Energy CVE-T struck with MEG in August. The Cenovus offer is composed of 75 per cent cash and 25 per cent stock.
Buyers typically see their share price fall immediately after announcing major acquisitions. Because Cenovus shares gained as much as 10 per cent in the aftermath of its MEG deal, Mr. Waterous claimed in a presentation released alongside his amended offer on Monday that the Cenovus deal undervalued MEG by roughly $3.9-billion.
“MEG’s board left more money on the table in this transaction than any public company M&A transaction in Canada in the last 20 years,” Mr. Waterous said in an interview. “This is going to go up there with the Dutch in 1626 buying Manhattan from the Native Americans for $24.”
The Cenovus offer equated to $27.25 a MEG share when it was announced on Aug. 22, though the subsequent increase in the company’s share price means the offer is now worth more. To be competitive with the latest Strathcona proposal, Mr. Waterous said Cenovus will need to dramatically increase its offer.
“This is not a fixable transaction for Cenovus,” he said. “The math would indicate they would have to pay in the mid-40-dollars per share.”
Cenovus and MEG both declined to comment. However, a source close to Cenovus with knowledge of the situation said the company will not get into a bidding war with Strathcona.
Cenovus believes its current offer is in the best interests of MEG shareholders and the company has no plans to enhance the bid, said the source, whom The Globe has agreed not to name because they are not authorized to comment publicly on internal discussions.
The source added Strathcona is taking advantage of an inflated share price and that the Cenovus offer carries lower risk because it is mostly cash-based.
While the amended Strathcona offer does not include a cash component, the company is planning to pay a special dividend to its shareholders in the fourth quarter of this year. If its offer to acquire MEG is successful, Strathcona investors will receive $5.22 a share and if not, the payout will be $10 a share.
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The Cenovus offer has unanimous support from the MEG board of directors, though the deal still requires two thirds of votes cast at an Oct. 9 shareholder meeting to win approval. Strathcona, which recently increased its stake in MEG to 14.2 per cent, plans to vote against the deal. And at least one other MEG shareholder is also opposed.
Cole Smead, chief executive officer and portfolio manager of Smead Capital, which owns more than 1.1 million MEG shares, said the promised Strathcona special dividend is a key sweetener that many appear to have missed.
“It is 0.8 shares plus a tax-free return of capital to shareholders by year-end of the combined business of $5.22 per share,” Mr. Smead said in an interview. “That is a total consideration of $35 and change.”
Cenovus had been widely expected to emerge as a rival suitor for MEG ever since Strathcona launched its initial hostile takeover bid in May, which at the time was worth $23.27 a MEG share or nearly $6-billion. When the offer was announced, however, Mr. Smead said the overarching reaction among other MEG investors was disappointment.
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“Those shareholders went from utter confidence that they were going to get some vivacious offer from Cenovus to hearing Cenovus’s offer and that went out with a whimper in their minds,” he said.
Mr. Waterous said he has been getting similar feedback from other MEG shareholders.
“I have not spoken to a single MEG shareholder who is happy about the MEG board agreement with Cenovus, not one,” he said.
Combining Cenovus and MEG would create Canada’s second-largest oil sands producer, with an average production of roughly 720,000 barrels per day. If the deal is ultimately approved, Cenovus CEO Jon McKenzie said the combined company would be producing more than 850,000 barrels per day from the oil sands by 2028.
That would rival long-time industry leader Suncor Energy Inc., which had oil sands production of roughly 748,000 barrels a day in its most recent quarter.
Mr. Waterous has previously accused the MEG board of adopting an “anybody but Strathcona” view that allowed Cenovus to negotiate as though it were “taking candy from a baby.”
“They had no competitive tension and they just gifted the company to Cenovus,” Mr. Waterous said on Monday. “This is a great case study of a dereliction of duty of corporate directors.”
Mr. Smead said questions should be asked about what appears to be personally motivated opposition to Mr. Waterous.
“If Alain Bouchard created Alimentation Couche-Tard and Murray Edwards built Canadian Natural Resources, what is everyone’s beef with Adam Waterous?” he said. “Those are all success stories that at one point had their haters and their doubters.”