Canadian oil producer Strathcona plans $4.25 billion hostile bid for MEG Energy

By Amanda Stephenson

May 16 (Reuters) - Canadian oil and gas producer Strathcona SCR.TO plans to launch a C$5.93 billion ($4.25 billion) hostile takeover bid for rival MEG Energy MEG.TO, aiming to create a large Canadian oil sands company with the heft to compete internationally.

The all-cash-and-stock offer, which the company announced late Thursday, would combine two of Canada's largest pure-play thermal oil sands operators and make Strathcona Canada's fifth-largest oil producer.

Strathcona is offering 0.62 of a share and C$4.10 in cash for each MEG share, valuing the bid at C$23.27 per share — a 9.3% premium to MEG's last closing price.

Some analysts said MEG was unlikely to accept the deal, and larger oil sands players would mount competing offers.

The takeover bid is the latest M&A move by Strathcona, which is owned by Calgary-based private equity firm Waterous Energy Fund. Since 2020, Strathcona has become one of the fastest-growing oil companies in North America through a series of acquisitions.

Strathcona founder and executive chairman Adam Waterous said in an interview that Canadian oil sands operators must be big to survive, especially as trade tensions with the U.S. — Canada's largest oil export destination — have highlighted the need for the country's energy sector to diversify.

"It's going to require big, strong Canadian champions to do that," Waterous said. "This is not a small company game."

Strathcona said it made an offer to MEG's board on April 28 and was turned down on Tuesday.

Strathcona already has nearly 9% in MEG through market purchases this year. It plans to file its offer formally in the next two weeks and is still open to talks with MEG's board.

MEG said on Friday its board will review the offer and urged shareholders not to act for now.

The bid came two days after Strathcona announced divestment of its natural-gas operations in Canada's Montney shale formation and purchase of western Canada's largest crude-by-rail terminal. Those deals would turn Strathcona into a pure-play heavy oil company.

Waterous has long been bullish on Canada's oil sands, which have long-life reserves that he said make them appealing as U.S. Permian Basin production may plateauing.

Strathcona and MEG would have combined production of 295,000 barrels a day, Waterous said, and their assets are a natural fit.

He said Strathcona expects to achieve C$175 million in annual cost savings and MEG shareholders would benefit from Strathcona’s significantly lower overhead.

But Garey Aitken, head of Canadian equity at Franklin Templeton's ClearBridge Investments, said Strathcona's bid will likely spur one of Canada's larger oil sands companies to launch a superior offer.

"With the consolidation that we've seen in the oil sands sector over the years, at some point it seemed MEG would be a logical dance partner for someone," Aitken said.

Strathcona said it would fund the cash portion of the deal through a bridge loan. If the deal goes through, MEG shareholders would own 37.8% of the combined company.

($1 = 1.3944 Canadian dollars)