Husky abandons MEG deal, blaming uncertainty in Canadian energy patch

Husky abandons MEG deal, blaming uncertainty in Canadian energy patch

Husky Energy dropped a bombshell this morning, telling investors it was walking away from its planned takeover of MEG Energy.

As of yesterday, most had expected the deal to go through. MEG recently abandoned its shareholder rights plan, allowing Husky to buy MEG shares on the open market. In order for the transaction to be approved, Husky needed to secure at least two-thirds of all outstanding MEG common shares.

On Thursday morning, Husky said it was unable to secure enough support from MEG's board of directors and shareholders. The company added that the business climate in Alberta has taken a big turn for the worse since the deal was first announced last September.

According to Reuters, Husky had more than enough support from MEG shareholders to follow-through with its merger, suggesting the company terminated the deal due to revised valuation metrics. 

The US crude benchmark, West Texas Intermediate (WTI), has since declined from about US$75 a barrel to the low-US$50s. Although Western Canadian Select has more than tripled from the lows of late 2018, Husky is far less exposed to Canadian heavy crude prices since its production and refining operations are largely integrated.

Husky blamed "several negative surprises" in Alberta's business climate, including failure to progress on new pipeline construction, and legally mandated production caps on all of its major crude producers. Several companies, including Husky, Suncor and Imperial, say they were disproportionally affected by the cuts, despite having already secured adequate export capacity for all their crude volumes.

According to Reuters, MEG CEO, Derek Evans contacted Husky CEO Rob Peabody in early January to discuss a possible friendly deal, but Evans says Peabody never returned his phone call. MEG opened their data room to prospective buyers last November, but no new buyers materialized.

Analysts had called the $6.4 billion offer (including MEG's $3.1 billion debt obligations) too rich. Moody's Investors Service called the deal "credit negative" for Husky, since it would add more debt  to its balance sheet and increase its exposure to the heavy oil discount.

Husky offered MEG shareholders $11 a share last fall, a premium of almost 40% to MEG's previous day closing price of about $8. In contrast, Husky shares sank almost 40% through the end of 2018, suffering much more than its peers due to concerns it may have offered too much for the MEG assets.

Now that Husky has walked away, MEG shares have collapsed almost 40%, falling to a low of $5.11 a share on Thursday morning. In contrast, Husky shares rose 14%, as its investors breathe a sigh of relief.

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