MEG’s stand-alone plan is worth substantially more than the value proposed to be delivered by Husky in the Husky Offer
MEG’s business is at an exciting inflection point and new CEO, Derek Evans, has plans to accelerate MEG’s cash flow generation
The Husky Offer was timed opportunistically and substantially undervalues MEG’s best-in-class assets and improves Husky’s business
CALGARY, Oct. 17, 2018 /CNW/ – MEG Energy Corp. (TSX:MEG, “MEG”, or the “Company”) today announced its Board of Directors (the “Board“) has unanimously determined that Husky Energy’s (“Husky“) unsolicited bid to acquire MEG significantly undervalues the common shares (“Common Shares“) of MEG and is NOT in the best interests of MEG or the holders (“MEG Shareholders“) of Common Shares.
On October 2, 2018, Husky made a formal offer to acquire all of the issued and outstanding Common Shares, at the election of the MEG Shareholder, for (i) $11.00 in cash or (ii) 0.485 of a common share (“Husky Share“) of Husky for each Common Share, subject to a maximum aggregate cash consideration of $1 billion and a maximum aggregate number of Husky Shares of approximately 107 million (the “Husky Offer“). The Husky Offer must remain open until at least January 16, 2019 unless otherwise extended, accelerated or withdrawn in accordance with its terms.
In June, the Board completed a comprehensive strategic review of MEG’s business plan, operations and financial condition and considered alternatives available to support MEG’s corporate strategy and enhance MEG Shareholder value. In August, the Board appointed a new Chief Executive Officer, Derek Evans, to execute upon MEG’s business plan, pursuant to which the Board and management expect to generate substantial free cash flow for MEG over the next several years.
Upon receipt of the Husky Offer, the Board, operating through a Special Committee, engaged with financial and legal advisors to diligently review the Husky Offer. The Board has unanimously concluded that the Husky Offer significantly undervalues the Common Shares, is not in the best interests of MEG or MEG Shareholders and recommends that MEG Shareholders REJECT the Husky Offer and NOT tender their Common Shares.
“The Husky Offer significantly undervalues MEG’s assets, technology, expertise and business prospects. Over the last few years, there has been a substantial transformation of our business, culminating in the appointment of a top-rated CEO and the strengthening of our management team. Since the start of 2017, the Company has successfully sold non-core assets, reduced debt and significantly extended our remaining debt maturities. MEG is now at an inflection point with a low risk business plan and a clear line of sight to significant free cash flow generation commencing in 2019,” said Jeffrey J. McCaig, Chairman of the Board.
The Board today filed its Directors’ Circular, which provides information for MEG Shareholders about MEG’s prospects and the Board’s analysis, deliberations and recommendations. The Directors’ Circular is available at www.megenergy.com/RejectHusky and at www.sedar.com. Additional information can be found in the Investor Presentation, which is also available at www.megenergy.com/RejectHusky.
Mr. Derek Evans, MEG’s Chief Executive Officer, said, “I took over the leadership of MEG because I believe that our assets and technologies set us up for an exciting period of growth and MEG Shareholder value creation. With a substantially improved balance sheet and continued focus on execution and cost control, we expect all future growth to be fully-funded through internal sources, while having significant free cash flow to pay down debt and return money to MEG Shareholders. All of these uses of our capital will drive significant MEG Shareholder value. None of this has been reflected in the Husky Offer which is widely acknowledged in the press and research community to be opportunistic. We urge MEG Shareholders to reject the Husky Offer.”
In its Directors’ Circular, the Board describes the reasons for its recommendations. Among other things, the Board notes:
- MEG’s stand-alone plan is worth substantially more than the value proposed to be delivered by Husky in the Husky Offer. MEG is producing approximately 100,000 barrels per day (bpd) today and has spent substantially all the capital required to increase production to 113,000 bpd by 2020. MEG expects that it can continue to produce at these levels, with a minimal decline rate, for approximately 40 years. The Company has 2.8 billion barrels of proved plus probable reserves with a $18.9 billion of before-tax present value (10% discount rate) as assessed by GLJ Petroleum Consultants Ltd. (“GLJ“), MEG’s independent reserves evaluator, as of December 31, 2017 and using GLJ’s January 1, 2018 pricing models. The Board expects MEG to generate significant free cash flow from 2019 onward.
- The timing of the Husky Offer is opportunistic and was timed to deny MEG Shareholders the opportunity to fully evaluate the plans, and experience the value creation of MEG’s new CEO, Mr. Evans. The Board also notes that the value of the Husky Offer is below the market trading price the Common Shares achieved just three months ago, in July 2018.
- In addition to being financially inadequate, the form of consideration offered in the Husky Offer is disadvantageous to MEG Shareholders. If the Husky Offer is successful, most of the consideration will be delivered to MEG Shareholders in the form of equity in Husky, a tightly controlled company with a nearly 70% owner. Moreover, MEG Shareholders would be receiving an equity interest in a slower-growing company – with inferior, shorter-lived thermal assets and higher cost operations.
- As the Husky Offer is presently structured, Husky’s existing owners are receiving the lion’s share of the benefits of the combination, many of which Husky has not even acknowledged. The inadequate price for MEG, together with the Husky acknowledged synergies, generates double-digit accretion for Husky shareholders and corresponding substantial dilution for MEG Shareholders. Moreover, Husky’s existing shareholders would also benefit from applying MEG’s superior technology across Husky’s operations and from significant tax assets that could be worth as much as $5 per Common Share, alone. Husky has the financial wherewithal to more fairly compensate MEG Shareholders for these benefits.
As noted in the Directors’ Circular, the Board also took note of the fact that:
- Several large MEG Shareholders have publicly expressed concerns about the value of the Husky Offer;
- A majority of research analysts covering MEG have price targets above the effective value of the Husky Offer;
- MEG’s share price has traded above the effective value of the Husky Offer continuously since Husky made the Husky Offer, reflecting the market’s judgment that the Husky Offer is inadequate; and
- The Special Committee has given its financial advisor, BMO Capital Markets a mandate to investigate alternative transactions to the Husky Offer. A data room containing confidential information about MEG and the value of its business is expected to be opened in the near term. Several strategic parties to date have expressed interest in participating in this process. MEG will not be providing more information to the market on the status of the strategic alternative process until MEG has material developments to disclose.
The Board has received a written opinion from its financial advisor, BMO Capital Markets, to the effect that, as of October 16, 2018, and based upon and subject to the assumptions, limitations and qualifications contained therein, the consideration to be received by the MEG Shareholders pursuant to the Husky Offer is inadequate, from a financial point of view, to MEG Shareholders.
For the principal reasons outlined above, the Board, on the recommendation of the Special Committee, has unanimously determined that the Husky Offer significantly undervalues the Common Shares and is not in the best interests of MEG or MEG Shareholders.
MEG also notes that the Board fully analyzed, vetted and provided feedback to Husky about a financially identical non-binding proposal that Husky made privately to MEG on August 8th.
“When Husky approached MEG in August, the Board and its Special Committee engaged with financial advisors and fully analyzed Husky’s non-binding proposal,” said Timothy Hodgson, Chairman of the Special Committee. “We told Husky then, after our full review, that its non-binding proposal was insufficient and highlighted numerous reasons for that conclusion. Instead of increasing the consideration under its non-binding proposal or continuing to engage with our Board, Husky is attempting to cajole MEG Shareholders into selling their Common Shares at the offered price. We encourage MEG Shareholders to reject the Husky Offer.”
NO ACTION is required to reject the Husky Offer.
If you have already tendered your Common Shares to the Husky Offer, you can withdraw your Common Shares by contacting your broker or Kingsdale Shareholder Services, North American Toll Free at 1-866-228-8614 or via email at email@example.com.