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Husky launches $6.4-billion deal in bid for prime takeover MEG Energy Corp.

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CALGARY – Husky Energy Inc. has launched a hostile takeover bid for oilsands competitor MEG Energy Corp. in a potential $6.4-billion deal that analysts say is a sign of more transactions to come.

In a release Sunday, Calgary-based oil giant Husky announced that – despite being rebuffed by its target company’s executives over the summer – it is offering $11 per share to buy MEG Energy.

That price is 37 per cent higher than MEG’s most recent closing price of $8.03 per share, valuing the company’s stock at $3.3 billion. When MEG’s $3.1 billion in net debt is considered, the deal is worth $6.4 billion.

“We decided to take this offer to MEG shareholders because we just felt it was too compelling to ignore,” Husky president and CEO Rob Peabody said in an interview Sunday afternoon. He said Husky had approached MEG over the summer but had been rebuffed.

MEG, for its part, refused to take a position on the offer on Sunday but confirmed it had been received.

The pure upstream production model doesn’t work over the longer term. You need to have a high level of integration.

“We need to determine whether or not that’s in our shareholders’ best interest,” MEG Energy vice-president, investor relations and external communications John Rogers said Sunday, adding the company’s board had 15 days to respond to Husky’s offer.

Rogers declined to comment on the $11 per share offer price, saying he’d leave a response to the company’s board.

Peabody is in Toronto on Monday and said he plans to visit Montreal, Boston and New York over the next two weeks to make Husky’s case directly to MEG’s shareholders.

The pitch he is planning to make is that Husky – as an integrated producer with oilsands, offshore, overseas and refining assets – is better poised to succeed than MEG, which is focused on oilsands extraction, having sold off its pipeline assets to pay down debt.

“The pure upstream production model doesn’t work over the longer term,” Peabody said. “You need to have a high level of integration.”

He said that, together, Husky and MEG would create a stronger Canadian energy company given their complementary assets.

In Calgary, hostiles rarely happen but now that the doors have been opened, there will be others,

The stop to visit shareholders in Boston is significant because Daniel Farb, a managing director of Boston-based Highfields Capital Management, resigned from MEG’s board on July 24 and said he was concerned the company “is intent on reverting back to a legacy of failing to put the best interests of the company and shareholders first.”

Highflieds Capital owns roughly 10 per cent of MEG’s outstanding shares.

MEG has long been considered a prime takeover target in the Calgary oil patch, Ninepoint Partners portfolio manager Eric Nuttall said Sunday. Nuttall’s fund owns 2.5 million shares in MEG.

“It validates the quality of their assets,” he said of Husky’s offer but added that he’s not willing to accept the deal as is because he thinks another bidder will step in and create a bidding war.

He said that MEG’s shares have been depressed due to a lack of oil export pipelines out of Canada, high costs and a difficult regulatory environment.

In addition, he said MEG could be an attractive takeout target for larger oilsands players because it has regulatory approvals in place to ramp up to 200,000 barrels of oil per day of production and “that have massive tax losses” that could be transferred to an acquirer.

“In Calgary, hostiles rarely happen but now that the doors have been opened, there will be others,” Nuttall said.

Peabody, for his part, acknowledged the possibility that he could get into a bidding war for MEG but said that no other company could offer the “synergies” that Husky offers.

“Whether there may be other competitors, I don’t know,” he said, adding, “MEG and Husky is a match.”

The deal could potentially continue a trend of consolidation in the Calgary oilpatch, Canoe Financial portfolio manager Rafi Tahmazian said.

“We are in consolidation mode, and it’s about survival of the strongest and fittest,” Tahmazian said.

He said there are only a few other companies in the sector that could match or exceed what Husky is offering, including Suncor Energy Inc., Canadian Natural Resources Ltd. and Imperial Oil Ltd.

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