Why Husky’s inability to clinch the MEG deal is a negative for its stock

CALGARY – Husky Energy Inc. blamed a combination of pipeline problems and an Alberta government-mandated oil production curtailment for its failed hostile takeover bid of MEG Energy Corp. on Thursday.

Husky announced Thursday that it had not garnered enough support from MEG shareholders for its unsolicited $6.4-billion offer to buy the company and would abandon its efforts to buy MEG.

Investors reacted strongly to the news, with MEG shares falling 36 per cent in mid-day trading from $8.54 to $5.44 each. Husky shares climbed almost 13 per cent from $15.53 to $17.49 each.

Husky cited “several negative surprises in the business and economic environment” since it launched its bid 105 days ago. Among them, the company said, was the Alberta government forcing producers to cut production in an attempt to lift prices, and a “continued lack of meaningful progress on Canadian oil export pipeline developments.”

“Given the outcome of the tender process, Husky will continue to focus on capital discipline and the delivery of the five-year plan we set out at our investor day in May 2018,” Husky president and CEO Rob Peabody said.

The deal’s implosion is another negative signal for investors in the energy industry looking for mergers and acquisitions to lift prices, Eight Capital analyst Phil Skolnick wrote in a research note, because “it shows such situations could fall apart.”

He also said there was only a slim chance another company would consider purchasing MEG given that Husky couldn’t gain enough support from its shareholders.

“There could be the view that another party might look to be opportunistic if there is a significant decline in MEG’s share price,” Eight Capital analyst Phil Skolnick wrote, adding, “however, as shown with Husky’s offer, there needs to be a higher offering price.”

Derek Evans, MEG’s president and chief executive officer, said the bid “did not fully recognize the quality and long-term potential” of the company. The CEO said in a statement that the company will provide an update on its 2019 business plan soon.

The lack of a deal is a negative for Husky, despite the company’s positive share price reaction on Thursday.

“Accurate or not, the decision to pursue MEG does suggest some level of desire at the senior management and board level to alter the asset profile of the business, and while we don’t expect Husky to immediately pursue alternative acquisition opportunities, the risk of that will likely weigh on the shares for a period of time,” Raymond James analyst Chris Cox said in a note.

BMO Capital Market said it was lowering its investment opinion to market perform based on its revised commodity outlook and the company’s guidance that was impacted by Alberta’s production cuts.

Husky said Thursday it would continue with plans to divest its retail fuel business and a refinery in Prince George, B.C.

Those asset disposition plans were announced while Husky was pursuing heavily indebted MEG and were considered to be measures to deleverage Husky after the transaction.

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