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Lukewarm shareholder reception gave Husky Energy an out in MEG bid

Shares in MEG Energy Corp. plunged 36% after Husky Energy Inc. walked away from its hostile takeover bid for the Canadian oil sands producer.

MEG, now coping with government-imposed production cuts and an unattractive environment for crude-by-rail sales of heavy Canadian oil, dropped C$3.04 to C$5.50 per share Jan. 17 in Toronto Stock Exchange trading. Husky had offered C$11 apiece for MEG's shares in a bid announced Sept. 30, 2018, that valued the company at C$6.4 billion. Husky terminated its bid after it failed to attract the two-thirds of MEG shares required to complete it.

Husky said it will now shift its attention to higher-margin production growth. Its shares gained 12% after the announcement, signaling approval of its decision to bow out of the transaction. The company had received tenders for more than 50% of MEG shares and was expected to extend its bid, Bloomberg reported Jan. 16, citing people familiar with the transaction. MEG's shares touched a low of C$5.11 apiece after Husky announced the termination before North American markets opened.

"We'd place this outcome firmly in the surprise camp following recent investor conversations that had suggested expectations for the minimum tender condition to be met, with a subsequent extension of the offer," analysts at Tudor Pickering Holt & Co. said in a Jan. 17 note. "Following the swift trend lower in crude markets subsequent to the offer and the pressure which the transaction would've placed on the company's leverage metrics, we don't view this as a negative outcome for the long-term story."

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Husky CEO Rob Peabody said his company is investing in higher-margin production growth.

Source: Husky Energy Inc.

Both Husky and MEG are based in Calgary, Alberta, and have substantial connections to China. Husky is controlled by Hong Kong billionaire Li Ka-shing through various entities, while MEG's biggest shareholder is China National Offshore Oil Corp. The bid was launched after prices for Canadian crude tumbled amid overproduction, pipeline congestion and brimming storage. Husky cited its refining capability and committed pipeline space as a way to reap value from the transaction.

Alberta's government imposed across-the-board production cuts of 8.7% on oil producers in an effort to bolster cash prices for the province's crude, a move that came after the MEG bid was announced. The cuts, which took effect Jan. 1, boosted prices for Canadian crude just as U.S. oil prices began to decline, narrowing the price gap between them and making it less attractive for U.S. refiners to buy rail shipments of deeply discounted Canadian crude. MEG had planned to ship more crude by rail to skirt pipeline constraints that have plagued Canadian producers.

In the wake of the offer's rejection, Husky said it would go back to a five-year plan it set in May 2018. "We are investing in reliable, higher-margin production growth that continues to lower the oil price we need to break even," CEO Rob Peabody said in a statement.

The company's integrated production and refining assets and its offshore production in Canada and Asia "receive global pricing and provide insulation from ongoing commodity price volatility," he said.

MEG issued a separate statement. CEO Derek Evans said the rejection "confirms that the bid did not fully recognize the quality and long-term potential of MEG."

China National and private equity firm Warburg Pincus LLC were instrumental in MEG's development and held equity positions in the company before its 2010 IPO. The company went public in August of that year at a price of C$35 per share.

Despite the company's optimism and apparent shareholder loyalty, rejection of the bid puts MEG "in a challenging position," the Tudor Pickering Holt & Co. analysts said in their note. In the current oil-price environment the company will likely shift to lower spending in 2019. MEG said it would issue an update on its business plan in the near future.