For the second time, shareholders voted on Cenovus Energy Inc's takeover of MEG Energy Corp. has been delayed as the oil major prepares for what could be the final push to complete the disputed deal.
MEG said in a statement Tuesday that about 63 percent of shareholders supported Cenovus' proposal based on votes that were cast early by proxy or were expected to be cast in person at Thursday's meeting.
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just shy of the two-thirds required for approval.
The move came as a surprise to investors and market watchers, who had expected Cenovus to easily secure the overwhelming majority of votes needed after rival bidder Strathcona Resources Ltd. withdrew its application earlier this month.
“I was operating under the assumption, as I think most people in the market are, that once you get to one active bidder, it's more or less over,” said Michael Tims, vice chairman of Matco Investments Ltd. and former chairman of investment bank Peters & Co.
“But it’s more complicated than Cenovus or the market anticipated.”
The delay has raised new doubts about the outcome of the long-running takeover battle.
the issue has gripped the Canadian oil patch since last spring, when Strathcona announced a hostile bid that resulted in MEG being put up for auction.
Cenvous was on the verge of victory ahead of a shareholder vote this week. It had a board-backed proposal valuing MEG at about $8.5 billion, as well as increased firepower in the form of newly acquired shares of the target company that it planned to vote for the deal.
But Tuesday's delay appeared to unnerve investors, with analysts at TD Securities and Scotiabank warning the deal could fall through again.
“(Cenovus) remains short, which is a concern as we do not see potential for further supply increases,” Menno Hulshof, managing director of equity research at TD Securities, said in a Tuesday note that downgraded MEG shares from “buy” to “sell.”
“(We) still believe the (Cenovus-MEG) deal will eventually be approved, but its visibility has diminished significantly over the past few days.”
The latest setback comes after at least three MEG shareholders filed complaints with the Alberta Securities Commission over the board's decision to exempt Cenovus from typical freeze provisions, allowing it to buy more MEG shares.
The complaints allege that the move was unfair to shareholders and competitor Strathcona, effectively preventing any further competitive bids for MEG, giving Cenovus a decisive procedural advantage.
Neither MEG nor Cenovus responded to the issues raised in the complaints. The regulator did not comment on the situation.
Cenovus' decision to buy a stake in MEG should have boosted its chances in the latest vote.
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but it failed, says Ashif Lalani, chief investment officer at family office Berczy Park Capital in Toronto and a former portfolio manager at UBS Securities.
“They still don't have support even after they did it,” Lalani said.
Lalani, who is one of three prominent shareholders who filed a complaint with Alberta's securities regulator and owns shares in MEG and Strathcona, said he had hoped to see the regulator intervene and require MEG to resume voting or the entire sales process.
“Cenovus clearly doesn’t want that because they see a path to the finish line,” Lalani said.
“But it's very uncertain right now. If (the Cenovus) can't get over the line by next week, they might have to walk. I don't know how many extensions they have left to keep trying.”
Ahead of the new shareholder meeting on Oct. 30, investors and those involved in the deals said they expect Cenovus to be scouring MEG's shareholder list, trying to see who has voted and who else can be persuaded to give the final push to get the deal done.
The oil major will likely target short-term investors, hedge funds and other traders who bought MEG most recently, betting its shares will rise as a result of the Cenovus deal.
“The usual approach is a carrot-and-stick approach,” Tims said. “The carrot is that “this is a complete and fair offer, and it is a better alternative than everything else that is on the table and available now.”
“The catch is that if you don’t pass it and the vote fails, chances are the share price will fall.”
