October 1, 2018 / 1:39 PM / in 19 days

Husky sees MEG as potential 'hand-in-glove' Canada oil sands merger

WINNIPEG, Manitoba (Reuters) - Husky Energy Inc’s (HSE.TO) hostile bid for MEG Energy Corp (MEG.TO) reflects the need for Canadian oil companies to own integrated assets, from production to refineries, to manage the deep price discounts on Canadian crude, Husky’s chief executive said on Monday.

FILE PHOTO: Banners for the Canadian company Husky Energy are seen at a sporting event in Lake Louise, Alberta December 1, 2009. REUTERS/Andy Clark

Husky’s cash and stock offer announced on Sunday would combine MEG’s heavy oil production with Husky’s output, pipeline space and refineries, in a deal valued at C$6.4 billion.

“This is a real hand-in-glove sort of deal. It just fits together extremely well,” Husky CEO Rob Peabody said on a Monday conference call with analysts.

Husky’s bid for highly indebted MEG, which hired a new CEO less than two months ago, is a bet that MEG’s production assets will be lucrative once price differentials return to normal. Even so, some investors own Husky shares for its low exposure to heavy oil differentials and may be disappointed by a bid that increases such risks, analysts said.

The offer comes as Canadian oil producers have struggled with transportation bottlenecks as output has surged, pushing Canadian heavy crude to huge discounts to U.S. light crude.

Husky shares fell 7 percent to C$21.19 in Toronto, while MEG stock climbed 38 percent to C$11.08, slightly higher than the offer price.

Peabody said Husky is taking the bid directly to MEG shareholders after the company’s leadership refused to discuss it. MEG said on Sunday that its board would consider Husky’s offer when it formally receives it. Husky plans to release its bid circular on Tuesday.

The companies are based in Canada, so there are no significant regulatory hurdles, Peabody said. Both have strong ties to Asia, as Husky’s majority investor is Hong Kong tycoon Li Ka Shing. One of MEG’s largest investors is Chinese state-owned oil producer CNOOC Ltd (0883.HK).

MEG’s best options are to negotiate for a higher bid or find another suitor, Eight Capital analyst Phil Skolnick wrote in a note. He added that Canadian producers Imperial Oil Ltd (IMO.TO) and Suncor Energy Inc (SU.TO) are potential bidders.

Suncor has no offer on the table for MEG but it considers all opportunities, spokeswoman Sneh Seetal said.

Imperial declined to comment.

Peabody said Husky will soon meet with MEG shareholders about the deal.

MEG shareholders will have the option to receive C$11 in cash or 0.485 of a Husky share for every share held, in a proposal that represents a 37 percent premium to MEG’s closing price on Friday.

Reporting by Rod Nickel in Winnipeg, Manitoba; editing by Susan Thomas and Jonathan Oatis

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