By Rod Nickel
WINNIPEG, Manitoba (Reuters) - Husky Energy Inc's (TO:HSE) hostile bid for MEG Energy Corp (TO:MEG) 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.
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 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 many Canadian oil producers have struggled with transportation bottlenecks as output has surged, pushing Canadian heavy crude to near-historic discounts to U.S. light crude.
Husky shares fell 7 percent to C$21 in Toronto, while MEG stock climbed nearly 37 percent to C$10.97, around 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 (HK:0883).
MEG's best options are to negotiate for a higher bid, or find another suitor with a more attractive offer, Eight Capital analyst Phil Skolnick wrote in a note. He added that Canadian producers Imperial Oil Ltd (TO:IMO) and Suncor Energy Inc (TO:SU) are potential bidders.
Imperial and Suncor could not be immediately reached for comment.
Peabody said Husky will shortly begin to meet with MEG shareholders about the deal, but would welcome talks with MEG's board.
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.