When is a takeover not a takeover? When it's a "merger of equals." That's what PanCanadian Energy's CEO David O'Brien and Alberta Energy chief executive Gwyn Morgan are calling the combination of their two companies: a $20-billion or so marriage (depending on whether you include the debt) between two equal partners. So why are some news reports ? particularly in the United States ? calling it a takeover of Alberta Energy by PanCanadian? Because when it gets right down to it, that's what it is.
The one big question that remains unanswered is whether this particular takeover ? which comes with no premium attached, unlike most takeovers ? will spawn any competing bids for PanCanadian or Alberta Energy, now that the "For Sale" sign is officially hanging on both companies. While there are still those who believe that counter offers are likely, particularly for PanCanadian, the stock market doesn't seem to think the odds are quite as high, since the stock has lost a lot of its earlier gains.
Although PanCanadian and Alberta Energy both have attractive assets, some industry analysts believe that either one would make a fairly sizable mouthful for even a U.S. major, since it would likely take a bid of more than $10-billion just to get the talks going ? and that's before taking into account the $350-million break-up fee included in the current merger deal. And most of the U.S. players who are looking to expand in Canada, such as Devon and Conoco, have already made their big purchases.
Under the terms of the deal as it stands now, it's pretty clear who is taking over whom: the shareholders of Alberta Energy will receive 1.472 common shares of PanCanadian for every AEC share they hold. If the deal goes ahead as planned PanCanadian shareholders will wind up with 54 per cent of the merged entity, while Alberta Energy's shareholders will control a 46-per-cent stake in the new company ? which will be called EnCana.
That split makes a certain amount of sense, because PanCanadian is larger than Alberta Energy by both market value and revenue: it had a market capitalization of about $11-billion before the deal was officially announced, which was roughly equivalent to its annual revenue. That compares with Alberta Energy's market value of $8.8-billion and sales of about $8-billion ? although AEC's production levels are somewhat higher.
The issue that investors are wrestling with at the moment is whether the value and structure of the current deal are fair or not, either to Alberta Energy or PanCanadian. Shareholders of the two companies are obviously interested in whether they are getting the most for their stock, but investors in general are probably also wondering whether there will be a competing bid. If the terms of the deal aren't fair, that increases the likelihood that the offer will either be rejected or trumped by someone else.
As news of the deal filtered into the marketplace, a lot of people seemed to be betting that PanCanadian was worth substantially more than that, and that there was a strong chance of a competing bid. The company's stock climbed by $3.41 or more than 8.5 per cent on Thursday after rumours first surfaced that a merger was in the works, and then climbed a further $3.36 or 8 per cent the following day to $45.20, after the companies confirmed they were in talks. That was more than 11-per-cent higher than the $40.46 value given to the stock under the terms of the share exchange deal.
Some analysts ? including Duncan Mathieson of Scotia Capital ? have argued that the deal as it is structured undervalues PanCanadian's stock by as much as 20 per cent, saying it should be trading close to the $50 range. While Alberta Energy has a lot of valuable assets, some analysts say PanCanadian deserves a richer valuation in the deal because it has a better chance of striking it big with its Deep Panuke discovery off the coast of Nova Scotia. The company also has less debt than Alberta Energy.
Whether it was a conviction that PanCanadian was worth more, or a simple bet that someone might come in with another bid, the stock lost a lot of that earlier momentum during the day's trading on Monday, as the share price tumbled more than 6 per cent to about $42.30. By contrast, Alberta Energy's stock rose slightly on Monday and is still around the $61 level ? which is about 10 per cent below where they should be, given the value of $66.53 that is implicit in the current share swap proposal.
The bottom line is that Mr. O'Brien and Mr. Morgan are going to have to do a selling job with their shareholders, in order to convince them that giving up more money now will pay off in the longer term, thanks to the wonderful synergies of this "merger of equals."
Author: Mathew Ingram
