Interesting perspective. MEG’s been dead money—shareholders should take the SCR deal. It’s a good asset, but poorly run and inefficient. In a $60 WTI world I think a lot of MEG shareholders are unrealistic. Sure, SCR might bump the offer slightly, but there’s no white knight coming. That’s already obvious.
I don’t think we have price discovery in SCR so it’s hard to say the offer is too low. If SCR was already in the S&P/TSX Composite I would be more inclined to agree with you.
Ultimately, this offer is attractive to MEG’s biggest shareholders as they get shares in a company with almost double the equity value and can increase their positions whereas their size was limited by the size of MEG. Plus as SCR’s free float slowly expands it will result in flows into MEG resulting in multiple expansion.
Finally, SCR can roll in GFR as well which will another tier one oil sand asset, growth, a bigger float (more index impact) and an NYSE listing.
I think I'd parse that a bit, SCR and MEG are pretty closely valued in terms of their reserves (1p/2p) to their market cap/EV, so the market is fairly efficient in that sense. Undervalued vs. say SU and CVE? Yes, though you'd have to strip out the midstream value as well, and after which you get closer. Are they undervalued relative to US? No question, so yeah larger entity that's relatively delevered would likely garner a higher multiple. Having said that, since SCR/MEG are closer in terms of their "undervaluation" you're better off with say a hypothetical higher bid, then taking the cash/equity and repositioning into SCR if you believe in the SCR strategy/mgmt.
It really depends on how high the alternative offer is and if it’s cash or stock. It’s a real problem for a large holder to take paper in a company like Cenovus if they want pure play oil sands exposure which means there will be flow back so the acquirers stock will fall. If they take cash, they have to pay taxes and redeploy. If they then try to switch to SCR, the price will be much higher by the time they are finished buying. With the SCR/MEG deal, they still own oil a pure play oil sands company with better growth and they can increase their position if they like ahead of the inevitable index flows that will take the multiple higher without incurring any tax leakage.
It’s just a better choice. It will be interesting how Fidelity and Capital see it. They both are or have been big shareholders of Fairfax which is supporting the transaction via WEF III of which they own ~75%.
The right move for MEG shareholders is to start buying SCR now. That will make the offer worth more and even if SCR doesn’t win they will be positioned before all of the other MEG shareholders look to redeploy their capital remaining after taxes.
Interesting perspective. MEG’s been dead money—shareholders should take the SCR deal. It’s a good asset, but poorly run and inefficient. In a $60 WTI world I think a lot of MEG shareholders are unrealistic. Sure, SCR might bump the offer slightly, but there’s no white knight coming. That’s already obvious.
Thanks Bridgington, agree let's run the numbers on a high level for CVE then, we'll post something.
I don’t think we have price discovery in SCR so it’s hard to say the offer is too low. If SCR was already in the S&P/TSX Composite I would be more inclined to agree with you.
Ultimately, this offer is attractive to MEG’s biggest shareholders as they get shares in a company with almost double the equity value and can increase their positions whereas their size was limited by the size of MEG. Plus as SCR’s free float slowly expands it will result in flows into MEG resulting in multiple expansion.
Finally, SCR can roll in GFR as well which will another tier one oil sand asset, growth, a bigger float (more index impact) and an NYSE listing.
I think I'd parse that a bit, SCR and MEG are pretty closely valued in terms of their reserves (1p/2p) to their market cap/EV, so the market is fairly efficient in that sense. Undervalued vs. say SU and CVE? Yes, though you'd have to strip out the midstream value as well, and after which you get closer. Are they undervalued relative to US? No question, so yeah larger entity that's relatively delevered would likely garner a higher multiple. Having said that, since SCR/MEG are closer in terms of their "undervaluation" you're better off with say a hypothetical higher bid, then taking the cash/equity and repositioning into SCR if you believe in the SCR strategy/mgmt.
It really depends on how high the alternative offer is and if it’s cash or stock. It’s a real problem for a large holder to take paper in a company like Cenovus if they want pure play oil sands exposure which means there will be flow back so the acquirers stock will fall. If they take cash, they have to pay taxes and redeploy. If they then try to switch to SCR, the price will be much higher by the time they are finished buying. With the SCR/MEG deal, they still own oil a pure play oil sands company with better growth and they can increase their position if they like ahead of the inevitable index flows that will take the multiple higher without incurring any tax leakage.
It’s just a better choice. It will be interesting how Fidelity and Capital see it. They both are or have been big shareholders of Fairfax which is supporting the transaction via WEF III of which they own ~75%.
The right move for MEG shareholders is to start buying SCR now. That will make the offer worth more and even if SCR doesn’t win they will be positioned before all of the other MEG shareholders look to redeploy their capital remaining after taxes.