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SU, COS Come to Terms on Sweetened Offer

After months of posturing and wrestling for shareholder approval, the boards of Suncor (ticker: SU) and Canadian Oil Sands (ticker: COS) have reached a merger agreement.

The joint announcement, released on January 18, 2015, includes a sweetened transaction value of CN$6.6 billion (about US$4.5 billion) for COS, inclusive of an estimated CN$2.4 billion (about US$1.6 billion) in debt. The transaction is a straight stock-for-stock exchange and each COS shareholder will receive 0.28 SU shares (CN$8.74/share) in exchange for each COS share, a 12% increase compared to the initial offer of 0.25 SU shares (CN$7.81/share) in exchange for a full COS share.

Once the merger is complete, the Suncor will own nearly half the interest in Alberta’s massive Syncrude oil sands project. COS estimates the project will average 2016 gross production of 260 to 301 MBOPD in a guidance document.

Completion of the transaction is still dependent on feedback from COS shareholders. The offer expires on February 5, 2016 and needs at least 51% approval. COS owes Suncor a breakup fee of $130 million if the deal is not completed.

cos-suAn Amicable Agreement

“Together, we’re bringing this full, fair and final offer to COS shareholders and we encourage everyone to tender their shares,” said Steve Williams, President and Chief Executive Officer of Suncor, in the press release.

Don Lowry, Chairman of Canadian Oil Sands, along with Seymour Schulich, a top stakeholder, both said they will tender their shares and encouraged other COS holders to do the same. “Our shareholders clearly signaled they expected more for their COS shares, and the Board has worked to secure that under very challenging circumstances,” said Lowry. “Given the current market for energy equities, we recommend shareholders tender their shares to Suncor’s improved offer.”

RBC Capital Markets, the financial advisor of COS, also recommended the exchange.

Positive remarks from both sides, let alone in the same press release, was understandable yet slightly unusual considering the pointed verbiage that ensued over the last several months. SU commenced a hostile takeover bid in September after failing to reach a deal in friendly discussions that began in March. The hostile takeover also fell short of the required two-thirds majority, but exact numbers were not released. Sources of Bloomberg and Reuters said COS shareholder approval was likely in the 40% to 50% range.

Note: Canadian Dollars

Note: Canadian Dollars

Williams was previously staunchly against the idea of raising SU’s offer price, but loosened his stance as the debate went on. Schulich had some choice rhetoric on the maneuver and even bought full page ads in several major newspapers to lobby against the move.

The consensus among analysts was that a higher price was simply the only solution. A source of The Wall Street Journal said the companies began working on a revised bid on Friday, January 15. The expiration on the hostile takeover attempt occurred on Monday, January 11.

COS management had previously discouraged its shareholders from tendering to the SU offer, saying COS’ exposure to oil prices created exceptional opportunities in the case of a price rebound. Sachin Shah, a strategist at Albert Fried & Co. told Bloomberg that “Canadian Oil Sands had to do a deal because the downside risk was greater.”

COS’ operations at Syncrude were entering a less cost-intensive phase, but the oil price slump strained its liquidity and forced the company to slash dividends by 85% in a cost saving move. If the deal is approved, COS shareholders will own 7.7% of SU shares.

The entire Syncrude project holds an estimated 4.4 billion gross barrels of proved plus probable reserves. Suncor calls the oil sands business its “bread and butter” of current operations, and its reserve base of roughly 7.0 billion barrels (not including the assets from COS) makes up approximately 90% of its portfolio.

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