Suncor to acquire Petro-Canada

[rafterman]

A Canadian icon to disapear....

or maybe not.

Suncor to acquire Petro-Canada
DEREK DECLOET, NATHAN VANDERKLIPPE AND SHAWN MCCARTHY
05:16 EST Monday, Mar 23, 2009

Suncor Energy Inc. has reached an agreement to acquire Petro-Canada, a deal that would mark the final chapter of independence for the former state-owned oil company.

The companies released a joint statement early Monday announcing the details of an all-stock deal that will see the companies form an entity with a combined market capitalization of $43.3-billion. The new corporation would continue to operate and trade under the Suncor name.

"This merger creates a made-in-Canada energy leader with the assets, cost structure and financial strength to compete globally," said Rick George, Suncor's current chief executive and prospective head of the joint venture.

The deal would create a new champion in the Canadian oil patch and unite two of the biggest players in the oil sands of northern Alberta, provided that the companies can stickhandle their way around federal legislation that was once thought to make Petro-Canada immune to a takeover. Under the Petro-Canada Public Participation Act, no person or company can own or control more than 20 per cent of the company's voting shares and the head office must remain in Calgary.

According to the companies, Petro-Canada shareholders are to receive 1.28 shares of the merged company for every Petro-Canada share they hold, while Suncor stockholders would receive a share in the new venture for each Suncor share they own. The companies say the deal represents a 25 per cent premium on the 30-day weighted average of Petro-Canada shares.

The deal values Petro-Canada at $19.18 billion based on Friday's closing prices on the Toronto Stock Exchange.

Existing Suncor shareholders would hold 60 per cent of the new company, while Petro-Canada shareholders would hold 40 per cent.

Petro-Canada has been under increasing pressure from shareholders unhappy with its performance and with the ballooning costs at expansion projects such as Fort Hills, the centrepiece of the company's oil sands strategy. Last month, the Ontario Teachers' Pension Plan disclosed that it had acquired 3.3 per cent of the company and was in talks with management on how to give life to its lacklustre share price.

Suncor is one of only a handful of domestic energy companies large enough to swallow Petrocan, and is among the most experienced firms in the world at running technologically complex oil sands projects. It completed its first oil sands plant in 1967, decades before energy companies from around the world began investing billions of dollars to claim land and extract some of the estimated 173 billion barrels of recoverable oil in the region.

The merger "makes a lot sense," said Greg Boland, chief executive officer of West Face Capital, a Toronto investment firm that is a major Petro-Canada shareholder. "It's just that nobody thought it would happen because of the Petro-Canada Act."

Suncor could potentially get around the law by appealing to the federal government for a change to the ownership rule, or by structuring the deal as a reverse takeover in which, legally speaking, Petro-Canada would be taking over Suncor, Mr. Boland said.

After watching several industry-leading Canadian companies, including Alcan Inc., Inco Ltd. and Falconbridge Ltd., get taken over by foreign interests, Ottawa might be receptive to a domestic merger that would create a new national champion in the oil patch. The federal government was openly supportive of the 2002 union between two large Calgary energy companies, PanCanadian Energy Corp. and Alberta Energy Co. Ltd., that created EnCana Corp. — although neither of those companies had the federal lineage that Petro-Canada does.

"You could create the story of the great Canadian company," said one Calgary investment banker who spoke on condition of anonymity.

Mr. Boland said: "There's no particular reason why Petro-Canada gas stations are any more nationalistic than Suncor gas stations."

Suncor and Petro-Canada have already come close to a deal once before. A few years ago, Suncor reached an advance stage of negotiations with Petro-Canada, according to a banker involved in those talks. But the deal was scuttled because the federal government refused to provide assurances that it would move quickly to revoke or amend to act. Another source said there were other obstacles that derailed that effort as well, though he was not specific.

But another financier in Calgary said the takeover might create an "awkward" situation for the Harper government because other potential suitors have approached Petro-Canada in the past. "How is the government saying, we'll take these guys [Suncor] and not anyone else?" he said. "There are a bunch of other companies who covet those assets."

EnCana and Imperial Oil Ltd. are the only two Canadian oil companies larger than Suncor and both have extensive operations in the Athabasca region. However, any move by Imperial on Petro-Canada risks being attacked as a foreign takeover in disguise because it is controlled by ExxonMobil Corp. of Irving, Tex.

Petro-Canada was created as a federal Crown corporation in 1975 by the Pierre Trudeau government as a tool to develop the domestic oil and gas industry and to take over the federal interest in Syncrude, a consortium that still manages one of the oldest oil sands developments. The government of Brian Mulroney began to privatize it in 1991.

Ottawa sold its last remaining stake in 2004, but the ownership limits remained. Petro-Canada operates around the world, including Libya, Tobago and Syria.

With a file from The Canadian Press

© Copyright The Globe and Mail

 

[toughb]

If you didn't like the price of gas before you certainly won't like it now...

 

[Rockslinger]

Is the Canadian oil patch still more than 50% owned by foreigners? (Of course, they were the ones who originally supplied the capital and took the risks.)

 

[Rockslinger]

Get ready for more LAYOFFS. This is what happens when a Canadian company is taken over by another Canadian company. Too much overlapping. This is less likely to happen if Petro-Canada was taken over by a foreign acquirer

 

[beenthere123]

Get ready for more LAYOFFS. This is what happens when a Canadian company is taken over by another Canadian company. Too much overlapping. This is less likely to happen if Petro-Canada was taken over by a foreign acquirer

Why did Petro gained 20% and Suncor lost 1 %. Isn't Suncor Canada's Prime and joy. Didn't know 50 % of Suncor or is it Petro was owned my foreigners. Can someone please clarify this.
Thanks

 

[Rockslinger]

Why did Petro gained 20% and Suncor lost 1 %.

Petro shareholders got the takeover premium as they are the acquiree. I think by law they have to be majority Canadian-owned which prevents a foreign takover. However, the news said there is much overlapping of jobs as Suncor is also a Canadian company.

 

[scrooge]

Petro shareholders got the takeover premium as they are the acquiree. I think by law they have to be majority Canadian-owned which prevents a foreign takover. However, the news said there is much overlapping of jobs as Suncor is also a Canadian company.

The law is that no one can own more than 20% of PCA.

 

[rafterman]

The law is that no one can own more than 20% of PCA.

They are going to circumvent this restriction by writing up the deal as a merger or reverse takeover of Suncor by PCA.

PCA had been an underperformer in the market before the 08 crash and Suncor has well established expertise in oilsands development which they could utilize on PCA's Fort Hills project.

Bottom line the market 'likes' this made in Canada oil giant and Ottawa would tamper or obstruct the deal at their peril.

 

[rafterman]

The deal was done on the golf course. Good to know some things haven't changed.

NEWS FROM Globeandmail.com




A merger driven on the back nine
PAUL WALDIE
03:05 EST Tuesday, Mar 24, 2009

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The proposed deal that will change the landscape of the Canadian energy sector came together after some fly fishing, a couple of rounds of golf, a lunch in Toronto and a collapse in world oil prices.

For years, Rick George, the chief executive of Suncor Energy Inc., and Ron Brenneman, his counterpart at Petro-Canada, had thought about resurrecting a failed merger between the companies but the timing just never worked.

The Calgary-based companies had tried to work out a deal in 1999 but the talks collapsed at the last minute when Petro-Canada's board balked at the terms. Mr. Brenneman became CEO shortly afterward and he kept in contact with Mr. George.

They attended many of the same social events, went fly fishing together on the Bow River and struck a few commercial arrangements between their companies. Two years ago, they started playing an annual round of golf with the chairmen of their respective boards - John Ferguson at Suncor and Brian MacNeill at Petro-Canada - alternating between the Calgary Golf and Country Club and Edmonton's Mayfair Club.

A merger "has been kind of in the back of people's minds for a period of time," said one source close to the companies.

When stock markets and oil prices nosedived last fall, both men knew it was time to act. Falling oil prices were hurting Suncor's developments in the oil sands and Petro-Canada was facing pressure from shareholders about its slumping stock price.

"When markets ... collide the way they have since last September and October, people sort of tend to change their perspective and have a different view," said Tom Kierans, a long-time Petro-Canada director.

The merger talks moved quickly after Mr. MacNeill and Mr. Ferguson met for lunch in Toronto last November.

"Most companies look at a whole bunch of different alternatives, but this one probably started in earnest at a discussion John Ferguson and I had, and evolved from there," Mr. MacNeill said in an interview.

At the time, the main impetus was the escalating cost of construction in the oil sands, but as the economy deteriorated and oil prices fell further, there was even more reason to move forward, he said.

Mr. George and Mr. Brenneman then reached out to each other, with years of friendly socializing making the initial contact easy, Mr. George said in an interview yesterday.

"Chemistry always helps," he said.

"There's lots of points of contact and through that you build up trust and that makes something like this a lot easier. If you trust the other side and know you share, not necessarily identical, but very common sets of values and ethics, and the way you treat employees, and the way you look at competition, all of that helps."

The initial talks went well and by late December led to full-blown merger talks under the codename Quantum, for the leap both companies were hoping to make. The talks intensified in the past two weeks and on Sunday the boards of both companies approved the terms. The companies then tipped off the federal government as a courtesy.

The all-stock deal, worth about $19.1-billion, will create a Canadian energy giant that will be 60 per cent owned by existing Suncor shareholders and 40 per cent by Petro-Canada shareholders. Mr. George will become chief executive of the new enterprise and Mr. Brenneman executive vice-chairman.

Yesterday both men said the merger will create a Canadian company capable of competing with Exxon Mobil Corp. and Royal Dutch Shell PLC.

"The one advantage this company has is there's a much stronger balance sheet, a much better position in oil sands, and we can compete with the Americans and the Europeans in our own backyard," Mr. George said.

He added that the merger complies with the Petro-Canada Public Participation Act, which prevents any shareholder from holding more than 20 per cent of Petrocan's voting shares and requires its headquarters to remain in Calgary.

"Our position on this is, this is not reviewable from the Petro-Canada Act," he said. That's because no shareholder in the new entity will own more than 20 per cent.

He acknowledged that there will be competition issues. For example, Petro-Canada controls more than 30 per cent of the retail gasoline market in Ontario, meaning Suncor may have to sell off some of its Sunoco gas stations.

And, both companies dominate the market for diesel fuel in Alberta. Those issues are not expected to be insurmountable and Suncor is believed to have proposals to deal with them.

As for approval of the overall merger by the federal government, Mr. George declined to speculate. He insisted Suncor has not lobbied for a favourable review.

"We did not seek, nor have we sought or solicited their support for this transaction."

Mr. George and Mr. Brenneman stressed the Canadian nature of the deal repeatedly yesterday.

They noted that the government recently changed the Investment Canada Act to protect sensitive sectors, like energy.

The changes allow the federal government to review proposed takeovers by foreign, state-owned companies on national security grounds.

"If you look at the intent behind [the changes], it's pretty obvious the government intends to step in the way of any takeover they don't feel is beneficial to Canada, particularly important sectors like the energy sector," Mr. Brenneman said yesterday during a press conference.

Mr. George echoed those comments and told reporters during a press conference: "I don't know if the marriage of Suncor and Petro-Canada is really a marriage made is heaven or not, but what I will tell you it is certainly a match made in Canada."

With files from Gordon Pitts and Richard Blackwell

***

THE COMBINED OIL SANDS GIANT

PROVEN RESERVES

(MMboe)

SUNCOR ENERGY

Oil Sands 15,000

North American Conventional 100

PETRO-CANADA

East Coast Canada and North Sea 1,000

North American Conventional 1,850

Oil Sands 7,260

Other International 1,160

PRODUCTION

Production, net before royalties (2008)

(Suncor) 264,700 (boe/d)

(Petro-Canada) 418,400 (boe/d)

REFINED PRODUCT SALES

(thousands of cubic metres/day for 2008)

Suncor 31.5

Petro-Canada 52.4

OIL SANDS HOLDINGS

Suncor

Base Upgrader

Millennium Steepbank

Voyager

Firebag

Petro-Canada

Fort Hills Project

Dover

Mackay River

Aurora

Meadow Creek

Chard

Lewis

THE GLOBAL COMPARISON

(Market Cap as of March 23, 2009)

Exxon Mobil $348.53-b (US)

Suncor (combined)* $37.66-billion (US) $46.09 billion (CAD) *includes premium

Suncor Energy $23.53-billion (US) $28.79 billion (CAD)

Petro-Canada $14.14-billion (US) $ 17.31 billion (CAD)

TONIA COWAN AND KATHRYN TAM/THE GLOBE AND MAIL

SOURCES: SUNCOR, BLOOMBERG, GOOGLE 3D WAREHOUSE

© Copyright The Globe and Mail

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