Ensign’s offer for Trinidad could be back in play
Stock sell-off jeopardizes $1-billion deal
CALGARY• The recent sell off in global stocks could jeopardize Precision Drilling Corp. ’s $1-billion deal to acquire smaller rival
Trinidad Drilling Ltd. and complicate attempts to sell shareholders on the transaction.
When Precision announced on Oct. 5 that it would buy its indebted competitor Trinidad in an all-share deal, the value of that deal was just over $1 billion and surpassed a hostile, cash bid from Ensign Energy Services Inc. for $947 million.
Trinidad’s board rejected the $1.68 per share all-cash bid from Ensign and recommended Precision’s all-stock offer to shareholders. The all-stock bid, $1.98 per share based on the bidder’s closing price at the time of the deal, represented a 7.6 per cent premium to Trinidad’s closing price on that day.
But a global stock sell-off has since flipped the relative value of the deals.
Precision shares have declined from $4.30 each to $3.20 each since Oct. 5 and now the Ensign offer represents a premium over the Precision deal. At current prices, Precision’s offer is worth about $1.38 per Trinidad share, an 18 per cent discount to Ensign’s $1.68 per share cash offer.
The change in fortunes is setting up a more intense fight between Precision and Ensign for the support of Trinidad’s shareholders.
The target company’s 10 largest shareholders declined to comment.
“Our fully valued all-cash offer provides shareholders with an important opportunity to realized immediate liquidity and certainty of value,” Ensign president and chief operating officer Bob Geddes said in an email.
“Given the significant drop in Precision Drilling’s share price and the ongoing volatility in the commodity and equity markets, Precision Drilling’s all-share proposal is a risky and inferior proposition for Trinidad shareholders,” Geddes said.
Precision Drilling president and CEO Kevin Neveu said the Trinidad shareholders he has spoken to “have a strong preference” for being involved in a share-based transaction so they can participate in the upside of the commodity cycle.
“The timing isn’t helpful to us,” Neveu said of the company’s recent share price drop but noted that shareholders won’t vote on a transaction until either December or January, depending on regulatory timelines.
The stock market volatility has also affected other energy companies and hasn’t changed his view of the transaction, which he characterized as Precision offering up 29.1 per cent of itself in exchange for Trinidad.
“The frustration that Precision is feeling on its share price is shared by every energy company in Calgary,” Neveu said, adding that he didn’t expect his company or others would be “pinned to their 52-week lows” long term.
Trinidad declined to comment further this week, saying that its previous comments on the situation still hold.
It had endorsed the Precision deal and agreed to a $20 million break fee with Precision.
But the tumbling equity values have made the outcome of the fight between Precision and Ensign for control of Trinidad more difficult to predict.
The TSX Capped Energy Index has fallen 14.5 per cent year-to-date, compared to an eight per cent drop for the broader index.
“We do not expect (Trinidad) investors to tender to (Precision’s) offer at its current price, but believe further details on the combined entity could result in share price improvement for (Precision) allowing the deal to pass muster,” GMP FirstEnergy analyst Ian Gillies said in a research note.
Gillies is looking for details on how much the combined company would be able to save in costs and expects a Precision and Trinidad merger could save up to $36 million for the combined entity.
Neveu said the company would be releasing more information on the deal next week and meet with more Trinidad shareholders to more aggressively pitch the merits of its transaction.
However, Precision’s deal to acquire Trinidad could be “moot” at this point and investors should evaluate Precision as a stand-alone entity, Raymond James analyst Andrew Bradford said in a research note.
“Since (Precision’s) allequity offer is out of the money, the market’s focus ought to shift toward the outlook for its existing business,” Bradford said, adding that Precision has been able to gain market share in the United States, where oilfield drilling demand is more robust than in Canada.