Cenovus megadeal comes under fire
Shareholders ask regulator to block $17.7B acquisition of Conoco’s assets
The Ontario Securities Commission has been asked to halt Cenovus Energy Inc.’s blockbuster $17.7-billion deal to buy ConocoPhillips’ Canadian assets pending a shareholder vote.
“It is pretty outrageous that they would do a deal that would dilute shareholders by 47 per cent and not bring it to a vote,” said Len Racioppo, managing director of Coerente Capital Management Inc., which controls 524,000 Cenovus shares for its clients. “If you’re going to transform a company without asking shareholders — I don’t care if it’s legal — it’s not right.”
Racioppo said in an interview the Toronto Stock Exchange rules normally give shareholders the right to vote on transactions where companies dilute their float by more than 25 per cent but the structure of the Cenovus deal avoided that requirement.
When Cenovus announced in March its “transformational acquisition” for ConocoPhillips’ oilsands and natural gas assets in Canada, it said it would issue 208 million of its own shares to ConocoPhillips to pay for part of the deal. It also announced a bought deal of 187.5 million shares.
“Is that fair to the average shareholder? I don’t think so,” Racioppo said.
In a letter to the OSC, Torontobased Coerente argues those two equity issuances represent 24.97 per cent and 22.51 per cent of Cenovus’ outstanding shares and, taken together, exceed the 25 per cent threshold.
“The two equity issuances are clearly linked to the transaction as indicated by Cenovus itself,” the letter states. “A shareholder vote must take place before the transaction is completed.”
“The TSX should not have allowed the transaction without a shareholder vote and we are now requesting that the Securities Commission intervene, stop the transaction from being completed due to its size, materiality and in the best interest of the capital markets,” Racioppo said in the letter. The TMX and OSC both declined to comment.
Cenovus spokesperson Sonja Franklin said in an email that shareholder approval is not required for an asset purchase or for equity financing. “The board of directors has sole authority to structure the overall transaction as it believed was in the best interests of the company, and did so,” she said.
She added that the board considered the transaction “over a number of months.”
“We acknowledge there was dilution to existing shareholders as a result of the equity financing and vendor take-back agreement,” she said, but added the overall financing plan was structured “to preserve our financial resilience,” maintain the company’s credit ratings and retain liquidity after the transaction.
Cenovus shares have fallen from $17.45 before the deal was announced to close at $14.15 on Monday.
“They got annihilated in the market,” the head of another investment management firm with Cenovus holdings said, adding the shares tumbled because “they overpaid with cheap equity.”
The investment manager, who asked not to be identified, said his firm continues to voice frustrations directly to Cenovus, but is “not optimistic” appealing to the OSC will prevent it from closing. “We’ve got to appeal to the board, not the OSC,” the executive said.
While the deal was “within the law,” Cenovus made a mistake by raising money through a boughtdeal rather than a widely marketed deal that would have allowed more shareholders to participate, and perhaps be supportive, the executive said.
The company’s annual meeting is scheduled for Wednesday in Calgary and while Racioppo said he would not attend, as he’s already voted against the re-election of the company’s board, he expected shareholders to express their disappointment to management and the board.
“Here’s a company that did a very good job surviving the oil price downturn,” Racioppo said, adding, “Now they’ve loaded the company up with debt.”
Cenovus CEO Brian Ferguson held a conference call with sellside analysts on Friday to answer questions about the company’s acquisition.
In a note to clients after the call, RBC Capital Markets analyst Greg Pardy said Cenovus paid a $129-million deposit to ConocoPhillips as part of the deal but there is no break fee.
Pardy also said Cenovus plans to sell $3.6 billion in assets by the end of this year and the company signalled that “select assets within the Deep Basin (natural gas assets) could be tagged as non-core,” the analyst said.