The bidding war for Trinidad Drilling Limited finally comes to an end, with Ensign Energy Services beating Precision Drilling Corporation
(PDS - Free Report
) to acquire 56% of Trinidad’s shares. In a bid to cement their market position, two of Canada’s largest drillers — Precision and Ensign — had been competing to acquire their smaller rival Trinidad for quite some time.
Notably, Trinidad had started a comprehensive strategic review process early this year, in a bid to contemplate on different strategies to enhance its shareholders’ value. Post the strategic review process, Canada’s second-largest driller Ensign went hostile with C$947 (C$470 million in cash and C$477 as assumption of debt) million bid for Trinidad in August 2018.
However, on Oct 4, Precision announced a stock and debt deal worth C$1.03 billion ($550 million in stock and $477 million as debt assumption) to acquire Trinidad. Consequently, Trinidad rejected Ensign’s hostile take-overbid and accepted Precision’s proposal, which represented 25% premium over Ensign’s offer.
However, shares of Precision witnessed a sharp deterioration in October, with prices dropping from C$4.30 a share on Oct 5 to C$3.10 as of Oct 29. Consequently, Ensign got an upper hand in the bidding battle, as its cash offer of $470 million outweighed Precision’s stock offer. Based on Precision’s closing price of C$3.26 on Nov 16, the company’s stock value sharply declined from its initial bid and also dipped below Ensign’s offer. At that time, Precision could have raised its offer again to become the superior bidder. However, Ensign capitalized on the situation and played the smart move by moving up the deadline (from Dec 13 to Nov 27) for acceptance of its cash offer or to settle for the lower all-stock bid from Precision, thus giving Trinidad’s shareholders little time to decide.
With Trinidad choosing Ensign’s bid over Precision, Ensign took over 56% of Trinidad’s shares. With Ensign already holding 10% of Trinidad’s shares, the former currently owns 66.18% stake in the latter.However, while the battle over Trinidad buyout has now come to an end, Precision claims a $20-million break fee as part of the deal it had inked with Trinidad.
The buyout of Trinidad by Ensign will integrate the premier assets of both the companies, in turn bolstering scale and leadership position of the combined entity. The deal will enable the companies to pool their expertise in the region and share their best practices, positioning them well for international growth.
As it is, consolidation has been picking up pace in Canada, so that the companies can achieve economies of scale and synergies, thereby boosting their earnings and reducing competition for services. In April 2018, Vermillion Energy Inc. inked an all-stock deal with Canadian rival Spartan Energy Corporation for C$1.4 billion. In June, Baytex Energy Corporation secured a $2.3-billion deal to acquire Raging River for broadening its scope of operations in Duvernay Shale. In fact, hostile takeovers are no more a matter of anomaly for the Canadian energy industry.
Last year, Total Energy Services Corporation outstripped Western Energy Services on the hostile takeover of Savanna Energy Services. In September end, Husky Energy’s $6.4-billion offer to buy MEG Energy Corporation marked the third hostile bid this year, after Ensign’s offer to buy Trinidad in August and Velvet Energy’s deal with Iron Bridge Resources. Industry observers believe that such consolidations are much needed for the Canadian Energy industry to thrive.
Zacks Rank and Key Picks
Precision Drilling currently carries a Zacks Rank #3 (Hold).
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