Just lately, Canadian vitality giants Strathcona (TSX:SCR) and Cenovus Power (TSX:CVE) have been locked in a bidding conflict over the smaller pure play E&P, MEG Power Corp (TSX:MEG). The 2 bigger firms have made their bids for the smaller E&P and look dedicated to closing the deal.
The stakes concerned listed below are comparatively giant. MEG is a $7.4 billion market cap firm, and Strathcona is providing $7.8 billion. Even after the deal’s announcement, upside stays within the occasion of a profitable shut.
There are two elements complicating the matter for Strathcona:
- MEG’s lack of curiosity within the deal.
- Cenovus Power’s competing $7.9 billion provide.
Strathcona has tried to purchase out MEG Power earlier than. MEG’s board by no means permitted the deal and (naturally) no deal ever closed. This time round, issues seem no completely different. After receiving Strathcona’s provide, MEG’s board reportedly felt “grumpy,” not wanting to debate the matter. So, it appears unlikely that they’ll approve the deal and suggest that shareholders vote in favour of it.
Second, Cenovus has made a competing provide for MEG value $7.9 billion. That is at the moment $100 million greater than what Strathcona’s deal is value. Since Strathcona’s provide is an all-stock provide (0.8 SCR shares for every MEG share), the worth might change. Nevertheless, proper now, Cenovus appears to be like just like the favorite to win any showdown right here – assuming that one occurs in any respect.
What MEG is value
The apparent play right here, in case you assume that both SCR or CVE’s takeover affords will truly shut, is to go lengthy MEG shares. Each of the tabled affords are above MEG’s present inventory worth, so there’s cash to be made if one among them closes. On the identical time, nothing is ever assured. Traders shouldn’t purchase this inventory until they assume it is smart with or with out an M&A deal closing. With that in thoughts, let’s check out the corporate that’s doubtlessly being purchased right here.
Within the trailing 12-month interval, MEG Power delivered the next monetary outcomes:
- $4.3 billion in revenues.
- $2.4 billion in gross revenue.
- $794 million in working earnings.
- $551 million in internet earnings.
- $639 million in free money stream.
Most of those metrics had been down on a year-over-year foundation once they had been reported. In consequence, MEG boasts the next progress metrics:
- Income: -23%.
- Working earnings: -19%.
- EPS: -1%.
It’s not an incredible displaying on progress, however might MEG be low-cost sufficient to make up for it?
For my part, in all probability not. At as we speak’s costs, MEG trades at:
- 13.8 instances earnings.
- 1.8 instances gross sales.
- 1.6 instances guide worth.
- 5.4 instances working money stream.
These metrics are decrease than common for the TSX as an entire, however above common for TSX Power shares. Suncor Power – a much better enterprise –trades at simply 12 instances earnings.
Silly takeaway
Contemplating every part I’ve checked out on this article, I’m not keen on shopping for MEG inventory as we speak. The corporate is shrinking, and whereas oil is mostly cyclical, the identical weak point isn’t being seen in different TSX vitality shares. Lastly, MEG’s gotten dear on a sector-relative foundation because of the M&A hype. I’d fairly personal Suncor than this.
