Suncor Energy Inc. (SU) Inks Deal to Buy Canadian Oil Sands Ltd (COS)

Suncor Energy Inc. (USA) (NYSE:SU) (TSE:SU) signed an agreement to acquire Canadian Oil Sands Ltd (TSX:COS) after increasing its original all-stock offer by 12% to 0.28 from 0.25 of each SU share for every COS share.

The total value of the acquisition deal is approximately $6.6 billion including the $2.4 billion estimated debt of Canadian Oil Sands. The Board of Directors of both Suncor Energy and Canadian Oil Sands support the transaction.

The acquisition price of around C$8.74 per share represents a 17% premium to the closing stock value of Canadian Oil Sands at C$7.48 per share on Friday, January 15.

Suncor Energy offers excellent value to COS shareholders

In a statement, Suncor Energy president and CEO Steve Williams, said, “We believe this transaction delivers excellent value to COS shareholders while maintaining Suncor’s commitment to capital discipline, providing both companies’ shareholders with near and long-term value.”

On the other hand, Don Lowry, Chairman of Canadian Oil Sands said the deal is a fulfillment of the Board’s commitment to maximize value for stockholders, who will receive a higher exchange ratio for their shares despite a 37% decline in spot oil prices.

“Our shareholders clearly signaled they expected more for their COS shares, and the Board has worked to secure that under very challenging circumstances. Given the current market for energy equities, we recommend shareholders tender their shares to Suncor’s improved offer,” said Mr. Lowry.

Seymour Schulich, a major shareholder of Canadian Oil Sands, will tender his shares to Suncor Energy. He is encouraging his fellow shareholders to do the same. At least 51% of the outstanding shares of Canadian Oil Sands must be voted in favor of the transaction. The previous requirement was two-thirds.

Declining oil prices weighed on COS shareholders

Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried & Co., commented that Canadian Oil Sands needs to accept Suncor Energy’s deal because its “downside risk was greater” given the declining oil prices.

Since Suncor Energy first submitted its proposal to acquire Canadian Oil Sands, the West Texas Intermediate (WTI) crude was trading at around $45 per barrel. Currently, the WTI crude is trading around $28.94 a barrel, the lowest level since 2003.

The declining oil prices weighed on shareholders. The deal should have valued Canadian Oil Sands for approximately C$9 per share on December 4, the deadline set by Suncor Energy for its original offer.

The stock price of Canadian Oil Sands surged more than 10% to $C8.24 per share while Suncor Energy was down more than 5% to $29.51 per share on the Toronto Stock Exchange (TSE) at the time of this writing around 2:07 in the afternoon.