Just lately, Canadian vitality giants Strathcona (TSX:SCR) and Cenovus Power (TSX:CVE) have been locked in a bidding battle 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 here 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 components 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 authorized 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 advocate that shareholders vote in favour of it.
Second, Cenovus has made a competing provide for MEG price $7.9 billion. That is at present $100 million greater than what Strathcona’s deal is price. 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 just like the favorite to win any showdown right here – assuming that one occurs in any respect.
What MEG is price
The apparent play right here, in the event you assume that both SCR or CVE’s takeover gives will really shut, is to go lengthy MEG shares. Each of the tabled gives are above MEG’s present inventory value, so there’s cash to be made if considered one of them closes. On the identical time, nothing is ever assured. Buyers shouldn’t purchase this inventory except they assume it is sensible with or with out an M&A deal closing. With that in thoughts, let’s check out the corporate that’s probably 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 revenue.
- $551 million in web revenue.
- $639 million in free money stream.
Most of those metrics have been down on a year-over-year foundation after they have been reported. Consequently, MEG boasts the next development metrics:
- Income: -23%.
- Working revenue: -19%.
- EPS: -1%.
It’s not an ideal displaying on development, however might MEG be low-cost sufficient to make up for it?
In my view, most likely not. At immediately’s costs, MEG trades at:
- 13.8 instances earnings.
- 1.8 instances gross sales.
- 1.6 instances e-book worth.
- 5.4 instances working money stream.
These metrics are decrease than common for the TSX as a complete, however above common for TSX Power shares. Suncor Power – a much better enterprise –trades at simply 12 instances earnings.
Silly takeaway
Contemplating every little thing I’ve checked out on this article, I’m not excited by shopping for MEG inventory immediately. The corporate is shrinking, and whereas oil is usually cyclical, the identical weak point shouldn’t be 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 somewhat personal Suncor than this.
