Acquisition was three transactions in one, says lawyer
The acquisition last month of Pipestone Energy Corp. by Strathcona Resources was effectively three transactions in one, says Olga Kary, a partner at Blake Cassels & Graydon LLP who advised on the deal.
The move makes Strathcona Canada's fifth largest publicly traded oil and gas producer. It was an M&A transaction through a plan of arrangement under the Alberta Business Corporations Act. It was an initial public offering of the shares of Strathcona, which was a private company before the deal. The transaction was also a backdoor listing on the Toronto Stock Exchange. All three aspects of the deal “were managed concurrently and completed on the same day,” says Kary.
“This transaction demonstrates an increased level of investor confidence in Canadian energy through a willingness to participate in a long-term, large-scale company that has created a new avenue of value for shareholders,” says Kevin Kerr, a partner at Blakes in Calgary. “Strathcona has and continues to be a leader in this respect, which is highlighted by each of the major transactions they have completed over the last six years.”
Strathcona has grown rapidly to become a big wheel in the oil and gas sector. It began in 2017, when Waterous Energy Fund, the private equity firm with a 91 percent stake in the company, recapitalized an oil producer in Montney, British Columbia. Strathcona’s assets now span BC, Alberta, and Saskatchewan, and the company has approximately $9 billion in enterprise value. Blakes has worked with the Strathcona on ten acquisitions in the last few years, at a pace of about one every nine months, says Kary.
“There's a lot of companies that grow by acquisition,” she says. But I think the strength of this team is that they're focusing on undervalued assets. They’re putting them under the Strathcona portfolio and then learning about the assets and managing them better to create value.”
The Pipestone acquisition, which closed on Oct. 3, was subject to shareholder and regulatory approvals. Three shareholders held around 63 percent of Pipestone’s total shares. Two supported the transaction, but the second largest shareholder, holding 18 percent of the votes, opposed it. That shareholder, GMT Capital Corp., put out a dissident circular to persuade Pipestone shareholders to vote against the deal.
Aware of GMT’s opposition, Strathcona negotiated a force-the-vote provision with Pipestone, which would require Pipestone to hold a meeting of shareholders to vote on the Strathcona deal even if there was another purchaser. Kary says a force-the-vote provision is uncommon for plans of arrangement.
The threshold for court approval of the shareholder vote was 66.66 percent. At the meeting, shareholders approved the deal with 67.61 percent in favour.
“I think we have the gold medal on the tightest margin of victory in corporate history in Canada,” says Connor Waterous, senior VP and CFO at Strathcona and co-founder and managing director of Waterous Energy Fund.
Kary says the low level of shareholder approval – the lowest she’s seen in her career – raised uncertainty for the final court approval application, the slim margin being a factor the judge may consider in determining whether the transaction was fair to Pipestone shareholders.
She says the Strathcona-Pipestone transaction, by which Strathcona went public, was also the largest energy sector IPO in a decade. In addition to the shareholder and Court of King’s Bench approvals, the transaction also required approval under the Competition Act.
Blakes has acted for Strathcona on its journey through several “unique and challenging transactions,” says Kary. These include the acquisition of Pengrowth Energy Corporation, among Calgary's oldest and largest energy companies, and the hostile takeover bid for Osum Oilsands Corp. She says hostile takeovers are few and far between, and the Osum transaction involved an Alberta Securities Commission hearing to deal with Osum’s application to cease the bid.
“Every deal with Strathcona has been unique,” says Kary.
Waterous says the Strathcona-Pipestone deal was the first transaction of its nature – a large private company taking over a public company of scale – since the Husky Oil and Renaissance Energy merger in 2000. “From a scale standpoint, it’s the largest new company in the oil and gas space to go public in the last couple of decades,” he says.
Waterous adds that most transactions in the oil and gas sector involve an acquisition of a given property. He says his company’s strategy is that if they are willing to take the shareholder approval and other risks, there’s a chance to get a better deal.
“There’s now a new big company in town,” says Waterous. “There’s a pathway to being the fifth investment-grade oil company in the patch. There are four. We think there’s a path to Strathcona being the fifth.”