Savanna Explains Why Friendly Proposed Acquisition by Western Energy Is Superior to Hostile Offer From Total Energy
Savanna Energy Services Corp. ("Savanna") (TSX:SVY) today explained why the Western Energy Services Corp. ("Western") (TSX:WRG) friendly proposed acquisition of Savanna (the "Western Offer") is superior to the Total Energy Services Inc. ("Total") hostile offer (the "Total Offer").
Savanna also refuted a number of unsubstantiated and erroneous claims by Total in a news release dated March 9, 2017. Savanna reiterated the unanimous recommendations of the board of directors of Savanna (the "Savanna Board") that Savanna shareholders should vote in favour of the Western Offer and reject the Total Offer.
As previously disclosed, the Western Offer is on the basis of 0.85 of a common share of Western for each outstanding common share of Savanna (the "Savanna Shares"). The transaction is to be completed by way of a plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement").
THE WESTERN OFFER IS FINANCIALLY, STRATEGICALLY AND OPERATIONALLY SUPERIOR
The Western Offer and proposed combination ("Savanna-Western") is far more compelling to Savanna shareholders than the Total Offer and proposed combination ("Total-Savanna") for a broad array of reasons.
The Western Offer premium favours Savanna-Western by a range of 3.5 percentage points to 12.8 percentage points, as further described in the table below. Beyond that, Savanna-Western delivers, among other things:
A Savanna-Western combination delivers 58% ownership of the combined company to Savanna shareholders, which compares favourably to Savanna's contribution of approximately 56% of Savanna-Western's average EBITDAS1 for the years ended December 31, 2014, 2015 and 2016.
In contrast, Savanna shareholders would own just 33% of a Total-Savanna combination, despite Savanna contributing approximately 65% of Total-Savanna's average EBITDAS for the years ended December 31, 2014, 2015 and 2016.
Savanna-Western provides Savanna shareholders a materially larger ownership position than Total-Savanna. These arguments remain valid on a debt-adjusted basis, after taking into consideration the relative indebtedness of each of Savanna, Western and Total.
Expected higher customer retention and better First Nations relationships with Savanna-Western
There can be no assurance that Savanna customers would become customers of Total-Savanna. Unsolicited, a number of Savanna's customers have expressed concerns about the Total transaction. The loss of any customers could have a significant negative impact on the Total-Savanna business. No similar customer concerns have been expressed with regard to the Western Offer. The Western management team has a proven track record of operating a large scale contract drilling and well servicing organization and has established strong relationships with a number of the top tier customers.
Savanna has developed deep relationships with First Nations communities in western Canada as investors, partners and employees. These relationships are based on mutual trust and Savanna is confident that they can be transferred to Savanna-Western. Western also works with a First Nations community and is eager to expand those relationships through the experience and relationships that Savanna's employees have fostered over the last 15 years. However, Savanna has heard, on an unsolicited basis, from certain of its First Nations partners that they would take steps to end these relationships if Total were to be successful with its hostile offer, one of which is due to a Savanna customer, which has an important relationship with the First Nations community, who has stated they will not do business with Total.
A pure play stock with greater liquidity than Total-Savanna
The market capitalization of Savanna-Western would be solely correlated to drilling, well servicing and related rentals. Total-Savanna would be a mixture of businesses that are not as closely related. For investors who want exposure to drilling and well servicing in a larger capitalization company, Savanna-Western will offer them another strong alternative.
1 EBITDAS means earnings before finance expenses, income taxes, depreciation, impairment losses and share based compensation and excludes other expenses (income). See "Cautionary Statements – Non-IFRS Measures".
True industry consolidation with Savanna-Western
Consolidation in the drilling and well servicing industry, which Savanna understands is the reason one of the Locked-Up Shareholders (as defined below) commenced this process, is important at this point in the business cycle. Savanna-Western provides that consolidation and the advantages of economies of scale. Savanna-Western would be the second largest drilling contractor and second largest service rig contractor in Canada. Total-Savanna does not provide meaningful consolidation in the drilling and well servicing segments.
During 2017 year-to-date, generally the most active time of the year in Canada, utilization of Savanna's and Western's drilling fleets were 51% and 60% respectively, compared to 14% for Total's 18 rigs. Total's drilling fleet utilization has been among the lowest in the industry and it has no well servicing rigs.
Less business integration risk with Savanna-Western
As a result of the hostile Total Offer, the Savanna Board initiated a strategic alternatives process that culminated with its recommendation of the superior Western Offer. Total was invited to participate in the process, including access to non-public information, which was declined. Western and Savanna, which operate in the same business lines, have taken the opportunity to perform and complete reciprocal due diligence.
Savanna-Western expects to efficiently and effectively integrate talent at the employee, senior management and board levels while quickly developing significant operational synergies. Having completed due diligence, Savanna and Western understand that they have complementary corporate cultures, similar businesses, similarity of systems, similarity of banking relationships and other third party service providers and minimal overlapping customers and markets.
In contrast, there is significant integration risk for Total-Savanna. Total's main business, gas compression, is different than Savanna's drilling and well servicing business. In addition, Total and Savanna appear to have vastly different corporate cultures. Value destruction for shareholders in business combinations is often the result of the attempt to combine disparate cultures. Total's needless insinuations about the integrity of the Savanna Board and senior management, has exacerbated integration risk. And, as noted above, Total and Savanna have not reviewed each other's non-public information.
Better aligned management, focus and experience with Savanna-Western
Total's main business is gas compression. That means the focus of Total-Savanna management would be split. Moreover, Total has no apparent experience in well servicing and only a tiny contract drilling business, amounting to just 5.6% of Total's revenue in 2016. In contrast, Savanna and Western are pure-plays on drilling and well servicing. Savanna-Western delivers a highly-focused management team with much deeper experience in drilling and well servicing. These are material strategic advantages for Savanna-Western.
Larger and more diverse fleets with Savanna-Western
Savanna-Western delivers a drilling fleet of 157 rigs, 32% larger than the Total-Savanna drilling fleet of 119. In well servicing, Savanna-Western delivers a fleet 153 rigs, 76% larger than Total-Savanna's fleet of 87. These are material advantages for Savanna-Western, particularly in light of increasing activity levels and improving industry conditions. Among other things, Savanna-Western would have an increased ability to strategically move equipment to meet customer demand and capture growth opportunities, compared with Total-Savanna.
Additionally, there is greater diversity between the Savanna-Western drilling rig fleets. Total's stand-alone fleet is very small: just 18 drilling rigs, none of which are in the U.S., and no well servicing rigs at all.
No secrets with Savanna-Western
As a result of the strategic alternatives process, each of Western and Savanna appropriately entered into confidentiality agreements in order to allow the other access to non-public information relating the business, operations and affairs of the other in order to conduct appropriate and necessary due diligence in discharge of their respective fiduciary duties. Total has refused to provide Savanna with access to such non-public information relating to Total so that the Savanna Board could properly discharge its obligations. Total's due diligence intransigence is yet another reason for Savanna shareholders to have more confidence in Savanna-Western than in Total-Savanna.
Better exposure to rising energy prices with Savanna-Western
Because of its stronger focus on contract drilling and well servicing, the performance of Savanna-Western would be more closely correlated to energy prices than Total-Savanna. While future price moves are hard to predict, prices firmed following agreements late last year by OPEC members and certain non-OPEC producers to curb production. In Canada, there was further encouragement from the approval of new oil export pipelines. Should price gains continue, Savanna-Western would be better positioned to benefit than Total-Savanna.
To illustrate the financial magnitude of exposure to higher activity levels, consider the 2014 (a time with stronger industry fundamentals) EBITDAS achieved by Savanna, Western and Total in the context of the Savanna's shareholder ownership in Savanna-Western versus Total-Savanna:
Total has no U.S. drilling business and thus Total-Savanna delivers absolutely no U.S. drilling exposure for Savanna shareholders, beyond what Savanna shareholders are already exposed to through Savanna's existing 28 U.S. drilling rigs. In contrast, Savanna-Western delivers a U.S. drilling fleet of 33 rigs, 18% more than Total-Savanna (i.e. Savanna alone), in many of the most active regions in the U.S. This increase will be a timely benefit irrespective of energy price trends, given the new U.S. administration promises of more favourable U.S. energy policies. Industry confidence is growing and U.S. contract drilling is continuing to strengthen, with Savanna-Western better positioned to benefit than Total-Savanna (i.e. Savanna alone).
DON'T BELIEVE TOTAL'S UNSUBSTANTIATED AND ERRONEOUS CLAIMS
In pursuit of its inferior offer, Total has made a number of unsubstantiated and erroneous claims relating to the Savanna Board's appropriate and proper conduct in the discharge of its fiduciary duties in attempting to maximize value for all Savanna shareholders, not only Total and the three Savanna shareholders who have entered into support agreement with Total (the "Locked-Up Shareholders"). Savanna believes it is necessary to set the record straight.
Total refused to participate in Savanna's strategic alternatives process
Despite repeated opportunities, Total refused to participate in Savanna's strategic alternatives process.
Savanna would have been blindsided by Total's material performance miss
The reason for Total refusing to provide Savanna with access to non-public information about Total and allow Savanna to conduct due diligence is now very apparent. Savanna would have been blindsided by Total's material fourth quarter 2016 results miss, compared with consensus estimates. Savanna only learned of this performance shortfall when Total disclosed it on March 8, 2017. Had negotiations concluded with Total prior that public disclosure, Savanna's shareholders might have been irreparably harmed.
The Savanna Board conducted itself appropriately
Since Total's initial expression of interest in a transaction with Savanna, the Savanna Board has taken all appropriate actions aimed at, and intended to, maximize shareholder value in accordance with its fiduciary duties. Total's mischaracterization of Savanna's actions as 'defensive tactics' and 'a desire to entrench' is entirely inaccurate.
The termination fee that is payable in certain circumstances under the Western Offer is appropriate and typical for transactions of that nature. The termination fee provided for in the arrangement agreement with Western was approximately 5.0% of Savanna's equity capitalization at the time of entering into the non-binding letter of intent with Western and approximately 6.1% of equity capitalization at the time of entering into the arrangement agreement. This is in contrast to Total's demand for a break fee that equated to 7.6% of Savanna's equity capitalization at the time for a one-off, no-premium transaction prior to the Savanna Board discharging its fiduciary duties by conducting an auction or other process to determine if superior alternatives were available.
The interests of the Locked-Up Shareholders will be best served by carefully reviewing both offers.
Savanna and Western continue to reach out to the Locked-Up Shareholders to request a fair and objective consideration of the Western Offer, in comparison with the weaker Total Offer. The public disclosure indicates that the Locked-Up Shareholders may freely tender to an offer they believe to be more favourable to the Total Offer.
Both Savanna and Western remain available, at any time, to review all relevant information which would be helpful to the Locked-Up Shareholders to make a truly considered decision on the two available offers.
Risks arising from Total's waiver of 66 2/3% tender condition
Total's actions, in particular the waiver of the minimum tender condition to the Total Offer such that the Total Offer will require only the tender of more than 50% of the outstanding Savanna Shares (excluding those owned by Total or any person acting jointly or in concert with Total), introduces significant risks to Savanna's stability and ongoing operations, and to shareholder value. It also casts significant doubt on the ability of Total to immediately deliver what it purports to be able to contribute to Savanna.
For example, a potential outcome, if the other conditions to the Total Offer are satisfied or waived, is that Total may end up owning as little as 50.1% of the outstanding Savanna Shares with the result that:
Two fairness opinions in respect of the Western Offer
The Special Committee received opinions from each of Peters & Co. Limited and Cormark Securities Inc. that the consideration to be received by Savanna shareholders pursuant to the Arrangement is fair, from a financial point of view, to Savanna shareholders.
The Arrangement is supported by all of Savanna's directors and officers and by other Shareholders
All of the directors and officers of Savanna and certain other shareholders of Savanna have entered into voting support agreements with Western pursuant to which such shareholders have agreed, subject to the terms and conditions contained therein, to vote in favour of the Arrangement.
The Savanna Board Recommends the Western Offer
The Savanna Board, on recommendation of the Special Committee, has unanimously determined that the Arrangement is fair, in the best interests of Savanna and Savanna shareholders and is unanimously recommending that Savanna shareholders vote in favour of the Arrangement at a meeting of shareholders of Savanna to be held in May 2017.
Such determinations and recommendations were made following a full and comprehensive strategic alternatives review process by Savanna and based on, among other things, determination from each of Peters & Co. Limited and Cormark Securities Inc., that the consideration to be received by Savanna shareholders pursuant to the Arrangement is fair, from a financial point of view, to Savanna shareholders.
The Special Committee and the Savanna Board, on recommendation of the Special Committee, have also unanimously recommended that Savanna shareholders reject the Total Offer to purchase all of the outstanding Savanna Shares on the basis of 0.13 common shares of Total and $0.20 in cash for each Savanna Share.
Savanna shareholders should not deposit their Savanna Shares to the Total Offer. Any shares deposited to the Total Offer can be withdrawn by contacting D.F. King, the Information Agent retained by Savanna. Contact information for D.F. King is provided below.
Savanna is a leading contract drilling and oilfield services company operating in North America and Australia providing a broad range of drilling, well servicing and related services with a focus on fit for purpose technologies and industry-leading Aboriginal relationships.
SOURCE: Savanna Energy Services Corp.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.