Total Energy Responds to Increased Acquisition Price Offered for Savanna by Western Energy Services Corp. and Announces Continued Support of Locked-Up Shareholders for Total Energy's Offer
Total Energy Services Inc. ("Total Energy") (TSX:TOT) announced today that, notwithstanding the recently announced increase in the acquisition price payable by Western Energy Services Corp. ("Western") in relation to the proposed plan of arrangement between Western and Savanna (the "Western Arrangement"), each of the Savanna shareholders who entered into a support agreement with Total Energy in November 2016 (collectively, the "Locked-Up Shareholders") has confirmed to Total Energy that it continues to support Total Energy's offer for the outstanding common shares of Savanna (the "Total Offer"). In addition, each of the Locked-Up Shareholders has confirmed to Total Energy that it has initiated the process to tender, to the Total Offer, all of the Savanna common shares owned by it, or over which it exercises control or direction. Based on public filings and additional information communicated to Total Energy concerning recent purchases of Savanna common shares made by Locked-Up Shareholders, the number of Savanna Common Shares to be tendered to the Total Offer by the Locked-Up Shareholders represents approximately 43.5% of the total number of issued and outstanding Savanna Common Shares.
THE TOTAL OFFER REMAINS OPEN FOR ACCEPTANCE UNTIL 11:59 P.M. (PACIFIC TIME) ON MARCH 24, 2017 UNLESS THE TOTAL OFFER IS EXTENDED OR WITHDRAWN BY TOTAL ENERGY.
Total Energy notes that the addition of cash consideration to the Western Arrangement does nothing to address (and, in fact, only exacerbates) certain fundamental issues that Savanna shareholders must take into consideration in relation to the Western Arrangement. Those issues include the current indebtedness of both Savanna and Western and the track records of their respective management groups. While a combination of Savanna and Western will result in a larger entity, certain Savanna shareholders who have contacted Total Energy have expressed concerns that a combined Savanna/Western entity will be saddled with significant indebtedness, limited financial flexibility and a high cost of capital. As a result, Western may need to undertake financing transactions, similar to the highly dilutive refinancing transactions completed by Savanna in December 2016, to address high debt levels, which could give rise to further dilution to the shareholders of Western (including former Savanna shareholders). In addition, recent energy market and commodity price volatility place a premium on go-forward financial flexibility and resilience, which will not be achieved by a combination of Savanna and Western. For these reasons and others, Total Energy continues to believe that the combination of Total Energy and Savanna on the terms set out in the Total Offer represents a more compelling transaction for Savanna shareholders than the Western Arrangement.
That Western, like Savanna, is burdened with substantial debt is highlighted by recently released 2016 financial information of Western. In 2016, Western's interest on its long-term indebtedness and other finance costs (net of finance income) amounted to $22.5 million, while its 2016 reported EBITDA amounted to $3.6 million; in other words, Western's 2016 EBITDA represented only 16% of its annual finance costs. It would appear reckless for Western to increase its bid by adding a cash payment when Western's balance sheet is already one of the weakest balance sheets in the Canadian energy services industry and such cash payment will put additional financial pressure on a combined Savanna and Western, which will reduce any near term liquidity flexibility for the combined entity.
In assessing the merits of the Total Offer and the Western Arrangement, Total Energy encourages Savanna shareholders to review and carefully consider the relative balance sheet strength/weakness and indebtedness of both Total Energy and Western
Savanna's agreement to a $15 million break fee in relation to the Western Arrangement is disturbing for several reasons. First, Savanna agreed to such break fee without first exploring with Total Energy what additional consideration Total Energy would be willing to make available in exchange for Savanna cooperation. This action reinforces observations made by Total Energy that Savanna's approach to the Total Offer appears inconsistent with the objective of sourcing a compelling combination transaction for the benefit of all Savanna shareholders, not just insiders. Second, the $15 million break fee was agreed to in respect of an inferior offer to the Total Offer. Western, itself, indicated (in its March 13, 2017 news release), that the acquisition price originally offered by it in relation to the Western Arrangement (such price having been determined, apparently, after a full due diligence exercise on the part of Western) was not a material improvement over the consideration offered to Savanna shareholders under the Total Offer; in that news release, Western noted that the "calculated values of the two alternatives are quite close together". The fact that Western has found it necessary to increase the acquisition price of the Western Arrangement through the addition of cash consideration just days after announcing the Western Arrangement simply confirms that the Western Arrangement was an inferior alternative to the Total Offer. The fact that Savanna has now agreed to increase the break fee by 33% is egregious.
Against that backdrop, Total Energy continues to question the appropriateness of the now increased $20 million break fee (and the desirability of the Western Arrangement from the perspective of Savanna shareholders), which represents close to 10% of the market capitalization of Savanna and also represents 51% of Savanna's 2016 EBITDA and 556% of Western's 2016 EBITDA. Behavior of this nature on the part of Savanna may explain, in part, the dramatic difference in the relative track records of Total Energy and Savanna in generating shareholder returns and the increasing alienation that independent Savanna shareholders have described to Total Energy vis-à-vis Savanna senior management and its board of directors. The increase to the break fee also reaffirms Total Energy's views that Savanna's senior management and board of directors are not aligned with Savanna's shareholders and not interested in maximizing shareholder value.
Total Energy has determined based on public filings by Savanna that the $20 million break fee will not be payable if the Total Offer is successful. Total Energy will vigorously contest any claim for payment of the break fee made following any take-up of Savanna shares under the Total Offer on behalf of all shareholders of Savanna.
In its March 13, 2017 news release, Savanna indicated that it will "continue to reach out" to the Locked-Up Shareholders to request that they consider the merits of the Western Arrangement. The impression that Savanna apparently hoped to create with that statement - that the Locked-Up Shareholders may come to support the Western Arrangement - is misleading, insofar as Total Energy has confirmed with the Locked-Up Shareholders that each of them considers the Western Arrangement to be inferior to the Total Offer (even after giving effect to the increase in price associated with the Western Arrangement). Having regard to the significant support for the Total Offer that continues to exist among Savanna shareholders following announcement of the Western Arrangement (and again after the increase in the acquisition price payable by Western), Savanna's suggestions that the Western Arrangement is a far more compelling transaction for independent Savanna shareholders and has higher degree of transaction certainty are questionable, at best.
Savanna's March 13, 2017 news release repeated inaccurate information concerning the limited interactions between Total Energy and Savanna during the course of the strategic alternatives review process initiated by Savanna in December 2016. In particular, Savanna again indicated that Total Energy refused to advise Savanna of the amount by which Total Energy was prepared to increase the consideration made available under the Total Offer unless Savanna first agreed, among other things, to an "exclusive dealing" period for the benefit of Total Energy. As Total Energy noted in the notice of variation filed and mailed by it on March 13, 2017 (the "Notice of Variation"), Savanna statements to such effect are simply not true. Total Energy has made numerous attempts to engage with Savanna and indicated, on multiple occasions, a willingness to increase the consideration offered by it for the outstanding Savanna common shares in exchange for cooperation from Savanna. Written correspondence forwarded by Total Energy to Savanna's financial advisor on February 13, 2017 clearly indicated that the "exclusive dealing" period referred to by Savanna would only come into effect following an agreement between Total Energy and Savanna upon the amount of the additional consideration to be made available by Total Energy. A copy of that correspondence is appended to the Notice of Variation, as Schedule "A", and readers are directed to paragraph 1 (on page 2 of that schedule) for information concerning the timing of the exclusive dealing period requested by Total Energy.
The fact that Savanna refused, in mid-February 2017, to engage with Total Energy prevented Savanna shareholders from receiving the best price that Total Energy could have made available at that time. Cooperation in combining Total Energy and Savanna in mid-February 2017 (or earlier in response to prior overtures by Total Energy) would have enabled Total Energy to avoid a number of costs subsequently incurred by it (and additional costs that may be incurred), which could have been added to the consideration under the Total Offer for the benefit of Savanna shareholders.
Since the announcement of the Western Arrangement, Total Energy has received feedback about the Total Offer from various sources. Total Energy is encouraged by unsolicited statements of support received from former officers and directors of Savanna and a number of current Savanna employees who are concerned about the future of their company. Total Energy is also encouraged by unsolicited supportive feedback received from Savanna's customers, who have, among other things, commented on the relative financial stability of the combined entity.
About Total's Offer to Savanna Shareholders
Full details of the Total Offer are contained in the offer to purchase and associated take-over bid circular, dated December 9, 2016 (the "Original Offer and Circular"), as amended, varied and supplemented (as applicable) by the notice of change and variation dated March 1, 2017 (the "First Notice of Change") and the Notice of Variation. All of those documents are available under Savanna's profile at www.sedar.com and on Total Energy's website at www.totalenergy.ca/savannaoffer. Securityholders of Savanna are urged to read the Original Offer and Circular, the First Notice of Change, the Notice of Variation, the Letter of Transmittal that accompanied the Original Offer and Circular, the amended Letter of Transmittal that accompanied the First Notice of Change and the Notice of Guaranteed Delivery for the Total Offer (collectively, the "Offer Documents") and to consider the important information set out in those documents. Copies of the Offer Documents may be obtained free of charge at www.sedar.com (under Savanna's profile) and may also be obtained free of charge upon request from the Corporate Secretary of Total Energy, at 2550, 300 - 5th Avenue S.W. Calgary, Alberta T2P 3C4, or from Laurel Hill Advisory Group ("Laurel Hill") at the numbers and email address shown below under the heading "Advisors to Total Energy".
Advisors to Total Energy
Total Energy has engaged GMP FirstEnergy to act as its financial advisor and dealer manager. Bennett Jones LLP is acting as Canadian legal advisor and Paul, Weiss, Rifkind, Wharton & Garrison LLP is acting as United States legal advisor in connection with the Total Offer.
Laurel Hill has been retained as information agent for the Total Offer. Savanna shareholders may contact Laurel Hill by telephone at 1-877-452-7184 (Toll Free in North America) or 1-416-304-0211 (Collect Outside North America) or by email at email@example.com.
Computershare Investor Services Inc. ("Computershare") has been retained as the depositary for the Total Offer. Shareholders of Savanna may contact Computershare by telephone at 1-800-564-6253 (Toll free in North America), or at 1-514-982-7555 (Collect Outside of North America), or by e-mail at firstname.lastname@example.org.
About Total Energy
Total Energy is a growth oriented energy services corporation involved in contract drilling services (Chinook Drilling), rentals and transportation services (Total Oilfield Rentals) and the fabrication, sale, rental and servicing of natural gas compression (Bidell Gas Compression) and process equipment (Spectrum Process Systems).
SOURCE: Total Energy Services Inc.
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