Western Energy Services Corp. Highlights Key Elements of Its Agreement With Savanna Energy Services Corp.
Western Energy Services Corp. ("Western") (TSX:WRG), wishes to summarize six matters relevant to its recently announced Arrangement with Savanna Energy Services Corp. ("Savanna") (TSX:SVY). These comments also address certain subjects that have either been reported in the media or have been otherwise publicly discussed by a competing hostile bidder.
Savanna's shareholders currently have two competing business combination proposals to consider, one being the Arrangement negotiated co-operatively between Western and Savanna; and the other being an increasingly acrimonious hostile bid by Total Energy Services Inc. ("Total"). The consideration in both cases consists predominantly of common shares of what would become a combined company, in each case.
The calculated market value of the consideration proposed, after share price fluctuations for all three companies, slightly favors the Western-Savanna Arrangement at this date, but the calculated values of the two alternatives are quite close together.
Given these circumstances, the following are matters that will likely be highly relevant to the Savanna shareholders in choosing between the two alternatives.
1. Experience Counts and Strategy Matters
Western is a substantial and widely-respected company, that is highly-focused on the businesses of contract drilling and well servicing for the oil and gas industry; the same is true for Savanna. The competing bidder, Total, derived a meager 6% of its corporate revenue in 2016 from contract drilling service and none from well servicing.
It should be important to consider which prospective partner will be better for Savanna's strategy and business, including the achievement of operating and cost synergies and overall competitive position. Western is a prospective partner with deep experience and a business culture that lives and breathes contract drilling and well servicing. Total is a company which has to date only dabbled in Savanna's main lines of business.
2. "You Attract More Flies with Honey Than You Do With Vinegar"
The business approach to the two proposals could hardly contrast more strongly. Western has engaged with Savanna by entering through the front door and by providing Savanna (and the Alberta Investment Management Corporation ("AIMCo")) access to an extensive data room and a full suite of information.
Negotiations have been at arm's-length and businesslike; agreements have been reached on a co-operative basis; and a jointly-approved press release announced the proposed Arrangement between the two companies and the consent of AIMCo.
Total's offer arrived as an unsolicited hostile bid to Savanna. Total has publicly stated that it will "vigorously investigate all actions taken by Savanna's directors and senior executives". Total has also threatened litigation; alleged a (non-existent) conflict of interest; and publicly lectured AIMCo, with whom it has not negotiated, on what it believes AIMCo should agree to do, if Total becomes the successful bidder.
Which of the two approaches (friendly vs. hostile) is likely to be more effective in advancing a business that is highly reliant on attracting and retaining excellent people to serve its many high-quality clients?
3. Creating Canada's Second-Largest Drilling and Well Servicing Company
Each of Western and Savanna is a very substantial competitor in the businesses of contract drilling services and well servicing for the oil and gas industry. Combined, they would have extensive operations in Canada and the United States and a very competitive operation in Australia. The combined entity would become the second-largest drilling and well servicing company in Canada, with considerable scale and ability to serve a broad range of clients.
The small size of Total's existing drilling and non-existent well servicing operations would not result in an entity of nearly the same breadth and scale as is achievable through the Arrangement between Western and Savanna.
4. "Break Fees" are Absolutely Normal in Business Combinations
In mergers, acquisitions and other types of business combinations, any offeror, other than a hostile one, is almost always granted the opportunity to receive a "break fee" in certain specified circumstances. Generally, after a new, acceptable offer is brought forward, if that negotiated transaction is not able to be later consummated because an even higher offer is made, then the friendly offeror receives a negotiated "break fee" for its time, effort and expense. Such "break fee" also recognizes the improvement in consideration that the target company's shareholders ultimately realize when there is more than simply one hostile bidder.
The events which might trigger the "break fee" in this case are completely customary ones and the amount involved is definitely consistent with precedents.
Indignation over what has become an "industry standard" process is unwarranted and represents a needless distraction from the key issues of strategy, experience and fit.
5. There is the Potential to Unlock "Locked-Up" Shareholders
Western acknowledges that certain Savanna shareholders have entered into conditional "soft-lock", Lock-Up Agreements with Total, for their own business reasons. If such Lock-Up Agreements had been unconditional, it is doubtful that Western would have entered into the Arrangement with Savanna.
However, the Lock-Up Agreements, by their terms, allow these shareholders to accept a superior offer that is on the table. This is normal, as many such investors act as fiduciaries for others, and wish to obtain the best available price for their Savanna common shares.
6. Board Representation of Savanna Shareholders is Also Normal
Reflecting the friendly and highly attractive deal that has been struck between Western and Savanna, and the very substantial equity interest that present Savanna shareholders will have in the combined company, it is expected that Chris Strong, the current President and Chief Executive Officer of Savanna, and another mutually acceptable nominee will join the board of the combined company. Again, this is entirely normal practice in this type of proposed business combination and any suggestion that this represents a conflict of interest is also unwarranted and a distraction.
Western looks forward to continuing to communicate the considerable merits of the Arrangement that has been agreed upon.
About Western Energy Services Corp.
Western is an oilfield service company which provides contract drilling services in Canada through its division Horizon Drilling and in the United States through its wholly owned subsidiary Stoneham Drilling Corporation. In Canada, Western also provides well servicing through its division Eagle Well Servicing and provides oilfield rental services through its division Aero Rental Services.
SOURCE: Western Energy Services Corp.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.