Merger talks started in spring between Canadian oil companies Husky, MEG

By Rod Nickel

WINNIPEG, Manitoba (Reuters) - Canadian oil companies Husky Energy Inc (OTC: HSE) and MEG Energy Corp (NYSE: MEG) discussed a possible merger for months, and one major MEG shareholder expressed interest early, before Husky was rebuffed and launched a hostile bid this week, according to a Husky filing.

Husky, controlled by Hong Kong tycoon Li Ka Shing, announced on Sunday a cash-and-stock offer for MEG in a deal valued at C$6.4 billion ($4.99 billion). MEG, whose investors include Chinese state-owned oil producer CNOOC Ltd <0883.HK>, said it would evaluate the offer.

The timeline, laid out in Husky's 114-page shareholder circular issued late on Tuesday, shows that MEG faced investor pressure to sell before talks fizzled with MEG's hiring of Chief Executive Derek Evans.

MEG is under pressure from large debt and a deep discount on Western Canadian heavy crude due to transportation constraints that has hampered any rebound in Canada's oilpatch.

Discussions started May 9, Husky's filing showed, when Husky CEO Rob Peabody invited MEG Chairman Jeff McCaig to a meeting where they discussed a combination.

On May 31, Peabody met with Dan Farb, a MEG director and partner with Highfields Capital, which owned 9.9 percent of MEG. Farb told Peabody he was open to a sale if it included a "significant premium" for MEG investors, the filing said.

The next day, Peabody met again with McCaig and MEG interim CEO Harvey Doerr, and told them Husky intended to pursue a combination, preferably with MEG's cooperation.

McCaig sent an email to Peabody on June 18, advising Husky that MEG would not disclose non-public information about MEG, and suggested that any written proposal should be sent to him.

By July 24, Farb was fed up with MEG and quit the board after only eight months, saying it failed to put the interests of the company and shareholders first.

Husky's pursuit of MEG continued, though. On Aug. 8, Peabody sent McCaig a written proposal to buy MEG for C$11 per share. McCaig said he would respond, but later that day, MEG hired Evans, an experienced oil executive, as CEO.

The discussions ground to a halt after Peabody and a Husky senior vice-president met on Aug. 20 with McCaig and another MEG director. MEG refused the offer.

Peabody left the meeting believing MEG "would not be open for further discussions," the filing said.

Highfields did not immediately respond to a request for comment. MEG declined to comment.

($1 = 1.2816 Canadian dollars)

(Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by Matthew Lewis)

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