Savanna Energy Services Corp (TSX: SVY), a Calgary-based contract drilling and oilfield services company, has agreed to be acquired by Western Energy Services Corp (TSX: WRG). The deal, which will see Savanna shareholders receive, for each Savanna share held, 0.85 of a Western share, is valued at about $533 million, including debt, Western said in a separate release. It is expected to close later this year. Western said the deal will create a stronger, more diverse global oilfield service company. Late in 2016, Alberta Investment Management Corp (AIMCo) agreed to provide Savanna with about $219 million in debt and equity financing.
Savanna Announces Agreement for the Acquisition of Savanna by Western Energy Services Corp. and Unanimously Recommends Rejection of Total’s Amended Unsolicited Offer for Savanna
CALGARY, ALBERTA–(Marketwired – March 9, 2017) – Savanna Energy Services Corp. (“Savanna”) (TSX:SVY) is pleased to announce that it has entered into an arrangement agreement (the “Arrangement Agreement”) with Western Energy Services Corp. (“Western”) (TSX:WRG) pursuant to which Western has agreed to acquire all of the issued and outstanding common shares of Savanna (the “Savanna Shares”) on the basis of 0.85 of a common share of Western (the “Western Shares”) for each outstanding Savanna Share. The transaction is to be completed by way of a plan of arrangement under the Business Corporations Act (Alberta) (the “Arrangement”).
The consideration reflects a value of $2.30 per Savanna Share based on the volume weighted average trading price of Western Shares on the Toronto Stock Exchange (the “TSX”) for the ten day period ended March 8, 2017 of $2.71, which represents a 14.5% premium over Savanna’s volume weighted average trading price on the TSX for the same period of $2.01.
Chris Strong, President and Chief Executive Officer of Savanna, stated: “This transaction, which has received the unanimous support of the special committee and the Savanna board, provides a compelling opportunity for Savanna and its shareholders. It creates a larger and more competitive company that remains centred on contract drilling and well servicing while offering enhanced exposure to the North American oil and gas industry recovery. The combined company will own the second largest contract drilling fleet and well servicing fleet in Canada. Along with the combined company’s US operations and Savanna’s continuing operations in Australia, this is a broad platform from which to grow operations to meet customer demand.”
Added Mr. Strong: “We reached this agreement following a comprehensive process to review all available strategic alternatives for Savanna to maximize value for our shareholders. The Arrangement delivers a higher premium and much larger ownership for Savanna shareholders in the ongoing company than Total’s unsolicited offer. Equally as important, the combination represents true consolidation in drilling and well servicing in both companies’ core Canadian market with customer bases that largely complement rather than overlap each other, which is expected to provide certain benefits of consolidation within these sectors.”
The board of directors of Savanna (the “Savanna Board”) is recommending that its shareholders vote in favour of the Arrangement at a meeting of shareholders to be held in May 2017, in order to benefit from the value and opportunity of the pure play combination with Western. The Savanna Board also recommends that shareholders reject, and not deposit their Savanna Shares to, the Total Offer (as defined below). Any shares deposited to the Total Offer can be withdrawn by contacting D.F. King, the Information Agent retained by Savanna.
COMPELLING STRATEGIC RATIONALE
The Arrangement is expected to provide holders of Savanna Shares with the opportunity to own a material stake in a larger drilling company with:
The second largest contract drilling and second largest well servicing fleet in Canada;
A broader, more diverse, domestic and international drilling platform from which to grow operations to meet customer demand;
An expanded customer base with greater geographic exposure within key operating areas throughout North America and a leading position in the Australian onshore drilling and well servicing market;
Increased ability to strategically move equipment to meet customer demand and capture growth opportunities;
A stronger organization after integrating talent at the board, senior management and employee levels;
Significant operational synergies and efficiencies through combining operational facilities and reduced corporate and professional fees; and
Potentially enhanced shareholder liquidity, with reduced cost of capital and future access to capital to fund future growth and acquisition opportunities.
The Savanna Board considered a number of factors in recommending the Arrangement including:
The premium offered pursuant to the Arrangement;
The Arrangement is a better strategic opportunity, providing Savanna shareholders with the opportunity to own a material stake in a stronger company that remains focused on drilling and well servicing;
The Arrangement provides Savanna shareholders with enhanced exposure to a recovery in industry activity levels;
Western is highly experienced in operating a large scale contract drilling and well servicing company;
The Arrangement is the result of an active and thorough strategic alternatives process conducted by Savanna to maximize value for all of its shareholders;
Peters & Co. Limited and Cormark Securities Inc. have each provided fairness opinions in respect of the Arrangement;
There is less risk to completing the Arrangement as compared to the Total Offer;
The Arrangement requires Court approval and shareholders of Savanna will be granted rights of dissent;
Savanna’s directors and officers and certain other shareholders have agreed to vote in favour of the Arrangement; and
The Savanna Board has preserved the ability to respond to unsolicited superior proposals.
COMBINED FLEET AND OPERATIONS UPDATE
The combined rig fleet will position the company to pursue a broad range of opportunities. Western’s fleet focuses on Montney and Duvernay class rigs suited to drilling longer reach horizontal wells, while Savanna’s fleet is weighted to Cardium class rigs. Savanna’s Cardium class rigs cover a wide spectrum, from trailer singles (ideally suited for drilling in the Viking oil play) and hybrids (ideally suited for the Oil Sands region) to deeper telescopic double rigs that are more like Western’s Cardium class doubles. In the United States, Western has five Duvernay class rigs located in North Dakota, which will be complementary to the Savanna fleet located in the Permian, Marcellus and Rockies regions. In Australia, the fleet has been purpose built to meet the demands of LNG operators in the Surat Basin. The combined drilling rig fleet consists of 157 drilling rigs as summarized below: (See data and notes here.)
In Canada, the combined company’s rig fleet would consist of 119 drilling rigs (68 from Savanna and 51 from Western) and 123 service rigs (57 from Savanna and 66 from Western). On a combined basis, the rig fleet would have had utilization rates of 54% and 39% in February 2017 for drilling and service rigs respectively, and would have generated the second highest number of drilling days in Canada in the first two months of 2017 (source: Canadian Association of Oilwell Drilling Contractors). Management believes this aggregate fleet size and utilization level is highly competitive among the top providers of contract drilling and well services in Canada.
In the United States, the combined rig fleet would consist of 33 drilling rigs (28 from Savanna and five from Western), and 18 service rigs from Savanna. On a combined basis, the rig fleet would have had utilization rates of 25% and 35% in February 2017 for drilling and service rigs respectively.
In Australia, where only Savanna has operations, the combined rig fleet consists of Savanna’s five built-for-purpose drilling rigs and 12 built-for-purpose service rigs. Management of Savanna believes it is in a strong position in the Australia oilfield services market with a long track record of providing operational and safety performance to its customers.
THE ARRANGEMENT AGREEMENT
The Arrangement Agreement contains customary representations and warranties of each party, non-solicitation and interim operations covenants by each party, and right to match provisions in favour of each party. Pursuant to the Arrangement Agreement, a termination fee of $15 million will be payable by either party in certain circumstances, including in certain circumstances if a superior proposal is announced or made.
The Arrangement is subject to customary conditions for a transaction of this nature, which include court and regulatory approvals (including the TSX), the approval of 66 2/3% of the votes cast by Savanna shareholders represented in person or by proxy at a meeting of Savanna shareholders to be called to consider the Arrangement and a majority of the votes cast by Savanna shareholders after excluding the votes cast by those persons whose votes may not be included under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions and the approval of a majority of the votes cast by Western shareholders represented in person or by proxy at a meeting of Western shareholders to be called to approve the issuance of Western Shares pursuant to the Arrangement in accordance with the rules of the TSX.
Pursuant to the Arrangement Agreement, it is expected that Chris Strong, President and Chief Executive Officer of Savanna and another mutually acceptable nominee will join the board of directors of Western on completion of the Arrangement.
An information circular (the “Information Circular”) regarding the Arrangement and the other matters to be considered at the Savanna shareholders’ meeting is expected to be mailed to shareholders in April 2017. Closing of the Arrangement is expected to occur shortly after the shareholders’ meeting.
A copy of the Arrangement Agreement and the Information Circular will be filed on Savanna’s SEDAR profile and will be available for viewing at www.sedar.com.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Based upon verbal fairness opinions from Peters & Co. Limited and Cormark Securities Inc. and the recommendation of the Special Committee of the Savanna Board, and after consulting with its financial and legal advisors, among other things, the Savanna Board has unanimously approved the Arrangement and unanimously determined that the Arrangement is fair to the Savanna shareholders and is in the best interests of Savanna and its shareholders. The Savanna Board unanimously recommends that Savanna shareholders vote in favour of the Arrangement.
All of the directors and officers of Savanna and certain other shareholders, holding an aggregate of 13.1% of the issued and outstanding Savanna Shares, have entered into voting support agreements with Western pursuant to which they have agreed to, among other things, support the Arrangement and vote their Savanna Shares in favour of the Arrangement, subject to the terms of the voting support agreements.
All of the directors and officers of Western, holding an aggregate of 14.4% of the issued and outstanding Western Shares, have entered into voting support agreements with Savanna pursuant to which they have agreed to, among other things, vote their Western Shares in favour of the resolution to approve the issuance of Western Shares pursuant to the Arrangement, subject to the terms of the voting support agreements.
REJECTION OF TOTAL OFFER
The Savanna Board, on the recommendation of the Special Committee of the Savanna Board, has unanimously determined that Savanna shareholders should continue to reject the amended offer from Total to purchase all of the Savanna Shares on the basis of 0.13 common shares of Total and $0.20 in cash for each Savanna Share (the “Total Offer”).
A notice of change to the directors’ circular dated December 23, 2017 containing the Savanna Board’s recommendation to reject the Total Offer and setting out the reasons for the recommendation will be filed and mailed to Savanna shareholders shortly.
Peters & Co. Limited is acting as financial advisor to Savanna in respect of the Arrangement and has provided the Savanna Board with its verbal opinion that, subject to the assumptions, qualifications and limitations contained therein and its review of the final form of the documents affecting the Arrangement, the consideration to be paid to holders of Savanna Shares pursuant to the terms of the Arrangement is fair, from a financial point of view, to the holders of Savanna Shares.
Cormark Securities Inc. has provided the Savanna Board with its verbal opinion that, subject to the assumptions, qualifications and limitations contained therein and its review of the final form of the documents affecting the Arrangement, the consideration to be paid to holders of Savanna Shares pursuant to the terms of the Arrangement is fair, from a financial point of view, to the holders of Savanna Shares.
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.
Savanna Energy Services Corp.
President and Chief Executive Officer
Savanna Energy Services Corp.
Executive Vice President and Chief Financial Officer
Longview Communications Inc.
D.F. King Canada
(Toll Free): 1-800-622-7678
Photo courtesy of Savanna Energy Services Corp