The C$4.4-billion merger of privately held Husky Oil Ltd. and Renaissance Energy Ltd. may turn out to be a good deal in the long run. But Canadian oil analysts initially expect the stock for the newly created public company to be valued 15% to 20% lower than management's current estimates. "I think they're going to have a hard time convincing people it's a good deal for Renaissance shareholders, particularly over the short term," suggested Scott Inglis of First Energy Capital Corp. in Calgary. "There are a lot of assumptions embedded in the offer as to where the company would trade, pro forma. One of their key assumptions is that it will trade at an average earnings multiple for integrated oil companies. It being a private company without a history, it's unlikely to trade at an average or premium earnings multiple." "Historically, [Husky Oil] has had very low growth, which would imply that going forward it should be a company that trades at a reasonably low multiple vis-a-vis its peers," observed Tom Ebbern of Newcrest Capital Inc. in Calgary. "And by nature, the newness into the public market, as well as the fact that it still has a fairly significant controlling shareholder even after [the merger], will suggest the stock will trade at a discount." The company will be known as Husky Energy Inc. with 429 million common shares outstanding. Based upon an estimated current trading range of 15.0 times forward earnings for Canadian integrated oil and gas companies, Husky Energy would have a C$7.2-billion market capitalization and C$3.3 billion of debt. That puts the share value at C$19.40, a 28% premium to Renaissance's 10-day average closing price prior to the announcement. Inglis estimated that Husky Energy shares will trade closer to C$16.50 in the short term. Ebbern thinks a value of C$15 is more appropriate. "Certainly in time, that C$19 figure is very attainable," he said. "But to suggest that within a month of Renaissance shareholders getting Husky shares that [a shareholder] could liquidate his position and end up with C$19 in his pocket I think is very optimistic. It may take six to 12 months to realize that value." Husky Oil shareholders will pay C$18 per share for up to 27.8 million shares of Renaissance. All other Renaissance shareholders will receive one share of Husky Energy per share of Renaissance. Husky Oil is 49% owned by Hutchison Whampoa Ltd., a firm controlled by Honk Kong billionaire Li Ka-shin. He and his family own another 46% directly. Canadian Imperial Bank of Commerce owns the other 5%. The three entities could own up to 71.5% of the new company's stock if the maximum cash option is paid to Renaissance shareholders. Husky will assume Renaissance's C$1.4 billion of debt, which gives the deal a value of C$4.4 billion. Moody's Investors Services affirmed the Baa3 senior unsecured and Ba2 subordinated unsecured debt ratings of Husky Oil following the announcement. Merrill Lynch & Co. was financial advisor to Husky Oil; RBC Dominion Securities Inc. advised Renaissance. -Jodi Wetuski
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