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Pipelines and storage tanks at the Husky Energy oil storage terminal in Hardisty, Alb., on June 15, 2016.

Larry MacDougal/The Canadian Press

Husky Energy Inc. has abandoned its quest to acquire MEG Energy Corp. in a $3.3-billion hostile offer, confounding investors and triggering a selloff in MEG shares.

Husky said fewer than its threshold of two-thirds of MEG shares were tendered by a Wednesday deadline, so it chose to walk away and concentrate on its own business rather than extend the cash-and-stock offer. It had been widely expected to win its play for the oil-sands producer, as MEG had failed to attract a higher bid in a negative market for Canadian oil and gas stocks.

MEG shares fell 36 per cent to $5.50 on the Toronto Stock Exchange after the surprise move on Thursday, a drop of more than $900-million in market value.

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“I would challenge you to find one person on the planet who expected this to be the outcome,” said Eric Nuttall, senior portfolio manager at Ninepoint Partners LP in Toronto. “I even threw out my MEG file, not expecting to have to revisit it.”

Husky declined to disclose the total of shares tendered to the bid, though spokesman Mel Duvall said it was more than 50 per cent of those outstanding. It had offered $11 a share in cash, up to $1-billion in total, or 0.485 of a Husky share for each share in MEG, which is known for its Christina Lake, Alta., steam-driven oil sands project.

“Given the outcome of the tender process, Husky will continue to focus on capital discipline and the delivery of the five-year plan we set out at our investor day in May, 2018,” Rob Peabody, Husky’s chief executive officer, said in a statement. Husky shares jumped more than 12 per cent on Thursday.

Two negative factors influenced the market during the bid period, Husky said. One was the Alberta government’s mandated oil production cuts, which the company said amounted to meddling in the market; indeed the discount on Canadian heavy oil versus U.S. benchmark crude has shrunk to levels not seen in a decade, and as a producer without refineries MEG has benefited from the improvement. The other factor was Canada’s continuing inability to add export pipeline capacity, it said.

The explanation did not satisfy some MEG shareholders, who said Husky could have extended the bid. Some wondered if Canada’s current diplomatic friction with China may have played a role in its decision. Husky is majority-owned by companies controlled by the family of Hong Kong billionaire Li Ka-shing. Mr. Duvall said that was not a consideration.

Husky launched the unsolicited bid in early October, saying that MEG shareholders would be better served in a larger company that could absorb its heavy debt load. MEG’s board subsequently rejected the offer and said investors should been offered more. As late as last month it reiterated its recommendation to take a pass.

That did not sit well with David Taylor, president and chief investment officer of Taylor Asset Management, a long-term shareholder of MEG. Mr. Taylor said he had no idea why any investors wouldn’t tender, given obvious downside risk.

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“I’m just really, really upset right now,” he said.

“If they really wanted to do what was right for shareholders, and the board knew that if people didn’t tender the stock was going to fall 40 per cent – which they should have known. ... They could have come out and said, ‘We recommend shareholders tender into the Husky bid,' knowing there was no other bid.”

For its part, MEG said the shareholder rejection showed how the “bid did not fully recognize the quality and long-term potential" of the company. CEO Derek Evans said in a statement MEG would provide an update on its business plan in the near future.

Royal Bank of Canada’s asset management arm is MEG’s sixth-largest investor, and the bank tendered its shares to the bid – but declined to comment on its motivations for doing so. Officials from MEG’s two largest shareholders according to Bloomberg’s latest data, China’s CNOOC Ltd. and Boston-based Highfields Capital Management, did not respond to queries into whether they tendered.

With a report from Tim Kiladze

Editor’s note: An earlier version of this story incorrectly stated Husky required at least 50 per cent of MEG shares for the cash-and-stock bid to be extended. In fact, it required two-thirds of shares.
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