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TSX Takeover Offer:
Trinidad Drilling

Benj Gallander and Ben Stadelmann, Contra the Heard, preparations for Thanksgiving were interrupted by the welcome news of a friendly offer from Precision Drilling (PD) to purchase Trinidad Drilling (TDG), a holding in their Vice-President’s Portfolio, that exceeded the value of Ensign´s hostile bid. Ensign proposed a $1.68 in cash after TDG´s strategic review process came within a whisker of concluding a sale to an unidentified party last July. “The hostile bid was viewed as opportunistic by the analyst community and was significantly below the average twelve-month price target.

By contrast, Precision´s deal values Trinidad at $1.98 (based on Precision´s prior close) and is a 1 for 0.445 shares exchange. By swapping shares, Trinidad owners will have the opportunity to participate in upside should the oil rally continue. Naturally all-cash offers where one can take the money and run do have their attraction.

On some levels, PD´s offer appears to make sense strategically and operationally. The combination is expected to generate annual operating savings of $30 million, result in the sale of 50 older rigs and increase the international reach of both organizations. That sounds yummy, but almost certainly there will also be major write-downs, squishing the combined book value. Some might argue that it would be a merger of two money-losing weaklings.

Behind the scenes both management teams appear to keenly believe in the prospects of their respective companies. TDG has seen net insider buying of $628,175 over the last year while PD has seen net insider buying of $626,951.

The transaction is expected to close before year end with two-thirds of TDG owners needing to vote in favour of the transaction. While Trinidad cannot solicit third party bids, management can accept a higher offer and pay a breakup fee of $20 million should a superior proposition emerge.

Will it? Ensign would be more likely than a new contender although that would mean quite an increase from the $1.68. That said, Ensign´s balance sheet is weak and small versus Precision´s. If the two organizations were to engage in a protracted bidding war the latter has more ammunition.

We are assessing the merits of owning the combined TDG/PD entity. In the meantime, the position will be held as the parties work towards closing the deal.”

Source: Benj Gallander is co-founder & President of Contra the Heard investment newsletter and manages the President’s Portfolio. Stock picks have returned 22.5% over the past 5 years and 16.7% over the last 15 years.  Ben Stadelmann, co-founder manages the Vice-President’s Portfolio which also has impressive returns over the last five years. They are considered Canada’s foremost contrarian investors. For more information: Contra the Heard, 42 Rivercrest Rd., Toronto, ON M6S 4H3, 1 year, 4 issues, USD$680, www.contratheheard.com.

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