Suncor, Petro-Canada merge to create company worth $43.3 billion

CALGARY - The merging of Suncor Energy Inc. (TSX:SU) and former Crown corporation Petro-Canada (TSX:PCA) could create a Canadian energy giant hefty enough to compete with heavyweights like ExxonMobil Corp. (NYSE:XOM) in the North American arena.
The combined company, which would have a market capitalization of $43.3-billion and would operate under the Suncor name, would be the largest energy company in Canada and the fifth largest in North America.
"It's a made-in-Canada response to the challenges presented by global market uncertainty today," Petro-Canada CEO Ron Brenneman said on a conference call with analysts Monday.
"We need to face head-on the issue of global competition in a time of economic uncertainty. In these difficult times, we believe that joining forces provides the strength we need to be a leader in value creation in an extremely competitive industry."
Under the proposed all-stock deal worth more than $19 billion, Petro-Canada shareholders would own 40 per cent of the new Calgary-headquartered entity and Suncor shareholders would own the rest.
Petro-Canada shares (TSX:PCA) shot up more than 20 per cent on trading on the Toronto Stock Exchange, rising $6.05 to $35.70 while Suncor's stock lost more than two per cent, or 69 cents to$30.21.
The companies, both headquartered in Calgary, both active in the Alberta oilsands and both involved in refining and retailing, say their plan will reduce their costs by $300 million at a time when Alberta's oilpatch grapples with tough economic conditions.
Part of those savings will include some job losses where positions overlap with one another, Suncor CEO Rick George told reporters.
"That is going to be difficult," he said, declining to give specifics on how many workers would be affected.
"I don't want to minimize the concern about jobs, especially in these difficult times, but I want to underline that in the mid to long-term ... the merger will be a strong contributor to job creation and wealth creation in this country as we pursue growth in ways that were not achievable with two separate companies."
Petro-Canada's portfolio spans Canada and the globe, with assets in the oilsands, Canada's East Coast, Libya, the North Sea and elsewhere.
By contrast, Suncor, the oldest and second-largest oilsands operator, has bulk of its activities centred around that industry.
Suncor's George told the conference call that the merged company would be focused on Canada and the oilsands, but that all of the assets will be evaluated.
"This will be a very disciplined approach. It will not be scattergun. But it will be a Canadian oilsands-centric type of strategy," George said.
While the combined entity will keep the Suncor name on the corporate level, Petro-Canada's brand will remain when it comes to selling refined products like gasoline and diesel.
"What we're trying to do here is take advantage of the brand value that both of these companies represent. We believe that Suncor has an excellent brand recognition in the investment community and that's why we've chosen together to go forward with the Suncor name corporately," said Brenneman.
"But we also recognize that Petro-Canada has the No. 1 brand recognition in the Canadian marketplace and so we want to take advantage of that by marketing our petroleum products jointly through the Petro-Canada brand."
The companies said the merged corporation will continue to be bound by the Petro-Canada Public Participation Act, a piece of federal legislation that prohibits any group from holding more than 20 per cent of voting shares in the former Crown corporation.
Officials for both the Department of Finance and the Competition Bureau said they would be evaluating the merger.
Edward Jones analyst Lanny Pendill said he had expected a major international firm to scoop up either company, and that the merger came as a surprise.
"It does create a supermajor up in Canada. I think it definitely increases the competitive strength of the combined company, particularly in light of today's more challenging environment," he said in an interview from St. Louis.
"It does improve their financial position and adds flexibility."
Current Suncor shareholders will receive one share in the new venture for each Suncor share they own, while investors who own Petro-Canada stock will receive 1.28 shares of the new company for each share they hold.
The deal values Petro-Canada at $19.18 billion based on Friday's closing prices on the Toronto Stock Exchange. The new corporation boasts 7.5 billion barrels of oil equivalent per day in proved and probable reserves, the two companies said.
While the merged entity will be smaller than other global heavyweights such as Exxon Mobil and ConocoPhillips (NYSE:CP) - which boast market capitalizations of US$326.6 billion and US$55.97 billion respectively - Suncor's George said the firm will be elevated into the same playing field.
"This sets up in my mind, hopefully, a very efficient Canadian company that will compete against the Americans and the Europeans in our back yard," said Suncor's George.
The deal, which is subject to regulatory and shareholder approval, is slated to close in the third quarter of 2009.
17:20ET 23-03-09