(Bloomberg) — Strathcona Resources Ltd. increased its bid for oil sands producer MEG Energy Corp., seeking to break up the oil sands producer’s sale to larger Canadian rival Cenovus Energy Inc.  

Strathcona, controlled by former investment banker Adam Waterous, is now offering 0.8 of a share for each share of MEG, valuing the Calgary-based target at around C$7.8 billion ($5.7 billion) at current prices. The new price is about 10% higher than Strathcona’s original takeover bid and tops the price Cenovus agreed last month to pay for MEG. The new offer expiry date is set on Oct. 20, 11 days after shareholders are scheduled to vote on the Cenovus offer. 

The new offer from Waterous marks the latest twist in the biggest takeover drama in the Canadian oil patch since Brookfield Infrastructure Partners LP succeeded in acquiring Inter Pipeline Ltd. four years ago in a battle with Pembina Pipeline Corp. 

Strathcona’s initial offer for MEG was criticized by some shareholders as too low, and the Cenovus takeover also wasn’t well received by some investors since it valued the company at less than the previous day’s closing price. 

Waterous said his proposal allows MEG shareholders to benefit from the upside of the combination, while Cenovus’ mostly cash deal would force them to “get off the train.”

“I have not spoken to a single MEG shareholder who is happy with the Cenovus MEG board deal,” Waterous said in an interview Monday.

MEG said its board and a special committee it has formed will evaluate Strathcona’s latest offer and will respond before Sept. 15.  

Cenovus didn’t immediately respond to an email seeking comment on the new Strathcona offer. 

Cenovus doesn’t anticipate it will enhance its offer, which it believes is already full and fair, according to a person with knowledge of the situation, who declined to be identified because they aren’t authorized to comment. 

Strathcona had acquired a 9.2% stake in MEG when he first introduced his bid, and he had increased the stake to 14.2% as of last week. Waterous has pledged to vote his shares against the Cenovus deal, which requires just over 66% of votes cast. If successful, a takeover of MEG would be the biggest acquisition yet for Strathcona, which Waterous built through a flurry of deals over the past decade.

MEG has repeatedly shunned Waterous’ advances, first saying it wasn’t interested in a sale when he’d approached the company’s board and later urging shareholders to reject his offer after he took it directly to investors. The board argued that the bid was too low and would expose its investors to “inferior assets.” 

MEG then started a review of alternatives and last month agreed to a takeover by Cenovus. The Cenovus bid values MEG at a little more than C$7 billion, based on Friday’s closing share price — but it’s also three-quarters cash. Strathcona’s offer is all shares. 

Strathcona’s most recent offer also will provide shareholders with a special dividend of C$5.22 per share in the fourth quarter, making the bid “the most attractive offer on the table,” said Smead Capital Management Chief Executive Officer Cole Smead. His firm owns shares in all three companies.

“The ball is in Cenovus’ court to see if their synergies and other financial benefits math to a higher offer,” Smead said.

Cenovus and MEG see the ability to eventually cut more than C$400 million in costs because they have operations near each other in northeastern Alberta, where MEG pumps about 100,000 barrels of crude a day. Strathcona can capture most of the synergies that Cenovus identified, other than developing adjacent wells along the property’s lease line, Waterous said. 

MEG’s shares rose 2.4% to close at C$29.02 in Toronto, the highest in more than a year but below the per-share value of Strathcona’s most recent bid at current share prices. MEG had been trading above the cash price of Cenovus’ offer for the past two weeks. Strathcona shares fell 0.3% to C$38.31, while Cenovus was little changed at C$22.12.

–With assistance from Derek Decloet.

(Updates with Cenovus view on offer in ninth paragraph)

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