Investors were greeted with some significant news on Monday morning concerning a merger and the Obama administration's "Toxic Asset" plan. Both news items were met with positive reactions from global equity markets. The S&P/TSX index climbed 5.32%, the Dow Jones 6.84% and the S&P500 7.08%. The broader S&P 500 closed above 800 points - a key technical indicator that analysts said had represented a significant barrier to gains.
Suncor Energy Inc. and Petro-Canada released a joint statement early Monday morning announcing the details of an all-stock deal that will see the companies form an entity with a combined market capitalization of $43.3-billion. The new corporation would continue to operate and trade under the Suncor name.
According to the companies, Petro-Canada shareholders are to receive 1.28 shares of the merged company for every Petro-Canada share they hold, while Suncor stockholders would receive a share in the new venture for each Suncor share they own. The companies say the deal represents a 25 per cent premium on the 30-day weighted average of Petro-Canada shares. The deal values Petro-Canada at $19.18 billion based on Friday's closing prices on the Toronto Stock Exchange. Existing Suncor shareholders would hold 60 per cent of the new company, while Petro-Canada shareholders would hold 40 per cent.
One challenge to the deal will be the Petro-Canada Public Participation Act, which states no person or company can own or control more than 20 per cent of the company's voting shares and the head office must remain in Calgary. Suncor could potentially get around the act by lobbying the government to change the law stressing the takeover is coming from a domestic company. The Act was created to prevent foreign majority ownership. Suncor could also structure the deal as a reverse takeover when Petro-Canada, legally speaking, would be taking over Suncor.
The Obama administration unveiled a program on Monday that may generate as much a $1 trillion in financing to buy illiquid assets using $75 billion to $100 billion from the U.S. bank rescue fund. The effort relies on a Federal Reserve partnership with private investors to buy the securities and FDIC guarantees to entice buyers. Tresury Sectretary Timothy Geithner said Monday the government will invest alongside private parties in funds that will buy troubled loans and securities from banks. The government will also lend the buyers money.
By providing a source of cheap, abundant financing, officials are hoping to bring together buyers and sellers in the troubled-asset marketplace. That market has been at a stalemate for months, with banks unwilling to accept the distressed prices vulture investors have been dangling.
The Treasury proposes a hypothetical transaction in which a bank would seek to sell a pool of residential mortgages with $100 in face value through an auction process and receives a bid of $84 for them. The FDIC would then provide cheap financing to the winning buyer. In essence $7 will come from the private sector which in an auction process will help determine a price for these mortgages, $7 will come from the federal government and the remaining $84 from a government backed loan. Markets reacted favorably as the concerns over the credit situation with the banks seems to have been addressed - at the very least there is a plan in place. Geithner had announced the plan about a month ago but with no specifics and as we all know the markets want to see details and does not like surprises. Time will tell if this plan will put us on the path to recovery.
Source: The Globe and Mail, CNN Money.com, Wall Steeet Journal, Bloomberg
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