Suncor launches hostile bid for Canadian Oil Sands

By Nia Williams and Amrutha Gayathri

(Reuters) - Suncor Energy launched what could be drawn-out takeover battle for Canadian Oil Sands Ltd on Monday, a deal that could increase its stake in Alberta's massive Syncrude project and cement its position as the country's largest oil producer.

Suncor's all-stock offer, valued at about C$4.3 billion ($3.29 billion), comes as slumping oil prices squeeze Canadian oil sands producers, which have some of the world's highest operating costs.

Canada has the world's third largest crude reserves after Saudi Arabia and Venezuela, and the oil sands in Alberta are a leading source of U.S. crude imports.

Canadian Oil Sands and Suncor are among stakeholders in Canada's largest synthetic crude project, Syncrude, in northern Alberta. Suncor said its share in Syncrude would rise from 12 percent to 48.74 percent under the proposed deal.

Canadian Oil Sands, which owns roughly 37 percent of Syncrude, urged shareholders not to act on the all-share offer, saying it will review the Suncor bid and advise them in due course.

But a source familiar to the matter, who is not authorized to publicly discuss the bid, said that Canadian Oil Sands is set to reject the Suncor proposal.

Canadian Oil Sands rose more than 48 percent to C$9.18 on the TSX, well above Suncor's implied offer price, clearly suggesting investors expect a rival bid or sweetened offer to emerge.

Exxon Mobil's majority-owned subsidiary Imperial Oil, which operates the Syncrude asset, is widely seen as the most likely rival bidder.

Imperial declined to comment on whether it would consider making a counter offer, and at least one analyst was skeptical about whether Imperial would jump into the fray.

BMO's Randy Ollenberger said an Imperial bid was unlikely since Syncrude is situated next to Suncor's existing oil sands operations, giving it the opportunity to generate more cost savings than Imperial could.

Canadian Oil Sands shareholders will receive 0.25 of Suncor shares for each share held, the company said.

The offer works out to C$8.84 per share based on Suncor's Friday close and represents a premium of about 43 percent to Canadian Oil Sands' most recent close on the Toronto Stock Exchange.

Suncor will assume Canadian Oil Sands' debt of C$2.3 billion as of June 30.

Suncor has been scouting for assets and in September bought a tenth of the Fort Hills oil sands project in northern Alberta from French oil company Total.

Suncor Chief Executive Steve Williams said the company approached Canadian Oil Sands in March and April with proposals, both of which were rejected.

"We still think the case is compelling for both Suncor and Canadian Oil Sands shareholders, a classic where put them together and one plus one equals three," he said in an interview.

Suncor said it was well-positioned to benefit from the offer because of integrated operations that include a refinery in Montreal. It estimated the deal would result in C$25 million in administrative savings.

(Wiht additional reporting by Amrutha Gayathri in Bengaluru, Mike De Souza in Calgary and John Tilak in Toronto; Additional writing by Euan Rocha and Jeffrey Hodgson; Editing by Sriraj Kalluvila, Matthew Lewis and Richard Chang)