Canadian Oil Sands shares rose 55 percent to C$9.60 on the TSX, well above Suncor's implied offer price, suggesting investors expect a rival bid or sweetened offer to emerge.
A source familiar with the matter, who is not authorized to publicly discuss the bid, said that Canadian Oil Sands is set to reject the offer. Canadian Oil Sands urged shareholders not to act on the all-share offer as it reviews the bid.
Bankers and investors said the bid is unlikely to launch a wave of consolidation in Canada's oil sands industry, which has some of the world's highest operating costs and lowest prices, as many companies are wary of doing deals while the outlook for oil prices remains uncertain.
The offer, valued at about C$4.3 billion ($3.29 billion), comes as slumping oil prices squeeze Canadian oil sands producers.
A successful deal would lift Suncor's stake in the Syncrude oil sands project, the largest single-source producer of oil in Canada, from 12 percent to 48.74 percent. The project produced just over 300,000 barrels per day of light, sweet synthetic crude in August.
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," he said in an interview on Monday. "This deal is not conditional on this being the bottom (for oil prices). We have actually looked at a case where it stays lower for longer and even in these market conditions we've been producing free cash."
Canadian Oil Sands, which owns roughly 37 percent of Syncrude, posted a loss in the third quarter and last month said it had reviewed selling a small portion of its future production but decided against it.
Canadian Oil Sands shareholders would receive 0.25 of Suncor shares for each share held. Suncor's shares slipped 2.2 percent to C$34.60, making the offer worth C$8.65 per share. Suncor would also assume Canadian Oil debt of C$2.3 billion.
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.
Bankers and investors, noting still low crude prices, said mergers and acquisitions are more likely to pick up in 2016 as expiring hedges hurt the cash flows of some companies.
"We might have some targeted strikes, like this one, probably from well-capitalized (firms)," said one Canadian energy-focused investment banker, who spoke on condition of anonymity to protect client relationships.
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 said it was well-positioned to benefit because of integrated operations that include a refinery in Montreal. It estimated the deal would result in C$25 million in administrative savings.
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.
(With additional reporting by Mike De Souza in Calgary and Euan Rocha, John Tilak in Toronto; Additional writing by Jeffrey Hodgson; editing by Sriraj Kalluvila, Matthew Lewis and Richard Chang)
By Nia Williams and Amrutha Gayathri
