Cameron England: Why Santos told Harbour Energy its takeover bid was not up to scratch

Santos chairman Keith Spence confidently told shareholders this month the company was in “great shape”. The company’s rejection of Harbour Energy’s $14 billion bid backs this up.

THERE was an air of resignation among shareholders at Santos’s annual meeting earlier this month.

While chairman Keith Spence and chief executive Kevin Gallagher had delivered upbeat, even bullish, forecasts for how the company would perform in the next year, there was a sense that in a few short months the company whose shares many had owned for decades, even a majority of their life on this earth, would soon be in the hands of private equity barons from the US.

One elderly shareholder received cheers when he asked the Santos board politely to make sure it got a good price for the company, and expressed frustration that the company’s many franking credits would go down the sink if the offer succeeded.

Mr Spence, in his first outing as chairman, was the picture of calm confidence, and stressed that Santos was not actually for sale. The board had not been out, touting the company to the highest bidder.

It had not even, at the time, received a legally binding bid from Harbour Energy.

Indeed Mr Spence told the meeting that Santos was “in great shape” and left no one wondering about whether he thought the bid, then priced at $6.60, should be increased.

And late Tuesday night, the board, in a strong show of confidence, told Harbour, in no uncertain terms, that it thought it could do a better job of delivering for shareholders than Harbour’s bid, which had been increased to a maximum $7 a share — with plenty of conditions attached.

In lay terms, Mr Spence told Harbour that the Santos management team and board thought they’d done a pretty good job turning the company around, and if they continued on that path, shareholders — 120,000 of which are ‘mum and dad’, retail shareholders — will do better with them than if they accepted the bid.

Mr Spence has reason to be confident.

Santos has been through the wars in recent years. Just a few short years ago it was saddled with a huge amount of debt following the construction of the Gladstone LNG plant and the company’s future was at stake.

Some hard decisions had to be made.

Managing director Kevin Gallagher and his team had the unenviable job of sacking many hundreds of workers.

The Santos share price, which had reached dizzying heights above $18 years ago, plunged below $3 less than a year ago.

But the message at the recent annual meeting was one of positivity, and a return to growth.

The company’s break-even oil price had dropped to below $40 per barrel — and the company had done it without sacrificing its commitment to safety.

The program to pay down debt was well ahead of schedule.

And the shares, even before the takeover bid, had started to recover.

Harbour’s bid could be considered what they call in the finance game “opportunistic”.

That is when you swoop in and buy up a company when it’s a little weak, but you can see the value in it.

The Santos board clearly thinks the company is worth more than its shares currently are worth, and Harbour clearly agrees.

They were going to use the company as a springboard to more growth in the region and across the globe.

But shareholders weren’t going to share in that growth.

In rejecting the bid — and cutting of all talks with Harbour — the Santos board is committing itself to doing the best it can for shareholders, which it is legally obliged to do, but it is also being courageous.

Because if they don’t pull it off, next year’s annual meeting will be full of more angry shareholders.

Mr Spence is betting that won’t be the case.

As he said in his statement Tuesday night: “Santos has a well-developed strategy, strong leadership and management team and outstanding growth opportunities that the Board believes will deliver superior value for its shareholders over time.”

The track record of the current management would give observers some faith that they are up to the task. It’s now for them to deliver.

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