Big banks line up for Santos-Woodside merger talks

Woodside Energy’s Macedon gas treatment plant. Picture: Woodside Energy

Morgan Stanley’s hopes of banking lucrative fees from a sale of Woodside Energy’s $US500m-plus Pyrenees and Macedon oil and gas assets in Western Australia have been dashed for now, but a bigger payday could be coming down the pipeline in 2024 with an $80bn Santos merger.

It’s a similar case with Goldman Sachs and the Santos-owned Dorado, for which it was searching for an investor.

But now Goldman has its eyes on a far bigger prize, being on Santos’s side as adviser on the merger talks with Woodside, which is advised by Morgan Stanley.

For a simple scrip merger (if that’s what is being explored – it’s early days), it’s interesting that Santos has three banks aiding it with a possible transaction.

One explanation is that the trio – Citi, Goldman Sachs and J.B North & Co Advisory – have all been tasked with slightly different assignments.

One might be working on the straight scrip merger, another looking for buyers of its assets domestically in a break-up play, and another shopping the business to global energy players like ConocoPhillips and BP.

The prize for Woodside would be the Santos gas assets in PNG and its Alaskan assets, while it may be quite keen on GLNG in Queensland and some in the Northern Territory like Barossa, while the West Australian assets, Cooper Basin and Narrabri in NSW would be sold over the longer term.

If the price from Woodside is not right, Santos chief executive Kevin Gallagher would almost certainly look to break up the business, selling Beach Energy its domestic assets and demerging LNG assets into a separate entity that Woodside could then bid for.

The problem for the investment banks is that the stakes are high, and as seen with Origin Energy, large deal teams can be tied up on transactions for almost 18 months only for there to be no result at the end.

A key condition for Origin’s defence advisers gaining all the $30m-plus transaction fees on offer when Brookfield and EIG were making their $16bn play for the business was that the business be sold, which proved not to be the case.

Investment banks have likely been hustling hard for transactions in the final months of the year, after what has been a lean year.

There have been lots of discussions and attempts to sell big assets, but few things have come to fruition.

And if they have, they’ve proven unpopular with investors. The share prices of companies such as Orora and Treasury Wine have tanked after equity raisings to fund their transformational deals.

A result on a smaller transaction, while it may not pay as much, doesn’t require as many resources.

With Woodside and Santos, many are not convinced that there will be a merger at the end of it.

However, both are serious about a tie-up.

Gallagher probably wants a buyout on his way out, which many believe will not be too far away, as he is known to be caring for a sick family member and the Santos share price has been lagging.

And Santos shareholder pressure is mounting for something to happen. The hope for Woodside is that investors lobby the board.

Woodside wants to buy Santos while it’s vulnerable.

Sources questioned whether the Richard Goyder-led Woodside board was even on board with such a deal yet.

The proposal has come as a big surprise to many in the market.

They are surprised Woodside would go for Santos when its messaging has always been that it wants to expand offshore and isn’t that attracted to domestic gas.

One thought from an industry expert is that perhaps Woodside has had a change of position on being so exposed to oil and less so to gas.

But until the talks play out, all other sale processes for smaller assets relating to Santos and Woodside will likely be on hold.