Santos shareholders join forces for bid

Santos CEO Kevin Gallagher. Pic: AAP

Santos chief Kevin Gallagher says predator Harbour Energy has raised no issues in due diligence around its $13.5 billion takeover approach, as signs grow that a firm takeover bid is not far off.

The comments came ahead of Harbour Energy confirming it is seeking to agree on terms with Chinese natural-gas distributor ENN Group and private-equity firm Hony Capital that will allow it to put forward a final proposal to acquire Santos, in an announcement released to the ASX after the market closed.

“There have been no issues raised, the due diligence process is very advanced and we are effectively getting to the end of that process now,” Santos chief Kevin Gallagher said on the sidelines of the Australian Petroleum Production and Exploration Association conference in Adelaide.

“The rest is subject to confidentiality until we get to a point where Harbour either decide to make a binding offer or they don’t,” he said.

“At that point, the board will decide whether to recommend that to the shareholders.”

Harbour is under pressure to increase its $US4.98 per share cash bid that values shares at $6.67 at current exchange rates.

Mr Gallagher said he was not sure of ENN’s position.

“There’s been no contact between ourselves and ENN on that,” he said.

“I do understand the translation is incorrect and that it’s not a given” he said of reports ENN had agreed to keep its shares in an unlisted Santos if Harbour’s bid was successful.

Earlier, ENN was due to enter a trading halt in Shanghai today after talks between the company and the Hong Kong-based Harbour Energy.

In a brief announcement, ENN said it plans to fold its 10.07 per cent stake in Santos into a special purpose vehicle set up by Harbour to buy Santos.

The Shanghai announcement said the stock had been suspended for up to 30 days and that only a “preliminary agreement” had been reached

“There is still no deal yet but there is every intention to make an agreement,” a spokesman for ENN said.

The addition of ENN, which is a cornerstone shareholder in Santos, potentially bolsters Harbour’s planned acquisition of the Australian company.

It could also help for additional financing if the Harbour bidding vehicle opts to sweeten its offer in the face of higher oil prices.

Santos told the ASX it had received no notification of any agreement between Harbour and ENN, or any change in substantial holding in relation to its shares.

“There is no certainty at this time that the Harbour proposal will result in an offer for Santos that is capable of being considered by shareholders,” Santos told the ASX.

“Santos continues to advise that its shareholders take no action in relation to the Harbour

proposal at this time.”

It comes as pressure mounts on Harbour to sweeten its offer for Santos, given the recent run-up in oil prices over the past month.

The oil surge has buoyed industry sentiment and prompted Santos chairman Keith Spence to say recently that Harbour might have to stump up more than the $13.5bn that secured it due diligence.

Citi analyst James Byrne is tipping a 5 per cent increase will be needed. “Harbour will likely need to sweeten its bid to about $7 a share to compensate shareholders for the recent increase in oil price,” Mr Byrne said.

“When we spoke to investors in late 2017 at the time of the first (rejected) bid, the price at which most holders were willing to part with the stock was $6.00 to $6.50 a share. Since then, this seems to have crept up to a range of $6.50 to $7 from our discussions.”

Debt repayment by Santos that exceeded expectations has also driven higher expectations.

Harbour, run by former Shell executive Linda Cook, was ­granted due diligence in April with a $US4.98 per share approach that translated at the time to $6.50. A fall in the Australian dollar has boosted the value to $6.67 a share, but that still may not be enough.

Shares closed up 5c at $6.25 yesterday.