The move by Santos to sweeten its offer for Oil Search comes after the two energy giants engaged in heavy negotiations at the weekend, according to sources.
Santos had been pushing for the company to engage all week, and Oil Search finally agreed on Thursday night that it would enter talks, and a presentation was scheduled for 4pm on Friday.
As a result, both companies have reached an agreement for a $21bn transaction that will be one the largest oil and gas mergers and acquisitions deals in Australian corporate history and in the world.
As announced on Monday, Oil Search shareholders will now secure 0.6275 new Santos shares for every Oil Search share held, with Oil Search shareholders owning 38.5 per cent of the merged group.
The proposal, via a scheme of arrangement, follows an earlier offer by Santos to merge with Oil Search for 0.589 new Santos shares per Oil Search share, where it owned 36.9 per cent.
This offer was rejected by the Oil Search board.
While Santos boss Kevin Gallagher will be the chief executive of the merged entity, the makeup of the board has yet to be determined.
The transaction, which makes the company one of the 20 largest in Australia and one of the 20 largest in the world, will provide greater ease in gaining funding for projects.
With environmental, social and governance factors weighing on the minds of investors, gaining funding for major developments like Oil Search has in Alaska has been more challenging, as is the case with the development of Woodside’s Scarborough gas field.
It is this factor driving corporate activity in the sector, along with the fact that some major players are fast running out of growth options.
Experts believe the merger will now lead to consolidation among smaller players such as Beach Energy, Senex and Cooper Energy, as scale becomes increasingly important.
All eyes are now on Woodside and BHP to see if they could be next in embarking on a giant-sized oil and gas deal, with talk in the market that Woodside is working on a transaction to buy BHP‘s $US$15bn petroleum unit.
The Santos merger was led by Citi’s Australian investment banking head Alex Cartel and the company’s long time adviser, Jon North at J.B North & Co.
Working to defend Oil Search has been Goldman Sachs, Macquarie Capital and Rothschild.
Most believe that the merger will be given the all-clear from the government of Papua New Guinea, where the bulk of the Oil Search business is based, with it subject to PNG court approval and regulatory approval.
Santos jointly owns the PNG LNG project with Oil Search, holding 13.5 per cent and 29 per cent respectively, so it knows that asset well.
Oil Search also owns a 22.8 per cent share in the Papua LNG development, along with its smaller Alaska division, which some now expect could be offloaded under Mr Gallagher’s watch.
Deal makers elsewhere are betting that more asset sales by Santos will be on the cards.
The latest offer implies a price of $4.52 per Oil Search share after shares on Friday closed at $3.81 and were trading at about $3.65 before the interest from Santos became known, falling on the back of the announced shock departure of the company’s chief executive Keiran Wulff.
This is based on the Santos closing share price on June 24 – one day before Santos submitted its first proposal.
The offer is a 19.7 per cent premium to the closing price of Oil Search’s shares on that date.
It allows for a dignified exit for chairman Rick Lee, who was criticised over the handling of the Santos approach and Mr Wulff’s departure.
Santos now gets exclusive due diligence, likely to take about four weeks, and Oil Search will also do due diligence on Santos, with Oil Search recommending the proposal.
The Oil Search board will grant Santos exclusive due diligence, subject to the parties entering into an acceptable confidentiality agreement, over about four weeks.
Oil Search will also undertake due diligence on Santos during the period.
Oil Search said it believed that the revised proposal presented Oil Search shareholders with an opportunity to maintain ongoing exposure to Oil Search’s portfolio of world class assets as part of a merged group for which there is strategic logic.
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