How the $30bn takeover of Santos turned to dust
There were signs Australia's biggest energy deal in decades was starting to fall apart but a single move by the Santos board sealed its fate.
The warning signs that a $30bn deal was on shaky ground came deep inside the 56-storey headquarters of the Abu Dhabi National Oil Co overlooking the Persian Gulf.
Several Australian journalists had been lured to downtown Abu Dhabi on Monday with the promise of a no-holds barred, on-the-record interview with one of the most powerful players in global energy markets.
Mohamed Al Aryani headed up global strategy and oversaw gas on behalf of ADNOC and worked as the on-the-ground executive leading the bid for Australia’s second-largest gas producer Santos.
Just minutes before the interview was due to start, media were told all previous promises had been shelved. Nothing could be used on the record. It marked the first visible signs of a wobble.
The trigger for the about-turn had been hatched 11,000km away in Santos’s head office in Adelaide when its board delivered ADNOC a bombshell of its own.
Chair Keith Spence lobbed a letter to ADNOC chief executive Sultan Al-Jaber reiterating a plan for a deal at the $US5.626 offer price – if his Gulf suitor kept its side of the bargain by submitting a binding deal by September 19.
If that was the headline, the information within the letter sent shockwaves through the Middle East bidder.
Spence laid out details on a surprise withholding tax charge in Papua New Guinea that ADNOC was expected to pay. He also addressed the issue of holding off sending the scheme booklet to shareholders until Foreign Investment Review Board approvals had been given. And an expected FIRB condition for the new owner to develop and supply gas to the domestic market also received an airing.
From the Santos side, these were classed as “risk allocation” issues which it had repeatedly raised with ADNOC’s bidding vehicle, the XRG consortium, but had been ignored.
Given XRG at one stage had 500 people involved in due diligence frustrations were brewing in the Santos camp over sealing the final details of the deal.
For Abu Dhabi, the issues raised by the Santos chairman raised a new threshold of risk.
“It was effectively saying, ‘take it or leave it’. We decided to leave it,” said one source close to the XRG camp.
A phone hook-up at 4.30pm Sydney time on Monday between the two camps and their advisers did not throw up any immediate concerns, with just one question raised by the Middle East bidders over the letter. That relative calm did not last.
Dubbed Project Sapphire by the Santos camp and Project Emerald inside XRG, months of painstaking negotiations were teetering on the brink. A letter of reply from Al-Jaber to Spence on Wednesday demanded $300m taken off its bid price, given the Gulf executive’s view that the Middle East entity was not responsible for the PNG tax bill. Abu Dhabi deemed it a material change to the deal at the last minute. In effect, this tax liability triggered in takeovers was a poison pill for future bids.
Six months of deal work and XRG’s hopes of using Santos to kickstart its global LNG ambitions had fallen at the last hurdle. XRG had a goal of becoming a top five integrated global gas and LNG business with 20 to 25 million tonnes a year of capacity by 2035 – with the Santos deal going a long way to delivering on its target.
After three extensions in trying to reach agreement on a deal, the mood went from goodwill between the two camps to stonewalling. XRG’s camp felt they weren’t able to get fulsome access to the company to get an understanding. (Santos has denied this).
After Monday, tensions between Abu Dhabi and the Santos board became so strained they couldn’t even agree an exit ramp.
On Wednesday night, Santos chief executive Kevin Gallagher got a call from an adviser in the XRG camp after 8.30pm advising the deal was off. A statement was issued in Abu Dhabi shortly after 9pm, effectively blindsiding Santos’s board.
Santos spent hours formulating its response and at 2.10am on Thursday morning finally sent around its media release, adding a few jabs at its bidder along the way.
The usual practice in friendly takeovers, even those that don’t get off the ground, is the call goes to the chairman and everyone is given the space to co-ordinates their exit.
On Thursday, Spence and Gallagher spent the day on the phones trying to calm a frustrated investor base.
Back in Abu Dhabi on Monday afternoon, there was little explanation for the change of heart when it came to Al Aryani speaking to reporters. There was a vague suggestion that it was out of respect for Santos as a publicly listed company.
ADNOC, its XRG arm and junior bid partner US private equity firm Carlyle Group don’t have to worry about those kinds of disclosure obligations.
Based on a full day of meetings with ADNOC’s top executives and insights into the global ambitions, it was clear the deep-pocketed Abu Dhabi regards Australia as an important piece in the global oil and gas chessboard. And this is fuelled by a desire to broaden its footprint outside the Middle East.
Indeed, the view is that to be a serious player in global LNG, you have to be in Australia.
That’s where the gas is, and the long-term customers in Asia are nearby.
It is hard to believe ADNOC will not quickly move on to a new target or strategy aimed at giving it a platform in Australia. Part of that appears to be motivated by discussions ADNOC is having with its customers in Japan and other nations that also buy LNG from Australia.
The other impression is that ADNOC saw the Santos deal as complex and large at $30bn-plus in debt. One executive said it was not like buying a supermarket.
Like the Santos board dealings with ADNOC, the tour was very much on their terms. A suit and tie were for compulsory for men and women were instructed to wear loose-fitting and modest clothing and told shirts and blouses must have sleeves below the elbow, and that skirts and dresses should cover the knees when seated.
Al Aryani wore a ghutra – the traditional Middle Eastern head covering – a kandora and scandals, and had his beard neatly trimmed in line with the ADNOC dress and grooming code.
In the end, he spoke for about 45 minutes, but only on the understanding that his comments could not be reported. Much of what he said was ambiguous and contradictory. He was polite, animated and spoke forcefully, but at no stage did he declare the deal was fading, even though it must have been on life support at best.
After rounds of finger pointing and accusations around each side’s behaviour, Santos is claiming back to business with a string of major projects to focus on and strong investor support.
ADNOC appeared to be bruised by the encounter, given the immense resources thrown into landing its target. The dream of capturing a major Australian gas producer has been put back on the shelf. Now all eyes are on whether a fresh suitor emerges, and whether Spence and Gallagher will still be in charge to field the offer.
Brad Thompson travelled to Abu Dhabi as a guest of ADNOC
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