Oil Search, Santos agree sweetened $21bn merger deal
The combined business is set to jump into the world’s 20 largest energy companies, leapfrogging Woodside Petroleum.
Oil Search will unanimously recommend a sweetened $21bn merger offer from rival Santos, after rejecting a first buyout deal unveiled two weeks ago, with the combined business catapulting into the world’s 20 largest energy companies.
The improved deal will see Oil Search shareholders own 38.5 per cent of the merged company with Santos the 61.5 per cent balance, a boost to the previous 37 per cent to 63 per cent weighting between the two.
It sets the scene for a dramatic recasting of Australia’s oil and gas landscape with the merged company to topple Woodside Petroleum as the nation’s kingpin producer, handing it extra clout and making it a top 20 ASX company and beefed up global energy player.
The deal would also make Santos boss Kevin Gallagher the most powerful energy executive in the country, just months after the Scottish executive was touted for the top job at Woodside before being convinced to stay put with a $6m carrot to deliver major growth projects. Woodside is also being tipped for deal action with a potential BHP petroleum tie-up looming.
Several institutional shareholders backed the merger deal.
“Our view is there’s a lot of synergies to be had and the two companies combined are a lot better than being apart, so we welcome the transaction,” said Matt Haupt from Wilson Asset Management which holds shares in both Santos and Oil Search.
Firetrail Investments, also a joint holder of both companies, had been pushing for Oil Search’s board to open talks and backed the improved tilt.
“I think it’s good for both sets of shareholders. I don’t think you could say Santos is massively overpaying or Oil Search is giving it away. Everyone is always going to feel like they’re a bit ripped off but I think it’s about as close to down the middle as you can get,” Firetrail portfolio manager Blake Henricks said.
Santos increased its bid to 0.6275 new Santos shares for each Oil Search share held from 0.589 shares under its previous offer.
The new buyout pitch is worth $4.52 per Oil Search share, or a 19.7 per cent premium, based on the closing price of Santos shares on June 24, the day before the South Australian producer lobbed its first proposal.
Oil Search rejected the original all-share offer with its new interim boss Peter Fredricson saying it needed extra carats added to the deal’s diamond to get a deal over the line.
However, several of Oil Search’s biggest shareholders urged it to engage amid concern the company had failed to track an oil price revival, uncertainty over the near-term prospects of its $US3bn ($4bn) Alaskan oil project and leadership turmoil after the sudden exit of former boss Keiran Wulff over behaviour issues.
Oil Search and Santos will conduct due diligence on each other over the next four weeks.
Santos said the deal would create a regional champion with a $21bn market capitalisation and among both the top 20 listed ASX companies and also 20 biggest oil and gas companies in the world.
“It represents a compelling combination of two industry leaders to create an unrivalled regional champion of size and scale with a unique diversified portfolio of long-life, low cost oil and gas assets,” Mr Gallagher said.
Oil Search and Santos own 29 per cent and 13.5 per cent stakes in the PNG LNG project respectively while Oil Search also holds a 22.8 per cent share in Papua LNG, which will add a further two trains of LNG or 60 per cent extra capacity by 2027.
The combined company will own 42.5 per cent of PNG LNG and 17.7 per cent of Total’s Papua LNG but analysts expect Santos will trim its stake in PNG LNG and may exit the Alaska project entirely.
“So much value upside spills out of a transaction with Total in PNG – logic says you can realise a higher price than the market is carrying it at when your bidder has a far lower cost of capital and gets large strategic synergies from the deal and the deal will almost entirely de-risk Papua in the process,” MST analyst Mark Samter said.
A rival bid is now also seen likely by some in the market with Exxon and Total — the two kingmakers in Papua New Guinea‘s LNG industry — weighing their options according to broker Bernstein.
“Oil Search’s acceptance of the revised Santos offer undervalues the company. But it will trigger Exxon and Total to evaluate whether they want to compete. It could therefore mark the start rather than end of the M&A process,” Bernstein analyst Neil Beveridge said.
“While we think a rival bid from one of the other majors is now likely, enthusiasm should be tempered by the changed state of the oil and gas industry where divestments are becoming more the norm.”
Oil Search, which previously fought off a $11.6bn takeover tilt from Woodside Petroleum in 2015, rose 4.7 per cent to $3.99 while Santos lifted 0.6 per cent to $6.49.
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