Santos under pressure to lift $23bn bid for Oil Search
Santos will have to boost the terms of its $23bn merger proposal given Oil Search shows little sign of opening the door to the current bid.
Santos will have to boost the terms of its $23bn merger proposal given Oil Search shows little sign of opening the door to the current bid, while the pitch by Oil Search’s interim boss to snare the job permanently indicates he sees an independent future for the company, analysts say.
Oil Search’s interim chief executive told The Australian on Monday the company would require a higher bid from Santos before it began talks over a tie-up, with Peter Fredricson declaring he wants the top job permanently as he seeks to unite staff unsettled by the shock exit of former chief executive Keiran Wulff.
A 5 per cent lift in Santos’s bid may be required to get the Oil Search board over the line or at least open for talks about a deal, MST Marquee said.
“I do think a premium is required to grease the wheels of this deal and, given the size of the prize, would hate to see Santos miss out because of 3-4 per cent here or there,” MST Marquee analyst Mark Samter said.
“Santos is worth a lot more with Oil Search (and vice versa), but there is a big asymmetry of share price outcomes if the deal fails.
“So, with Oil Search trading at a 3.5 per cent premium to the rejected offer, and my view maybe we get a 5 per cent lift to get a marriage proposal accepted, my fresh dollar into the pair logically lands with Santos today.”
Oil Search on July 9 rejected the all-share offer which would have given it 37 per cent of the merged company, saying the deal to create Australia’s biggest oil and gas company offered a premium of only 6.8 per cent despite its rival owning 70 per cent more of the equity.
Mr Fredricson’s call for Santos to add a “couple more carats” to the deal struck a jarring tone, according to the broker.
“I hope it was just a bit of public posturing by Oil Search, which I totally get if the right outcome prevails, but I have to confess to being a bit surprised by the tone from the acting CEO in the article in The Australian this morning,” Mr Samter said. “To me, there are real risks when the former beauty pageant winner gets too big for their boots and thinks they can demand a bigger ring, even when their looks have already started to fade a fair bit.
“Sometimes those are the ones who end up miserable spinsters, living on their own with their cat (not that there is anything wrong either with living alone or with a cat, or both in concert).”
There is now a risk to Santos boss Kevin Gallagher pulling off a merger, Credit Suisse said, both in terms of Oil Search’s own call for a higher valuation and caution within the South Australian producer about paying too much.
“We see material risk a MergeCo does not eventuate as the Oil Search board may have a much higher view on Oil Search value (than) Santos,” Credit Suisse analyst Saul Kavonic said.
“We struggle to justify an Oil Search value much beyond $4 a share even after derisking all Papua New Guinea growth and any MergeCo cost synergies.
“We see Santos as having already allocated most potential MergeCo tangible synergy value to Oil Search in its prior proposal, leaving little room for an increased bid without overpaying.”
After being called up to lead the company a week ago, following the sudden exit of Mr Wulff over behavioural issues, the New Zealand-raised Mr Fredricson says he wants the job on a permanent basis, despite a shortage of oil and gas experience.
His tilt for the job also suggests Oil Search sees a future without a Santos tie-up, Mr Kavonic said.
“Mr Fredricson is well regarded and could bring some needed discipline to Oil Search in our view,” he said.
“His ambition for the permanent CEO role does indicate to us that Oil Search still sees a future without a Santos MergeCo.”
If the mooted deal falls apart, Credit Suisse sees Santos gaining 5 per cent in its share price by removing the ‘‘overhang’’ while Oil Search could suffer a 10 per cent fall “amidst an otherwise deteriorating narrative regarding management and Alaska”.
Oil Search shares closed at $3.95, down 4c.
