Woodside and Santos end merger talks as due diligence fails to find mutual benefits
Woodside and Santos were unable to find mutual value in a mega-billion dollar tie-up. What’s next for both players?
Santos faces shareholder pressure to offload its LNG assets and will likely attract fresh buyout offers from suitors after $80bn merger talks with Woodside Energy were abruptly axed amid a valuation gulf between the rivals.
A combination of the two was seen as unlikely given Woodside had vowed it would not overpay and Santos shareholders indicated a deal would only get their support if they received a substantial premium.
The announcement by Woodside on Wednesday that talks had ended sent shares in Santos down more than 6 per cent as investors fretted about its future given a beefed up company would have eased pressure to deliver mega projects.
The collapse of talks saw one major shareholder reiterate a split of the company to create a separate liquefied natural gas offshoot
Melbourne-based fund manager L1 Capital, with the support of Tribeca Investment Partners and Wilson Asset Management, last year urged a split of the company to create a separate LNG vehicle which would increase the value of the business by an estimated 40 per cent.
James Hawkins, who runs L1 Catalyst Fund, said on Wednesday the proposal was still the best option for Santos.
“L1 Capital believes that a structural separation of Santos’ LNG assets presents a more compelling alternative for Santos’ shareholders in comparison to a merger with Woodside,” Mr Hawkins said.
Other investors such as Ben Cleary, investment manager of ASX-listed Tribeca Global Natural Resources, said they expected new interest in Santos.
“Regardless of Woodside walking, Santos seems to now be in play, the company trades on a lower price to net present value to most of the global peer group given their strong project pipeline in LNG and I would assume others will emerge for some or all of the company,” Mr Clearly said.
MST Marquee energy analyst Saul Kavonic said the reaction of the market to the end of talks with Woodside underscored market jitters about the future of Santos.
“Santos may languish for a few years, absent M&A, with rising risks from the spend and balance sheet outlook alongside a leadership succession vacuum,” Mr Kavonic said.
For Santos, a deal with Woodside could have aided efforts to deliver expansion projects that were delayed by environmental legal challenges.
Santos chief executive Kevin Gallagher said the collapse of talks came when both sides decided a deal could not be reached, but he said he was confident about the future of his company.
“Santos has a very strong future as an independent entity, our base business is strong and our strategy has significant upside over and above where the company is currently trading,” Mr Gallagher told Santos employees in a memo seen by The Australian.
“I am very confident our strategy to backfill and sustain our infrastructure, decarbonise our operations and develop the low-carbon fuels the world needs, is the right strategy at the right time.”
Despite Mr Gallagher’s insistence, Santos will be under pressure to quickly deliver after a favourable few months of momentum. In December it secured approval from a regulator to begin drilling on its $5.3bn Barossa project after more than a year of delays, and a federal court earlier this month rejected an application from a Tiwi Islander to block a 262km pipeline needed for the LNG development.
The Barossa LNG project is shaping as critical to boost supplies and capitalise on strong global demand for gas.
The future of Mr Gallagher himself remains the subject of much conjecture. Sources have say the Santos boss has intimated a desire to step down next year, but he has publicly insisted he sees a long-term future at Santos.
Sources close to Santos said the outlook for the company had improved markedly in recent months, which was reflected in the company’s share price.
Shares in Santos had risen more than 14 per cent in the past couple of months after the series of regulatory approvals and legal victories – denting any hope a cheap offer from Woodside would woo shareholders. Santos fell 46c or 5.8 per cent on Wednesday while Woodside rose 17c or 0.5 per cent to $32.46.
Santos, however, remains in the crosshairs of environmentalists. Australasian Centre for Corporate Responsibility special adviser Harriet Kater said Santos and Woodside should be more focused on positioning themselves to profit from the energy transition.
“Santos’ board and management are now under even more pressure to fix the wallowing share price. However, there are major questions over whether Keith Spence’s board has the capacity to design and execute a strategy that will appease increasingly frustrated shareholders,” Ms Kater said.
Woodside and Santos began talks late last year. The Australian revealed Woodside had initiated talks amid dissatisfaction among Santos shareholders, and a deal with its domestic counterpart was seen as an opportunistic move, although some investors worried about overpaying.
Woodside chief executive Meg O’Neill said the company would continue to evaluate M&A deals, but only under the right circumstance.
“We continue to be disciplined in our approach to mergers and acquisitions, and capital management, to create and deliver value for shareholders. While the discussions with Santos did not result in a transaction, Woodside considers that the global LNG sector provides significant potential for value creation,” Ms O’Neill said.
“Woodside’s world-class global portfolio, growth pipeline and strong balance sheet underpin our attractive investment proposition for Australian and global investors.”
