SCOTT MURDOCH MAY 22, 2018
Santos has delivered a shock rejection of Harbour Energy’s $14.5 billion bid, ending discussions with its privately owned US suitor on the grounds the bid undervalues the Adelaide oil and gas company and is a private equity-structured offer that treats shareholders unequally.
After days of deliberations, the Keith Spence-led board last night resolved to reject an offer that it had managed to get the bidder, run by former Shell executive Linda Cook, to increase five times since an initial approach last August.
“The final proposal was a highly leveraged private equity-backed structure that, prior to implementation, would have required Santos to provide significant support for Harbour’s debt-raising and to hedge a significant proportion of oil-linked production,” Santos said.
“In addition, the final proposal was stated to be subject to various conditions, including Foreign Investment Review Board approval and restrictions on the conduct of Santos’ business from the time of entering into the scheme implementation deed until implementation.”
After bidding against itself five times already and negotiating with the board over the weekend, a frustrated Harbour on Monday released a statement saying its bid was final.
This came as Santos ruminated on the bid longer than expected.
Last night, Harbour said it was disappointed that Santos had walked away from what it said was an offer with a $4bn premium and with how it had approached the final decision.
“There was insufficient engagement with Santos on valuation, no meaningful attempt by Santos to discuss a realistic price which could be supported by any reasonable set of technical and commercial assumptions, and an unwillingness by their board to explore means of closing the gap between the offer and their expectations,” a Harbour spokesman said.
But The Australian understands that Santos chief executive Kevin Gallagher lobbied in favour of the bid and a majority of the directors were also thought to be in favour of the higher offer.
It is understood that Santos chairman Keith Spence has been an opponent of Harbour since the US company arrived on the scene mid-last year and could not be convinced of the bid’s merit.
Mr Spence held discussions with Harbour chairman R. Blair Thomas over the weekend.
The bid, at $US5.21 ($6.95) a share, required Santos to hedge oil production in a rising price environment to lower costs for Harbour on a deal where Foreign Investment Review Board approval was uncertain.
It required Santos shareholders to take on currency risk and also offer major shareholders, the private Chinese companies ENN and Hony, the chance to stay invested — but not other shareholders.
“After careful consideration of all aspects of the final proposal, the Santos independent directors and managing director and CEO have unanimously resolved to reject the final proposal on the basis that it does not represent a full value of the company and, when combined with the associated risks, is not in the best interests of Santos shareholders,” Santos said.
“Accordingly, Santos has now terminated all discussions with Harbour Energy.”
The Santos board believes its strategy offers better value, with the company having paid down debt earlier than expected. Santos says the strategy has strong investor support.
It also saw the bid premium as having reduced, despite the offer rising from a $US4.98 approach in April, because of rising oil prices and the resultant impact on peer companies.
The complexity and the risk of the transaction structure (with Santos needing to assist Harbour’s debt program by hedging before shareholders voted), a long execution timetable and unequal treatment of shareholders also prompted the rejection.
“Santos has a well-developed strategy, strong leadership and management team and outstanding growth opportunities that the board believes will deliver superior value for its shareholders over time,” Mr Spence said.
Most observers expected the board to turn the offer, which was conditional on 75 per cent shareholder approval, over to investors by recommending it.
It is a brave call by the board. The bid price, if another offer fails to emerge, will now be a yardstick for future performance.
Santos shares rose 8c to $6.44 yesterday as the board considered the deal.
This was well below the offer price.
STO Price at posting:
$6.44 Sentiment: Hold Disclosure: Held
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