My source is this AFR article.... hidden in here somewhere is the statement "With that Gallagher is said to have made a final briefing to the board, recommending rejection and pursuit of the existing strategy and the addition of a short-term growth stream though the acquisition of whatever share of Quadrant Energy is on the market."
Harbour Energy bid for Santos delayed by spectre of Scepter
Harbour Energy's Linda Cook had to work out a way of telling the Sultan of Brunei and his world of royals that they were no longer welcome. Supplied
One of the greater mysteries of Harbour Energy's pitch for Santos, outside of its final failure, was the interregnum between first contact last year and the April pitch that opened the doors to due diligence.
Well, as it turns out, the eight months delay was caused by the spectre of Scepter. When US private equity first approached Santos in August last year, it did so with a proposal financed by the very same investment bank that had come shopping for Santos in October 2015.
As we understand it, the $11 billion non-binding, conditional and very private pitch that Harbour principal Linda Cook took to Santos last August was almost 50 per cent funded by Scepter.
http://www.copyright link/content/dam/images/h/1/0/3/q/g/image.imgtype.afrArticleInline.620x0.png/1526369362858.jpg
Santos chief executive Kevin Gallagher has been busy justifying the decision to those institutional owners. Ben Searcy
Scepter is a merchant bank modelled along the original European lines but one that has a very particular group of customers. It is a banker to royalty. The idea, as it is explained to us, is that the royal family of Brunei effectively funds Scepter's search for global investment opportunities.
The business is run by a Brunei princeling but the deals that he helps identify required sign off by the sultan to proceed. Once that happens, the proposition is then syndicated through a family tree of Asian, European and Middle Eastern royal families. Effectively businesses being marketed to royalty like thoroughbreds.
Now one product of doing business bloodstock style is that both the financial structure and governance of any individual offer can end up being worryingly opaque.
Certainly that has twice proved the case for Santos.
At first approach, Harbour talked about an indicative price of around $5.30 a share and about firming its approach into formal non-binding by Christmas. Given the Santos share price was then $4.38, Harbour was offered encouragement but advised very firmly that Scepter's role as the senior source of funding was, and would ever remain, a problem.
http://www.copyright link/content/dam/images/h/0/y/a/f/a/image.imgtype.afrArticleInline.620x0.png/1523266041850.jpg
Cook had to work out a way of telling the Sultan of Brunei and his world of royals that they were no longer welcome and then gather a whole new bank of equity and debt. Daniel Gray
So, ever so delicately, Cook had to work out a way of telling the Sultan of Brunei and his world of royals that they were no longer welcome and then gather a whole new bank of equity and debt. And by the time that had happened, the oil stars had realigned and Harbour was left chasing the oil price rather than anticipating recovery.
Santos' negative view of Scepter was set firm back in October 2015 when global royalty came shopping for the debt-tainted Adelaide icon with a wildly opportunistic $7.1 billion. For all of the notional premium offered, and the fact the bid arrived at a moment of peak crisis for Santos, Scepter's bid arrived and went in double quick time.
Then chairman Peter Coates had been forced to assume executive duties after despatching David Knox, a chief executive overwhelmed by circumstances that he was incapable of working through. The Saudi-triggered bifurcation of the oil price had exposed the risk of ambition that was being sustained by a comparatively high cost domestic gas business.
With the oil price anchored below $US50 a barrel, Santos was barely profitable and increasingly crushed the debt accumulated in supporting its share of the $20 billion two-train liquid natural gas plant at Gladstone. Ramp up had only just begun at the first of those two Gladstone trains and, with free cash dwindling, net debt was running at a deeply concerning four times EBITDA.
http://www.copyright link/content/dam/images/g/i/r/0/n/p/image.imgtype.afrArticleInline.620x0.png/1438653542087.jpg
There is an obvious echo of David Knox's flawed priorities in the narrative Santos has used to justify rejection of Harbour's $14.4 billion offer this time around. David Mariuz
For at least two years ahead of this crisis, Santos management refused every invitation to forestall a gathering debt storm by raising new capital. In part, that imprudence was sustained by a desire not to importune his retail shareholder base. Knox, backed by his board, took a punt and lost big time. In August 2015 Knox resigned and Coates opened an all-options review in the name of balance sheet recovery. Then, in November, just weeks after Scepter was dismissed, what started as an asset fire sale ended up as a $2.5 billion rights issue, a $500 million private placement to Chinese private equity in the form of Hony Capital and to minor but profitable asset sales.
The humiliation of Knox and his board was complete. Well, at least, it was until December 2016 when Santos again surprised it owners in tapping them for a further $1.5 billion in new equity.
There is an obvious echo of Knox's flawed priorities in the narrative Santos has used to justify rejection of Harbour's $14.4 billion offer this time around. Whether that story ends in the same quantum of tears, well, time till tell.
http://www.copyright link/content/dam/images/h/0/z/5/v/l/image.imgtype.afrArticleInline.620x0.png/1526259332354.jpg
The story for now is that the retail base killed the deal. David Mariuz
The story for now is that the retail base killed the deal. How that might have happened is a bit of a puzzle given none of the owners were ever asked to consider the offer. Just why the interests and rights of retail owners might trump those of the professionals who speak for up to 70 per cent of the business is not so clear. Sure, we understand that retail is a whopping 90 per cent of the owners and deals like this require approval of 50 per cent of them. But we also know our history and retail most always follows the direction of their board.
Little wonder then that the man that led the board to its rejection, Santos chief executive, Kevin Gallagher, has been busy justifying the decision to those institutional owners who thought the deal had reached a point of maturity that required them rather than the board to make a decision.
The path to this rejection began on Friday with a face-to-face meeting in Adelaide between the respective chairman and chief executives of bidder and target. The word is that Cook and her chairman, Blair Thomas, earned a good cop, bad cop routine from the Santos pairing of Gallagher and his chairman Keith Spence.
The bid was formalised on Saturday and the board convened for its final decision on Tuesday. There is as ever a lot of rumour and speculation about events of this sort of moment, but there are some suggesting that both of Santos' lead advisors, Deutsche and Rothschild, advised that the situation was tough and complicated but recommended acceptance.
http://www.copyright link/content/dam/images/h/1/0/c/r/8/image.imgtype.afrArticleInline.620x0.png/1526891184862.jpg
The word is that Cook and her chairman, Blair Thomas, earned a good cop, bad cop routine from the Santos pairing of Gallagher and his chairman Keith Spence (pictured). David Mariuz
With that Gallagher is said to have made a final briefing to the board, recommending rejection and pursuit of the existing strategy and the addition of a short-term growth stream though the acquisition of whatever share of Quadrant Energy is on the market.
As we have noted before, Gallagher is nothing if not tactically acute and rhetorically persuasive. He won. Cook lost. And, given all things now run sweetly to the Gallagher plan, that should be the end of one story and the start of many others.
And what will Cook now do? Well, as we noted on Wednesday, given hostility is not an option she intends to move to deploy quickly the capital accumulated in the name of timely growth in LNG.
It is informative to appreciate that Santos was not Cook's first failed effort to secure exposure to Australian LNG volumes. Harbour was the underbidder in the race to secure Apache Energy's 13 per cent share of Chevron's $US29 billion Wheatstone project up on the North West Shelf. Wheatstone was another pitch that Cook appeared to have locked up only to be trumped at the last minute. In the end Woodside came over the top with a $US3.67 billion deal that put a sturdy $US2.8 billion valuation on the Wheatstone position.
There is a consistent strategy to both of Cook's Australian disappointments. The former Shell CEO aspirant is working to fill the void left in the rapidly evolving global LNG market by Shell's $US70 billion takeover BG Group.
Above all else, BG was a trading house and its takeover has seeded Shell's return to its roots, which was trading energy.
It was interesting to hear Wednesday's coincidental acknowledgement by Woodside's CEO Peter Coleman of the role that traders are going to play in opening and sustaining the new horizons of LNG over the coming years. There are a lot of emerging markets that do not have the credit standing necessary to attract the likes of Woodside. He assessed that the traders have the risk appetite to ensure that supply will follow demand.
http://www.copyright link/content/dam/images/g/z/m/x/m/7/image.imgtype.afrArticleInline.620x0.png/1527221044886.jpg
Gallagher is said to have made a final briefing to the board, recommending rejection. David Rowe
Cook has the savvy and the capital to sustain her aspirations to feed the gas boom that is occurring across the emerging economies that fringe the Indian and Pacific oceans. What she needs next is oil and gas production. That is why Harbour spent $US3 billion on some very mature North Sea assets that fell out of her old employers portfolio in November last year. That is why she went for Wheatstone ahead of approaching Santos. That is why her team is scouring West Africa for opportunities. And that is why I expect Harbour will recover, reset and return to Australia looking for gas
STO Price at posting:
$5.72 Sentiment: Hold Disclosure: Held
(20min delay)
