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Santos to open books to Harbour Energy after unsolicited US$10.4 billion bid

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Reuters are reporting that Australian gas producer Santos Ltd said on 3 April that it would “engage with” Harbour Energy after receiving a US$10.4 billion takeover offer from the US company, its fourth unsolicited bid since August 2017.

The bid, valuing Santos at a 28% premium to its last close, would give Harbour access to a recently revived company with a low cost of oil production and stakes in LNG in the Asia-Pacific, where demand is soaring.

News of the latest offer, the biggest inbound bid for a listed Australian company since Unibail-Rodamco’s US$16 billion buy-out offer for shopping mall giant Westfield Corp, sent Santos shares soaring.

But even if accepted by Santos this time round, a deal may be fraught with political and regulatory risk: Australia’s lingering energy supply crisis has stoked fears that companies that come under foreign ownership may ignore domestic needs.

“The price is definitely in the ball park of something that we will seriously consider,” said Andy Forster, senior investment officer at Argo Investments, Santo’s ninth-largest shareholder.

Investment bank RBC Capital Markets described the bid as a “knock-out” in a note to clients on 3 April.

The offer values Adelaide-based Santos at AUS$6.50, per share, a 28% premium to the company’s last closing share price of AUS$5.07. Santos’ shares close 16.2% higher at AUS$5.89.

The latest offer price is also 43% higher than Harbour’s first attempt last year.

Harbour’s chief executive Linda Cook said the plan for Santos was “one of growth, in Australia, Papua New Guinea and beyond”.

“We are prepared to move expeditiously through the due diligence phase to immediately begin the government review and approval process,” Cook said in a interview.

But given the highly politicised nature of the Australian domestic gas landscape and Santos’ key role there, analysts and investors see government approval as a key risk to any deal.

A takeover would be subject to government approvals and will be scrutinised by Australia’s Foreign Investment Review Board (FIRB), which provides recommendations to the government. Cook said Harbour was preparing its FIRB application.

Santos’ more sensitive assets include its interest in the Gladstone LNG project in the Australian state of Queensland and the strategically important Cooper Basin in the country’s east, where significant onshore oil and gas deposits are located.

“Any buyer of Santos would need to be prepared for ongoing engagement with government and public scrutiny for many years going forward,” said Saul Kavonic of energy consultancy Wood Mackenzie.

Still, for a new LNG player, Santos represents an attractive target given its portfolio of LNG assets and growth options, according to analysts.

“The Santos board considers that, based on the indicative offer price of AUS$6.50 per share, it is in the interests of shareholders to engage further with Harbour,” Santos said in a statement to shareholders.

The bid from Washington-based Harbour, a private equity-backed firm led by Cook, who is a former Royal Dutch Shell Plc executive director, consists of US$4.70 per share in cash and a special dividend of US$0.28 per share, or AUS$6.50.

The offer would allow for majority shareholders Hony Capital and ENN to retain a stake of up to 20%.

Santos was in considerable trouble just a few years ago, struggling with high debt and low oil LCOc1 and gas LNG-AS prices. But asset sales, debt reduction and cost-cutting have led it back to health.

As a result, Santos is seen to be able to produce profitably at average oil costs of just over US$32 per barrel, versus actual costs of around US$68 a barrel.

The company’s focus on LNG, which is seen to be a bigger growth markets in coming years than oil, is also seen as attractive for investors.

Harbour plans to fund the takeover through a combination of debt and equity, with J.P. Morgan and Morgan Stanley underwriting US$7.75 billion of debt.

Santos is a partner in the Papua New Guinea LNG export project, which was highly profitable before it got knocked out by a strong earthquake in late February. It is expected to resume operations in April.

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