Australian oil & gas producer Santos has rejected Harbour’s takeover proposal claiming it does not represent a full value of the company and terminated all discussions with Harbour.
To remind, after launching a non-binding bid in April to take over Santos, Harbour Energy firmed up the offer earlier in May. According to Bloomberg, this offer valued Santos at $10.3 billion.
On May 21, 2018 Santos received an increased takeover bid from Harbour Energy, however with some conditions.
Namely, Santos received a conditional binding offer from Harbour Energy to acquire 100 per cent of Santos shares by way of a scheme of arrangement at a cash price of $5.21 per share (currently equivalent to A$6.86 per share).
Harbour indicated that it would be willing to increase its offer to $5.25 per share (currently equivalent to A$6.91 per share) if Santos was willing to extend certain oil price hedging arrangements.
Harbour subsequently confirmed that the price offered under the final proposal was “best and final” and followed a seven week period of engagement with Harbour on the price and terms of an indicative proposal announced in April.
Following extensive due diligence, the final proposal price was increased by 4.6 per cent to US$5.21 per share from the price of US$4.98 per share in the indicative proposal. The consideration would be in US dollars and Santos shareholders would be subject to fluctuations in the AUD/USD exchange rate, with no adjustment if the US dollar depreciated against the Australian dollar.
‘Thanks but no thanks’
Announcing its rejection, Santos stated on Tuesday that, since receipt of the indicative proposal, Brent oil prices have increased by 14 per cent and the share prices of other major ASX-listed energy peers by an average of 18 per cent. The Santos business has continued to perform well and is generating strong free cash flow.
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. In addition, the final proposal was stated to be subject to various conditions, including FIRB approval and restrictions on the conduct of Santos’ business from the time of entering into the scheme implementation deed until implementation.
After careful consideration of all aspects of the final proposal, the Santos independent directors and Managing Director & CEO have unanimously resolved to reject it 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.
Accordingly, Santos has now terminated all discussions with Harbour Energy.
In arriving at this decision, Santos said it has had regard to its belief that superior shareholder value could be realized by executing existing strategy. Furthermore, Santos said that the offer price was too low and control premium inadequate.
Santos also took into consideration the complexity and risk in the transaction structure, including its reliance on a high level of debt funding, unequal treatment of shareholders – Santos’ largest shareholders being offered an opportunity that was not available to all shareholders to remain invested in Santos; and, uncertainty for shareholders due to a protracted execution timetable.
Santos Chairman, Keith Spence, said: “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.”