Santos chairman will be a 'hero or gone' warns spurned bidder

A key Santos institutional shareholder has backed the company's decision to reject Harbour Energy’s $14.4 billion bid amid fresh speculation the Adelaide-based oil and gas is mulling its own takeover in Western Australia.

Santos, on Tuesday night, rejected US private equity firm Harbour’s final offer completely, just over 24 hours after it was put on the table, terminating all discussions with Harbour.

Santos CEO Kevin Gallagher said the company has terminated all discussions with Harbour Energy.
Photo: Ben Searcy

There is now animosity between the two companies, with sources close to Harbour saying the company is "appalled" at Santos’s actions. Meanwhile, sources close to Santos are voicing surprise at the "hostility of Harbour's response". And then Citi analysts describing Harbour’s comments on the process as "salty".

Santos said it is in a better position for growth than Harbour acknowledged and was unable to accept the offer of $US5.21 a share for the company.

It has been aggressively driving down debt under chief executive Kevin Gallagher, selling off of its non-core Asian assets and riding a wave of higher oil prices, as the oil price punches through $US80 ($106) a barrel.

Santos is also likely to start paying out a dividend to shareholders later this year, with a yield of around 3 per cent expected.

Large shareholder Paradice Investments, which a holds three per cent share in Santos, was supportive of the board’s decision to reject Harbour’s proposal.

“Harbour didn’t offer a full value for Santos’s assets and the growth optionality in its portfolio,” the head of Paradice Investments, Troy Angus, told Fairfax Media.

“We are very happy to take a medium-term view on value and let management the board of Santos continue to execute on their growth plans.

“Our long-term view on oil is positive, and it wouldn’t be too dissimilar to Harbour’s considering they are trying to buy Santos at a low price right now.”

A source close to Santos the scheme of arrangement would have put additional costs on shareholders.

Harbour came to the table with only about a third of the money it needed to buy Santos
Source close to Santos

“Harbour came to the table with only about a third of the money it needed to buy Santos and they wanted Santos shareholders to help them stump up with the rest," he said.

"The 120,000 plus shareholders who have stuck with Santos through thick and thin, and are about to return to fully-franked dividends, would have been the ones required to take the risks of this transaction."

It is unknown how the rejection of Harbour’s bid, which was supported by Chinese companies Hony and ENN, will impact Santos longer term relationship with these groups. ENN and Hony collectively hold a 15.1 per cent share on Santos.

ENN said it was disappointed with the result after what it saw as positive conversations on the takeover but as the largest shareholder with a seat on the board the company will continue to work with the group to grow Santos.

"As Santos’ largest shareholder, we remain committed to growing the value of our collective investment in Santos," an ENN spokesman said.

Santos's takeover target

A source familiar with the Harbour deal said rumours are emerging that Santos may now have the fourth largest oil producer, West Australian-based Quadrant Energy, in its sights and is looking to gain access to joint owner Brookfield Asset Management’s share of the company, using the $2-$3 billion increase in market capitalisation Santos has enjoyed following Harbour’s bid as leverage to make a tilt for the company.

Quadrant Energy is a joint venture between Brookfield and Macquarie Capital. It supplies around 20 per cent of Western Australia's domestic gas, and operates the Devil Creek project with Santos. It had planned its own public listing earlier this year, but later pulled out.

Santos declined to comment, saying it is continuing its focus on growth. Santos share price fell sharply on Wednesday following the knockback of Harbour’s proposal, slumping 8.39 per cent to $5.90 by the market close.

No sweetened bids in the future

With a minimum six-month hold on any sweetened bid from Harbour for Santos, following its ‘best and final’ offer, the question is whether Harbour will come back for another round.

Analysts believe there is little chance of an improved offer or hostile takeover.

“If Harbour does come back to the negotiating table with the Santos board it has a hide not made of leather but made of some sort of titanium/Kevlar weave,” RBC Capital Markets analyst Ben Wilson said.

“The nature of the shareholder arrangement between ENN, Hony and Santos essentially precludes a hostile approach. We think Harbour's Santos ambitions are dead. “

Santos says it is focusing on continued growth of its assets.
Photo: David Mariuz

A source close to Harbour Energy said the analysts’ predictions are correct.

“To say Harbour Energy were appalled by the behaviour and manner in which they were treated is an understatement,” he said.

“In 12 months time, [Santos chairman] Keith Spence will either be a hero for this decision or out of a job.”

Harbour Energy’s chief executive Linda Cook said Santos is gambling on the continued strength of the oil price.

“We urge the board of Santos to reconsider their position,” Ms Cook added, however, it is unlikely she will be in a position to respond, as it is understood that Ms Cook returned back to the US following the collapse of the proposal.

However, it is unlikely this failed deal will completely preclude Harbour from returning to Australia’s shores. Its parent company, EIG Partners, is a shareholder in QLD-based oil and gas junior Senex Energy.