Analysts support strong Santos bid

THE focus for private equity firm Harbour Energy's A$13.5 billion bid for Santos, its fourth since August, will be global LNG market exposure, but analysts say the hurdles are all domestic.

Analysts support strong Santos bid Santos' Gladstone LNG project

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The private equity firm is offering US$4.98 per share or A$6.50, which is a 28% premium on Santos' last closing price of $5.07 and 30% overall for the past 30 days of trading.
 
Harbour is funding this via US$7.75 billion of debt underwritten by JP Morgan and Morgan Stanley and the balance in equity from Harbour, with other managed funds from Harbour's parent EIG and from Mercurua Global Energy. 
 
Questions around Gladstone LNG and Cooper Basin gas assets are already looming with the both seen as integral to domestic gas supply. 
 
The Santos-led LNG operation in Queensland is second only to PNG LNG in terms of Harbour's interest, according to Singapore-based Wood Mackenzie principal analyst Saul Kavonic. 
 
Meanwhile, RBC Capital Markets wrote that "Santos operates significant gas infrastructure in Moomba, Gladstone, and central Queensland, hence any foreign-based takeover will likely invite FIRB scrutiny". 
 
Ensuring domestic supply will be the central concern of the FIRB and part of Harbour's latest bid, and the only one made public by both parties, was a promise to ensure east coast Australian energy security and to increase local exploration, though with Santos in foreign hands it means GLNG would be entirely foreign-owned and operated, while Santos' interests in the Cooper Basin venture would be minority owned by Australia's Beach Energy. 
 
Such domgas concerns are something of a deterrent to foreign investors, and this may also ensure Harbour's is the only bid.  
 
The best contenders to launch a counter-offer could be existing Santos shareholders ENN and Hony but similar FIRB concerns could also hold them back, as would the fact that public scrutiny tends to be tougher on Chinese-led acquisitions, especially given a ravenous Chinese gas market. 
 
The AWE takeover offer by China Energy Reserve Chemical Group was subject to public and analyst scrutiny more than the competing, and ultimately successful, offer by Japanese Mitsui, for example. 
 
Santos chief executive Kevin Gallagher has called the bid a compliment, after his company rejected a far lower Harbour in August last year and Kavonic sees the Adelaide company as a bargain buy: a full portfolio of assets and a price of under A$15 billion. 
 
Peripheral Southeast Asia assets, like those in Vietnam, will likely be divested. 
 
"The domestic gas assets on the west coast would also appear a nice cash generator, but could be a candidate to spin off later, as they are peripheral to an LNG focus," he said in a note yesterday. 
 
"Future CSG deliverability uncertainty, JV contractual positions across the three LNG projects, and decommissioning liabilities would likely be a focus of due diligence."
 
Harbour's second hurdle is that private equity firms are not always trusted to maintain legacy assets, but rather buy then flip. 
 
This was a central concern of former South Australian Treasurer Tom Koutsantonis. 
 
"What we see with these types of foreign private equity funds is that often their interest in energy assets is not to operate them, but to break them up, sell the parts and make a quick profit," he said last November when the rejected August bid became public. 
 
However, Harbour CEO Linda Cook told the AFR yesterday evening that not all private equity firms were created equal and said her company planned to be a long-term investor. 
 
Certainly her pedigree, decades at Shell with a strong Asia Pacific and LNG focus, suggests Harbour's commitment to an LNG portfolio is real and its offer for Santos is based on its keenness for the commodity's growing market share. 
 
Santos share price shot up over 16% mid-week, and has since slumped by half a percent. 
 
The company is currently trading at $5.82, much lower than what Harbour is offering.

 

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