It’s easy to understand why Origin Energy rejected the higher $13.6 billion takeover offer from BG Group of Britain.
It was too cheap, based on the valuation implied by Thursday’s huge deal that will see Petronas of Malaysia investing $2.6 billion in Santos’ Queensland coal seam methane gas business and LNG export gas plant in Gladstone.
That deal surprised the market and pushed Santos shares to a record of more than $21. In Friday comment some brokers wondered if the deal might signal problems for BG, which had been widely tipped by business writers to have won the hand of Origin.
It did and the Santos deal caught everyone off guard, especially BG Group, which was blind sided by the valuations set in the Santos deal.Santos shares closed at $21.08 on Friday after hitting an all time high of $21.75.
Origin’s rejection was despite BG lifting its price to $15.50 a share from the original $14.70.
The market responded by sending Origin shares up by well over a $1.20 to a high of $16.15, before they settled back around $15.60, up $1 on the day with the punters hoping BG Group will come again with another offer.
At that level Origin is worth $13.7 billion and a new bid would have to top the $14 billion to have a chance, despite the feeling there’s a ‘bubble’ in coal seam gas stocks at the moment.
Fellow central Queensland group, Arrow Energy called a halt to trading Friday in its shares with the market expecting a sale of a similar interest to a bigger buyer along the lines of the Santos deal and valuations.
Oil giant Shell was tipped and if it is the buyer there’s an irony. At one stage Shell had big coal exploration interests in central Queensland and a stake in at least one producing mine. But these were sold. Arrow shares traded at $3.30 when they were halted.
Origin said after the rejection was announced that it was back to business and it was open to new offers, from anyone.
The feeling is that it could follow Santos and sell a stake in its Queensland coal seam gas reserves to a major player, such as BG Group.
Origin has made it clear it is not interested in heading down the Santos and Queensland Gas route towards an export LNG plant of its own.
Origin managing director Grant King said yesterday its coal seam gas assets now made the company a far more valuable business.
He told ABC TV’s Inside Business that any new offer would have to be "a lot more than $15.50".
Mr King said the Santos transaction set a new benchmark that valued Origin’s coal seam gas assets alone at more than $16 billion.
"The proposition evidenced in the Santos-Petronas deal gives effect to what we’ve been promoting for some time: that the value of the company’s resources is substantially higher than appreciated by investors and the community at large," Mr King said.
"What it did was validate the view we had of the value of our business, and it was very important from that point of view."
Mr King said Origin was "always for sale" at the right price.
"If people want to put an offer, including BG, to shareholders, they’re free to do so," he said.
"From our point of view, a lot of the interest BG and others have is clearly around our coal seam gas assets – it’s not so much the generation or the retail.
"We, obviously, have a challenge now to demonstrate that value to our shareholders, whether we do that by way of a farming or joint venture or contracting our reserve to other (LNG) projects or taking an equity interest in a project or even demerging those assets is something that will now be tested," He told the ABC.
BG is already invested in the business through a 9.9% stake (plus more over time) in Queensland Gas’s ambitious plans for an export LNG plant.
Origin was the biggest reserves holder in Queensland’s rapidly expanding coal seam gas business which is emerging as the major source of energy for the East Coast of Australia and for export markets in the region. Now there is no dispute, its reserves position more than doubled as a result of a review commissioned after the BG offer was received.
In rejecting the offer, Origin pointed out that its gas reserves (which Origin boosted by 121% in a separate announcement) were in the same area as the Santos reserves).
"This certified assessment (Of Origin’s reserves) confirms Origin’s preeminent position as the largest holder of CSG reserves and contingent resources in Australia and demonstrates Origin’s unparalleled record of converting Resources into reserves.
"The Santos announcement establishes a new and higher benchmark for the value of CSG and, along with the proposed BG LNG project, demonstrates confidence in the use of CSG for LNG production. It is particularly relevant to the valuation of Origin’s CSG interests, which includes acreage covered by and adjacent to the acreage being acquired by Petronas."
According to Credit Suisse, Origin, which is also Australia’s second-biggest electricity and gas retailer, may be worth $16.62 a share.
But they were also worried about competition problems: the ACCC had already blocked Santos from buying Queensland Gas for competition reasons and some brokers reckoned that BG would be up against it getting approval, even if it sold off Origin’s retail and distribution businesses.
It is the second huge takeover rejected by a leading Australian company: Insurance Australia Group said no to an $8.6 million suggested "offer” from rival insurer, QBE, saying it was opportunistic and undervalued the company. That cost Michael Hawker his CEO’s gig at IAG.
There won’t be any pressure on Grant King for the ‘no’ t
