Investors took the predictable route after Santos on Tuesday confirmed it is chasing smaller energy rival Oil Search.
After Oil Search admitted on Tuesday morning it recently rejected a takeover approach, Santos issued a statement revealing its proposed offer.
Santos had its shares halted briefly to allow it to release the statement in the wake of the Oil Search release.
Investors had pushed up Oil Search shares by more than 3% ahead of the Santos release – that was a cautious move because the price was well short of the $4.25 in the subsequent statement from Santos.
When trading resumed in Santos shares, down went the shares – falling by 5% by the close to $6.49. At that level the implied value of Oil Search shares was $3.82 each.
Oil Search shares edged up to be 6% higher at the close at $3.90 after falling 5.1% on Monday after news of the departure of the company’s CEO, Kieran Wulff.
Not helping the valuations was the 7% slump in world oil prices on Monday in the wake of the latest OPEC+ deal to allow higher production between now and the end of 2022.
The weakness in oil prices does support the rationale behind the merger which was not the first time some analysts have looked at a proposed linking up of the two companies.
The retirement of long time CEO Peter Botten and the botched appointment of his replacement has left Oil Search rudderless and vulnerable.
The health of world oil prices will probably determine the fate of the Santos proposal, especially if the Delta variant of Covid continues to make inroads around the world and threatens the pace of economic activity and demand for oil.
The longer the delta variant hits economies, the longer it will take for more countries to re-open borders and restart global travel and demand for jet fuel.
Oil Search had said in its statement that it wished to clarify a response it made in relation to a rumoured takeover offer, confirming that it had received a non-binding offer.
“That proposal has been carefully assessed by OSH’s Board, and Senior Management (excluding Dr Wulff, whose departure from the company was revealed on Monday), and our advisers Goldman Sachs and Macquarie Capital, as well as legal advisers Allens,” Oil Search said.
In its statement Santos told the ASX on Tuesday morning:
“Santos refers to the Oil Search ASX release this morning and ongoing speculation regarding a possible merger of Oil Search and Santos.
“In light of this, and in order to keep the market fully informed, Santos confirms that on 25 June 2021 it submitted a confidential, non-binding indicative all-scrip merger proposal to the Oil Search Board.
“The Merger Proposal provides that the transaction would be implemented through a Scheme of Arrangement under which Oil Search shareholders would receive 0.589 new Santos shares for each Oil Search share held.
“Following approval of the Scheme, Oil Search shareholders would own 37 per cent of the merged group and Santos shareholders would own 63 per cent.
“The ownership ratio implied a transaction price of A$4.25 per Oil Search share, based on Santos’ closing price on 24 June 2021.
“This represented a 12.3 per cent premium to the Oil Search closing price on 24 June 2021 of A$3.78 and a 9.8 per cent premium to the Mubadala block trade sale price of A$3.865.”
“On 9 July 2021 Santos received a letter from Oil Search which acknowledged the strengths of the combined company and the rationale for the Merger Proposal but noted that the proposal did not offer appropriate value for Oil Search shareholders or a basis on which discussions could be progressed.
“Santos has subsequently sought to engage the Oil Search board on the transaction rationale and the opportunity for Oil Search shareholders to participate in the value created by the merger,” Santos said in the statement.
