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Santos aims to raise money after failed takeover bid

The company wants to raise A$3.5bn to strengthen balance sheet and keep opportunistic bidders at bay

A new chief executive has also been appointed as the company concludes its strategic review.

Santos said it will issue new shares to Chinese private equity giant Hony Capital at a 15% premium to the 6 November closing price of A$5.91. The company is also launching a rights issue offering all shareholders, including Hony, new shares at A$3.85, marking a 35% discount.

The A$500m private placement to Hony Capital will see the firm increase its stake from 1.4% to 7.9%. However, the Chinese group will be barred from building a stake of more than 9.9% in the energy company for three months, ensuring the move is not seen as the start of an acquisition by one of China’s largest private equity groups.

The troubled Australian player said it will sell its 35% stake in the Kipper gas field, which is positioned off eastern Australia, to Japanese gas trader Mitsui E&P for A$520m.

The initiatives bring down Santos’ net debt to about 40% of equity from a worrisome 89% (A$8.8bn) as of the end of June, which should be sufficient to preserve their investment grade credit rating. In August the company’s shares fell below A$6, from more than A$15 a year earlier.

The moves to shore up the company’s balance sheet follows a rejected takeover bid of A$7.1bn from Scepter, an investment group backed by Middle Eastern and Asian royalty, which it said did not reflect fair value, in October.

The Financial Times reported that Santos’ sale of a near 10% stake to Hony means Scepter will probably walk away. Under Australian takeover rules Scepter would need to get 90% shareholder acceptance to gain full control of the company. 

Analysts at Wall Street research firm Bernstein say they are disappointed by the lack of creativity in the strategic review, which instead of selling off some key assets, has arrived at “an outcome, which should have been obvious to most at the start of this year.”

Santos also said it had appointed Clough chief executive Kevin Gallagher as its new CEO, starting early 2016. Gallagher is a driller by background, sending a signal that the focus will be on cost management of the core business. He worked for Woodside for 13 years, but appears to lack significant LNG experience. Neil Beveridge, an oil and gas specialist at Bernstein, doubts whether Gallagher can transform Santos, given his limited commercial experience. “While it is pleasing to see Santos appoint an external candidate, it is hardly a top tier appointment and signals to us a lack of ambition”, says Beveridge.


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