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Scepter makes $5bn swoop on Santos

Australia’s Santos has rebuffed a A$7.14bn ($5.15bn) takeover bid from Middle Eastern private equity group Scepter

Santos, which needs to reduce its hefty debt by A$3.2bn to maintain its investment-grade credit rating, rejected the bid on the grounds that it was opportunistic and undervalues its assets. The current offer marks a 26% premium to Santos’ closing price of A$5.44 on 21 October and a 40% premium to the past 40 days. But analysts expect the deal, which values Santos at A$6.88/share, will be sweetened by 10% to around A$7.50/share, which would “be sufficient to get a deal done” and values the company on a long term oil price of close to $80/barrel, reported investment house Bernstein.
The alternatives for Santos to pay down its debt are less attractive. Either a dilutive equity raise or selling its entire stake in the Papua New Guinea Liquefied Natural Gas (PNG LNG) project will be needed, said Bernstein. But a competitive auction is unlikely given strong pre-emption rights and it would materially reduce the attractiveness of the rest of the company.
While Scepter’s bid for Santos comes as a surprise to many, private equity makes sense. Not only could debt be restructured at lower costs using Scepter’s balance sheet, but private equity is likely to take a proactive approach to restructuring, said Neil Beveridge, an oil and gas specialist at Bernstein. “More importantly private equity can take a much longer term view on a recovery in oil price, which is also likely to be a key part of their thinking,” he added.
Other than shareholder approval, the key risk is government approval, as Santos holds critical national infrastructure in the Eastern Australian gas market. Still this is not expected to be a showstopper in the current business environment.
While there are many who have never heard of Scepter, they are a serious investment fund with $14bn in discretionary assets, whose core stakeholders include a syndicate of ruling families, ultra-high-net-worth industrialists and sovereign wealth funds. Among the directors are two Princes of the Brunei royal family, one sheikh, one former US ambassador, and two industry veterans.
Australian media reported that ex-Santos chief executive John Ellice-Flint will become executive chairman of Santos if Scepter’s rejected bid ever succeeds. It is understood Ellice-Flint, who was replaced by David Knox in 2008 and remains a shareholder, has agreed to return to the helm of the oil and gas producer if Scepter’s takeover offer is successful.
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