Harbour Energy seeks Santos growth with $10.3-billion offer

By Perry Williams on 4/3/2018

SYDNEY (Bloomberg) -- Harbour Energy CEO Linda Cook said she would seek to expand Santos in Asia and Africa after making a A$13.5-billion ($10.3 billion) offer for Australia’s third-largest energy producer.

U.S.-based Harbour would look to grow Santos’ gas assets in South Australia’s Cooper basin, the ConocoPhillips-operated Darwin LNG plant in the Northern Territory and in Papua New Guinea, Cook said in a phone interview Tuesday. The Adelaide-based company granted Harbour due diligence after receiving the indicative proposal worth A$6.50 per share on March 29, it said in a statement Tuesday.

Santos shares jumped as much as 22% to A$6.20 and traded at A$5.905 in Sydney. The company’s $800 million 2027 bonds were set for the biggest gain since the notes were sold in September.

“Our focus areas would be in Asia and Africa in particular,” Cook said in a phone interview Tuesday when asked about Harbour’s plans for Santos. “We are big believers in the liquefied natural gas story. Our focus for Santos going forward would be in natural gas and LNG in particular.”

Santos will continue to focus on its existing assets including stakes in the Gladstone liquefied natural gas plant in Queensland, the Darwin LNG facility and a holding in Exxon Mobil’s Papua New Guinea LNG project, CEO Kevin Gallagher said.

“Santos’s strategy before anybody is taking us over is very much focused on Australia and Asia. There is no Africa,” Gallagher said in a phone interview. “If Harbour Energy is focused on Africa, that’s really their strategy.”

The company’s board will likely issue a recommendation to shareholders in the next two months, according to Gallagher. An alliance Santos entered last year with its top investors, China’s ENN Group and Hony Capital, to coordinate investment in LNG production in Australia and PNG would not be impacted by the offer, he said.

Knock-out bid

The A$6.50 per share proposal followed offers of A$6.37 on March 27 and A$6.25 on March 22, Santos said in the statement.

“We do see this latest Harbour Energy approach as a knock-out bid, one which the board of Santos will struggle to turn down,” RBC Capital Markets analyst Ben Wilson said in a note. “The additional measures taken by Harbour to accommodate ENN/Hony and fulsome indications of bid financing offer further evidence of intent from the bidder.”

Harbour’s a joint venture led by resources investment house EIG Global Partners. In November, Santos said it rejected Harbour’s A$4.55-a-share non-binding proposal made last August due to an “inadequate” price and uncertain funding.

Harbour indicated the latest offer would be funded by $7.75 billion of debt to be underwritten by JPMorgan Chase & Co. and Morgan Stanley, with the balance in equity from Harbour, other EIG managed funds and global trader Mercuria Global Energy. The indicative offer price includes cash equivalent to A$6.13 a share and a special dividend of A$0.37, which is expected to be fully franked.

Santos was among the biggest casualties of the rout in crude oil prices, plunging from a 2014 peak of A$13.23 a share to a low of A$2.48 in 2016 as debt levels ballooned while it was building Gladstone. After facing pressure from major shareholders over its strained balance sheet, Santos has emerged a stronger energy producer after slashing its costs and receiving regular LNG revenues from its share of the GLNG plant.

Harbour held a preliminary meeting with Australia’s Foreign Investment Review Board last year when details of its initial bid for Santos became public, Cook said Tuesday, and is confident of securing regulatory approvals. The politicized nature of Australia’s domestic gas landscape raises the risk of issues in seeking FIRB clearance, Wood Mackenzie analyst Saul Kavonic said in an emailed note.

"The biggest uncertainty sometimes with FIRB is the timeline and not knowing how long that will take," Gallagher said.

Rothschild & Co., J.B. North & Co. and Deutsche Bank are acting as financial advisers to Santos and Herbert Smith Freehills is acting as legal adviser.

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