The Santos independent directors and Managing Director & CEO have unanimously resolved to reject the Final Proposal on the basis that it does not represent a full value of the company and, when combined with the associated risks, is not in the best interests of Santos shareholders
On 21 May 2018 Santos received a conditional binding offer from Harbour Energy Ltd (Harbour) to acquire 100 per cent of Santos shares by way of a scheme of arrangement at a cash price of US$5.21 per share (currently equivalent to A$6.861 per share) (Final Proposal). Harbour indicated that it would be willing to increase its offer to US$5.25 per share (currently equivalent to A$6.911 per share) if Santos was willing to extend certain oil price hedging arrangements.
Harbour subsequently confirmed that the price offered under the Final Proposal was “best and final” and followed a seven week period of engagement with Harbour on the price and terms of an indicative proposal announced on 3 April 2018 (Indicative Proposal).
Following extensive due diligence, the Final Proposal price was increased by 4.6 per cent to US$5.21 per share from the price of US$4.98 per share in the Indicative Proposal. The consideration would be in US dollars and Santos shareholders would be subject to fluctuations in the AUD/USD exchange rate, with no adjustment if the US dollar depreciated against the Australian dollar.
Since receipt of the Indicative Proposal, Brent oil prices have increased by 14 per cent and the share prices of other major ASX-listed energy peers by an average of 18 per cent2. The Santos business has continued to perform well and is generating strong free cash flow.
The Final Proposal was a highly leveraged private equity-backed structure that, prior to implementation, would have required Santos to provide significant support for Harbour’s debt raising and to hedge a significant proportion of oil-linked production. In addition, the Final Proposal was stated to be subject to various conditions, including FIRB approval and restrictions on the conduct of Santos’ business from the time of entering into the Scheme Implementation Deed until implementation.
After careful consideration of all aspects of the Final Proposal, the Santos independent directors and Managing Director & CEO have unanimously resolved to reject the Final Proposal on the basis that it does not represent a full value of the company and, when combined with the associated risks, is not in the best interests of Santos shareholders.
Accordingly, Santos has now terminated all discussions with Harbour Energy.
1 AUD/USD exchange rate of 0.7598 as at 22 May 2018. Source: Bloomberg.
2 Dated Brent oil price and equal weighted average of Woodside and Oil Search performance based on closing share prices from 29 March to 21 May 2018. Source: Bloomberg
In arriving at this decision, Santos has had regard to the following matters:
Santos Board believes superior shareholder value could be realised by executing existing strategy
- The significant improvement in operating performance over the past two years and a continuing positive outlook;
- Santos expecting to reach its 2019 net debt target of $2 billion more than a year ahead of schedule, based on current oil prices;
- Santos’ strong balance sheet enabling restoration of fully-franked dividends in the near term;
- The superior value for shareholders that the Santos Board believes could be realised through the execution of Santos’ existing strategy, capitalising on its strong free cash flows, sustainable low cost operating model and significant growth opportunities; and
- Feedback from shareholders indicating support for Santos’ existing strategy and management.
Offer price too low; control premium inadequate
- The reduction in the implied premium for Santos shareholders since the Indicative Proposal, in light of the strengthening oil price and ASX-listed energy peer group performance;
- Harbour’s confirmation that the Final Offer was “best and final”; and
- A US dollar-based bid with foreign exchange risk for more than 120,000 retail shareholders.
Private equity transaction structure complex, high risk, uncertain and unequal treatment of shareholders
- The complexity and risk in the transaction structure, including its reliance on a high level of debt funding;
- Prior to shareholders having the opportunity to consider the Final Proposal, Santos being required to assist Harbour’s debt raising and to undertake significant hedging, removing potential upside to higher oil prices;
- Unequal treatment of shareholders – Santos’ largest shareholders being offered an opportunity that was not available to all shareholders to remain invested in Santos; and
- Uncertainty for shareholders due to a protracted execution timetable, which exposed the business to a high degree of risk and would have constrained the execution of Santos’ existing strategy.
Santos Chairman Keith Spence said: “Santos has a well-developed strategy, strong leadership and management team and outstanding growth opportunities that the Board believes will deliver superior value for its shareholders over time.”