Jilted Santos responds to shock collapse of $30b takeover deal from Middle East-backed XRG Consortium

Shares in jilted takeover target Santos have been obliterated in early trade after the oil and gas giant revealed it had expressed concerns about delays in finalising a deal before its suitors eventually pulled the plug just days before an offer was due to be tabled.

The XRG Consortium led by Abu Dhabi National Oil Co. walked away from the proposed $30 billion offer late on Wednesday night, saying a “combination of factors” had discouraged it from making a final bid.

The shock decision came just days before a second extended deadline for the consortium — which also included Abu Dhabi Development Holding Co. and Carlyle Group — was set to finalise a scheme implementation agreement on Friday.

Santos runs the Darwin LNG plant, Queensland’s Gladstone LNG, and Papua New Guinea LNG offshore. The business also supplies about 16 per cent of WA’s domestic gas through Varanus Island.

Responding on Thursday morning to XRG’s withdrawal, Adelaide-based Santos said its board had expressed concern to the consortium about delays in agreeing a deal.

“The XRG Consortium would not agree to acceptable terms which protected the value of the potential transaction for Santos shareholders, having regard to the likely extended timeframe to completion and the regulatory risk associated with the transaction,” it said.

“Further, the XRG Consortium would not agree to an appropriate allocation of risk between the XRG Consortium and Santos shareholders under the SIA.

“This included the obligation of the XRG Consortium to secure regulatory approvals and the provision of a reasonable commitment to the development and supply of domestic gas.”

Santos shares closed trade on Wednesday at $7.65 — well below the offer price, but up almost $1 after the offer was disclosed.

They plunged almost 13 per cent to $6.70 in the first few minutes of trade, taking its market capitalisation to just under $22b.

“The market will ask questions about Santos’ valuation after this,” said Saul Kavonic, an energy analyst at MST Marquee.

Investors may be wary about “any skeletons that may be lurking there, all the more so because XRG was a less price-sensitive buyer than most, yet still couldn’t make it work.”

It’s not the first time Santos has been left at the alter.

The collapse of the deal comes about 20 months after merger talks with larger rival Woodside ended with no deal being agreed. In 2018, Santos rejected multiple offers from US-based Harbour Energy.

XRG first lobbed its cash offer of $US5.76 ($8.89) a share in June and was given two extension on exclusivity arrangements to complete due diligence.

In a statement late Wednesday night, it said while it maintained a positive view of Santos, “a combination of factors, when considered collectively, have impacted the consortium’s assessment of its indicative offer”.

“Following a comprehensive evaluation, and taking into account all commercial factors and the terms of the scheme implementation agreement required by the Santos board, the consortium has determined that it will not be proceeding with the proposed transaction,” it said.

The consortium said while it was disappointed not to proceed with a binding offer, its engagement with Santos had “reinforced our confidence in Australia’s energy and investment environment, as well as the other locations that Santos operates”.

It also noted it had been prepared to undertake new long-term commitments to Australian energy production “that would deliver meaningful benefits to domestic gas consumers and enhance regional energy security”.

Just three weeks ago, Santos chief executive Kevin Gallagher said he was confident a deal could be reached, despite regulatory hurdles — including a nod from the Foreign Investment Review Board.

“We’re finalising an acceptable agreement and have made considerable progress,” he told investors when presenting the company’s half-year results late last month..

“This is a big transaction. I believe it will be the largest all-cash transaction ever on the ASX.”

But there had been resistance to a deal from trade groups. Offshore Alliance, which represents two major labour unions, on Wednesday urged the Federal Government to keep Santos “in Australian hands” and block the sale.

Santos board chairman Keith Spence said Australia’s second-biggest oil producer would continue its clear strategy, with its base business generating strong, stable cash flows underpinned by a low-cost operating model.

“Santos has a clear strategy, strong leadership and high-quality growth opportunities across our global portfolio,” Mr Spence said on Thursday.

“The board is confident these strengths will deliver long-term value for shareholders.”