Santos, Australia’s second-largest gas producer, has seen its market valuation significantly impacted following the withdrawal of a substantial takeover bid from a consortium led by Abu Dhabi National Oil Company (ADNOC). The consortium, operating under its overseas unit XRG, abandoned the proposed $18.7 billion acquisition due to unresolved commercial terms, a development that saw Santos’ share price tumble nearly 14%. This marks the third failed acquisition attempt for Santos in the past seven years, a trend that might raise concerns about the company’s strategic direction and shareholder value realization.
Despite the immediate market reaction and the recurring theme of failed bids, a segment of investors appears to maintain a degree of optimism regarding Santos’ underlying business prospects. Their sentiment stems from the anticipation of two key projects, the Barossa gas project off the coast of northwestern Australia and the Pikka oil project in Alaska, nearing production. Portfolio managers suggest that the company’s focus should now shift towards operational execution and leveraging the anticipated cash flows from these ventures to bolster its share price over time.
The breakdown in negotiations is reportedly linked to the discovery of imminent capital gains tax liabilities associated with Santos’ assets in Papua New Guinea. It appears XRG had anticipated Santos would cover these payments, estimated to be in the hundreds of millions of dollars. The consortium’s objection to assuming these tax obligations ultimately proved to be a decisive factor in halting the deal. Santos had communicated its willingness to finalize the acquisition at a revised price of $5.626 per share, a slight adjustment from the initial June offer of $5.76 per share, which, when accounting for a recent dividend payment and net debt, valued Santos at approximately A$36.4 billion. This would have represented Australia’s largest all-cash corporate buyout.
The sharp decline in Santos’ stock price on Thursday has brought its valuation back to pre-bid levels, with the removal of the takeover premium and selling pressure from arbitrage funds cited as primary reasons for the drop. However, some institutional investors, like Katana Asset Management, view the failed bid with a degree of acceptance. Their perspective emphasizes that Santos is poised to enter a lucrative phase as its major development projects approach production. The argument is that shareholders are now positioned to benefit from the substantial investments made in these assets, rather than seeing them potentially broken up or subsumed under new ownership.
Sophia Patel brings deep expertise in portfolio management and risk assessment. With a Master’s in Finance, she writes practical guides and in-depth analyses to help investors build and protect their wealth.