Troubled Australian oil and gas producer Santos has rejected a A$7.14 billion ($5.19 billion) takeover offer from Bermuda-based investment fund Scepter Partners, the company said Thursday.
Santos received the "indicative, highly conditional and non-binding proposal" from Scepter on behalf of the managed funds of its core stakeholders on October 20, the company added.
Scepter has offered A$6.88/share in cash, representing a 26% premium to Santos' closing price of A$5.46/share on October 19 and was 40% above its average trading level over the past 30 days.
"The Santos board has met to consider the proposal and decided to reject it," the Adelaide-based company said in a statement. "The proposal is considered to be opportunistic in nature and does not reflect the fair underlying asset value of the company."
Santos added that some of the conditions attached to the offer would be adverse to its continued evaluation of other alternatives in its current strategic review process.
In response to market jitters about its liquidity, Santos announced in August that it would conduct a strategic review of all options to restore and maximize shareholder value.
Hong Kong-based analysts with Bernstein Research said they expected Scepter to sweeten the offer by 10% to around A$7.50/share, which they said would be reasonable for shareholders.
"Although we think it more likely than not that a deal gets done, government regulatory approval is a risk given Santos' gas infrastructure in eastern Australia which has strategic value," the Bernstein analysts said in a note.
"The alternatives for Santos are less attractive," they added. "Santos needs to raise A$3.2 billion in debt to maintain its investment grade credit rating. This means an equity raise or asset sales, neither of which options is particularly attractive for shareholders."
The Bernstein analysts said the private equity interest in Santos made sense. "Not only could debt be restructured at lower costs using Scepter's balance sheet, but private equity is likely to take a more proactive approach to portfolio restructuring ... 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," they said.
Santos' shares were particularly hard-hit by the fall in oil prices over the latter part of 2014, dropping from more than A$15.00 in early September to around $8.00 at year-end, wiping more than A$7 billion off the company's capitalization.
Since then the rot has continued, with the company's shares dipping below A$4.00 on September 30, before rebounding above A$5.00 this month. "The strategic review is ongoing, and will continue to consider all proposals which deliver appropriate value and certainty for shareholders," Santos said.
In addition to considering asset sales as part of the review, the company has so far announced plans to cut 756 employees from the 3,636 it had at the end of last year.
Santos is Australia's third-largest oil and gas producer, behind the petroleum division of BHP Billiton and Woodside Petroleum.
The company expects to produce between 57 million and 64 million barrels of oil equivalent in 2015, at a production cost of A$14.20-14.60/boe.
Santos last week made the first shipment from its $18.5 billion Gladstone LNG project on Australia's east coast. The company owns 30% of GLNG, which will have a capacity of 7.8 million mt/year at two production trains.
GLNG is Santos' first operated LNG project, and adds to a portfolio which includes 13.5% of ExxonMobil's PNG LNG and 11.5% of ConocoPhillips' Darwin LNG. The company's other core operations are its oil and gas assets in central Australia's Cooper Basin.
Scepter is a direct investment business whose stakeholders include a standing syndicate of Asian and Persian Gulf-based ruling families, ultra-high net worth industrialists and sovereign wealth funds.
Scepter represents over $14 billion in discretionary assets and over $100 billion in net worth of its core stakeholders, according to information on its website.
