Reports that a US consortium is close to making an all-cash takeover bid for $9.1 billion market cap Santos Ltd (ASX: STO) are likely to set the sector alight today even as the oil price slipped further in overnight trade.
But no one will be paying much attention to the commodity after the Australian Financial Review reported that Washington-based Harbour Energy was poised to offer $5.30 a share to buy the entire LNG producer.
Santos' share price fell 2.2% to $4.38 yesterday as the energy sector came under selling pressure from a softening oil price and Shell's $700 million sale of its stake in Woodside Petroleum Limited (ASX: WPL).
Indeed, there has been quite a bit of corporate action in the sector with Oil Search rumoured to be a takeover target by French oil giant Total.
If the takeover of Santos comes to pass, it would be the largest takeover of an Australian oil and gas major in recent memory and could pave the way for similar rumblings at the smaller end of the energy sector.
Harbour Energy, which is run by an ex-executive director of Shell, Linda Cook, is said to be eyeing a bigger role in the regional LNG market, and Santos would provide an ideal vehicle with its GLNG project in south-east Queensland.
Santos holds a 30% stake in this project. Interestingly, Total holds a 27.5% stake in this project too, along with Malaysian energy company Petronas and Kogas.
Investors have to wonder if Harbour has opened the gates for rival bids. This may also include Chinese interests as ENN and Hony Capital hold a 15% investment in Santos and have a representative on its board.
For this reason, a hostile bid for Santos is probably off the table. Harbour Energy will need the backing of the board to pull this off. The AFR has said the bidder has lined up its funding from sources in the US, Europe and Asia, and that will go a long way in getting Santos' board onside.
It's still anyone's guess how the takeover drama will unfold and the indicative bid for Santos may only form the starting point for negotiations. But what all investors will agree with is that Harbour Energy has delivered an early Christmas present to shareholders in Santos, and very possibly the wider energy sector.
I am not suggesting investors should try to increase their exposure to the sector based on M&A interest. This is not a smart strategy for retail investors and the investment thesis for the sector is till clouded by the volatile oil price, which has been under pressure due to shale.
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