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Santos Ltd gets a $13.5bn takeover offer from Harbour Energy

Oil and gas company Santos Ltd (ASX: STO) will probably be one of the few bright spots on the market today after it received a takeover bid from US-based Harbour Energy Ltd that prices its stock at a 28.2% premium to its last closing price.

The news comes amid an expected meltdown in the markets with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) tipped to drop in sympathy with US stocks, which shed around 2% in overnight trade.

Santos has found safe harbour from the market turbulence even though the bid is indicative and conditional on several things.

But the initial offer could be worth a lot more to local investors that can benefit from franking credits. Harbour Energy is proposing to pay US$4.70 (equivalent to $6.13 at the moment) in cash for each share and a fully franked special dividend of US$0.28 cents (or $0.37).

This works out to $6.50 a share but if you qualify for the franking, you can pick up another $0.16 a share to make a total of $6.66 a share compared to Santos’ closing price of $5.07 on March 29 (this is a very nice 31.4% premium).

But don’t count your chickens before they are hatched! The exchange rate could work against us as it will only be fixed for the first 10,000 shares you hold and at the prevailing rate when a binding agreement is reached.

Getting to the binding agreement could also take a while and there are a number of conditions to the bid.

The most interesting one is that at least 15% of Santos’ stock (and up to a maximum of 20%) has to be rolled over into an unlisted special purpose company (referred to as Harbour RollCo).

I suspect this is aimed at Santos’ Chinese investors ENN Group and Hony Capital as they hold around 15% of the stock.

Hony Capital has an agreement with Santos that gives it the right to make a counterbid on any takeover offer that is priced above its entry price into the Australian energy company.

The condition could be a way to win Hony Capital over as they can still benefit from any further upside from Santos’ LNG projects, although it could also be a sign that Harbour Energy is struggling to raise sufficient debt funding to engage Santos’ board.

The $6.50 mark is a sweet spot as Santos has agreed to give the US bidder access to its books to undertake due diligence.

The other conditions to the bid look pretty standard. Harbour Energy will only move forward if Santos’ board supports its bid, the due diligence process doesn’t throw up anything unexpected, debt funding is locked in and other standard deal protections are in place.

The energy sector is ripe for merger and acquisition (M&A) activity and we have already been hearing ramblings from dealmakers involving Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL).

While I am not expecting a competing bid to emerge for Santos, one can’t rule out that possibility either.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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