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The $13.5 billion takeover offer from Harbour Energy may not be enough for Santos Ltd

LNG cargo ship docked in the port 

A $13.5 billion bid may not be enough for Harbour Energy to take over Santos Ltd (ASX: STO).

The offer from the American energy investment vehicle seemed hard to refuse when it came along one month ago at a 28% premium over the target’s share price of $5.07. It finally convinced Santos’ board to open up to due diligence after having already turned down some lower bids from Harbour.

At the Santos AGM held in Adelaide on Thursday, chairman Keith Spence said “there is no certainty at this time that the Harbour proposal will result in a binding offer for Santos that is capable of being recommended by the Board for consideration by shareholders.”

This statement might be something more than just prudent words suited to address Harbour’s non-binding, indicative, conditional offer.

According to the Australian Financial Review, Santos now expects a higher binding bid from Harbour, after the Brent crude oil price grew about 8% in the last month. The AFR reports that Mr Spence commented on the recent surge, suggesting it must have had an impact on the company’s valuation, although at the moment the parties are not negotiating over the acquisition price.

Santos delivered solid quarterly results recently thanks to high commodity prices, and is on track to achieve its end-2019 net debt target of US$2 billion by the second half of 2018. The sale of its non-core Asian portfolio to Ophir Energy for US$221 million announced yesterday can only accelerate the process.

At the time of writing, shares in Santos are 0.6% down to $6.18, which is considerably more than the price of the stock right before the bid, but not quite the $6.61 implied by Harbour’s indicative offer at the current exchange rate between the Australian dollar and US dollar. The discount reflects the risk that the takeover may eventually fail, including because of possible opposition from the Foreign Investment Review Board.

Foolish takeaway

I don’t think the increase in oil prices is enough to prevent the deal with Harbour. However, in light of the recent results from Santos, I see value in the company, and even in the event of the takeover failing, I don’t expect the stock to sink as low as its pre-offer price.

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