Shares in Santos Ltd (ASX: STO) is yet to resume trading this morning after management announced that it has received a binding offer to acquire the company on revised terms.
Harbour Energy, which had undertaken a five-week due diligence on Santos, has tabled a binding but conditional offer to pay shareholders US$4.98 a share, giving Santos a market value of $13.8 billion at the current exchange rate.
I suspect the stock will move higher when trade resumes now that there is a greater certainty of a deal although investors may feel a little disappointed about the new terms.
The US dollar offer is the same as the initial proposal from the private equity bidder that was announced on 3 April even though the Brent crude oil price has jumped by 17% over the period.
If investors are feeling a little short changed on that front, they won't be happy to hear that they will also have to wear the exchange rate risk.
Harbour Energy had initially offered to fix the exchange rate at the time of a binding agreement is struck for the first 10,000 shares that each investor holds to provide certainty and win over retail shareholders.
While the US dollar has strengthened against the Aussie in the past seven weeks, which lifts the offer price to around $6.63 a share from $6.50 when the initial approach was announced, it's anyone's guess where the currency will end up when the deal is signed.
I would have thought that if Harbour Energy was serious about winning backing for the deal, it would have at least provided a floor for the exchange rate.
Another significant change to the terms from the initial proposal is to allow Santos' two key Chinese shareholders, ENN and Hony, to roll-out their existing holdings in Santos into the new company holding company with the option for them to subscribe for new shares in the holding company.
The US dollar cash consideration doesn't apply to ENN or Hony, which makes me wonder if they have received a sweeter deal to win their support.
There are a number of other conditions to the binding offer such as the completion of final due diligence, the backing of Santos' independent directors so that the bidder and target can enter into a scheme of arrangement and approval from shareholders and the Foreign Investment Review Board (FIRB).
The board is studying the new offer and is urging investors not to take further action in the meantime.
Given the bright outlook for the oil price and the US dollar, I think the offer is a little miserly. I also think this backdrop creates a conducive environment for more merger and acquisition (M&A) activity in the energy sector with Oil Search Limited (ASX: OSH) and even Woodside Petroleum Limited (ASX: WPL) being on either side of an M&A transaction.
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