Santos (ASX:STO) share price lower after Oil Search rejects merger proposal

Santos is wanting to merge with Oil Search…

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The Santos Ltd (ASX: STO) share price is falling on Tuesday.

In morning trade, the energy producer’s shares are down 3% to $6.63.

Why is the Santos share price sinking?

Investors have been selling down the Santos share price today after a sharp pullback in oil prices overnight.

In addition to this, this morning Santos revealed that fellow energy producer Oil Search Ltd (ASX: OSH) had rejected a merger proposal.

The Oil Search share price is having a better day. It is defying the oil price decline and charging higher on the merger approach news.

Santos-Oil Search merger

According to the release, late last month Santos submitted a confidential, non-binding indicative all-scrip merger proposal to the Oil Search Board.

That proposal would have seen Oil Search shareholders receive 0.589 new Santos shares for each Oil Search share held. After which, Oil Search shareholders would own 37% of the merged company and Santos shareholders would own 63%.

The ownership ratio implied a transaction price of $4.25 per Oil Search share, based on the Santos share price on 24 June 2021. This represented a 12.3% premium to the Oil Search share price on 24 June 2021 of $3.78.

However, although Oil Search acknowledges the strengths of the combined company and the rationale for the merger, it noted that the proposal did not offer appropriate value for Oil Search shareholders. Nor did it offer a basis on which discussions could progress.

Nevertheless, Santos has subsequently sought to engage the Oil Search Board on the transaction rationale and the opportunity for Oil Search shareholders to participate in the value created by the merger.

Why merge?

Santos believes the potential merger of the companies is a logical combination of two industry leaders to create an unrivalled regional champion of size and scale.

It notes that it would have a pro forma market capitalisation of $22 billion, which positions the merged entity in the top 20 ASX-listed companies and the 20 largest global oil and gas companies.

The merged company would have a diversified portfolio of high quality, long-life assets across Australia and Papua New Guinea. It would also have a robust balance sheet with strong liquidity that can self-fund growth options and an investment grade credit rating, a larger portfolio of development assets and opportunities, and strong ESG credentials.

In addition, Santos believes the merger could create value on day one from substantial combination synergies and an expected re-rating in share prices.

It concluded: “The strategic rationale for a merger is clear and offers superior value to Oil Search shareholders rather than continuing on a standalone basis. Santos continues to believe that the Merger Proposal represents an extremely attractive opportunity to deliver compelling value accretion to both Santos and Oil Search shareholders.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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