The Santos Ltd (ASX: STO) share price is falling today amid reports experts expect its merger bid for Oil Search Ltd (ASX: OSH) to get messy.
Santos made an under-the-table proposal that would have seen it merge with Oil Search in late June. Santos' proposal went public on Tuesday when Oil Search rejected the bid.
Right now, the Santos share price $6.64, 1.48% lower than its previous close.
It has also fallen 2.7% this week, despite announcing positive quarterly results yesterday.
The market seemingly expects Santos to increase its bid but some analysts say Oil Search's board is preparing for battle. Let's take a closer look.
Is a bidding war brewing?
With oil prices back in focus and its bid for Oil Search rejected, the Santos share price is having a tough week.
Santos' bid for Oil Search and its following rejection was announced on Tuesday.
The all-scrip offer put forward was 0.589 new Santos shares for every Oil Search share.
Santos' offer implied a value of $4.25 per share – a 12.3% premium on the Oil Search share price as of 24 June. Oil Search said Santos' offer undervalued its shares.
The proposal offered Oil Search's shareholders a 37% holding in the resulting company.
Word on the street today is Santos is preparing to put forward an increased offer, and Oil Search's board is ready to toss it out.
According to reporting by The Australian, Wood Mackenzie senior analyst Daniel Toleman believes Oil Search's shares have surpassed the offer's premium. Toleman was quoted as saying:
The Oil Search board will likely believe that a merger with Santos would not provide full value to Oil Search shareholders. As a result, we expect the board to fight off the merger attempt.
MST Marquee analyst Mark Samter said Oil Search, and its share price, isn't in a good position to fight off Santos' proposal:
I do think for Oil Search we need to remember the alternate scenario, where no deal happens, and we are back to a world with no CEO, likely a few less board members and clearly greater challenges on progressing Alaska…
Clearly, as I have discussed before, I think there are far greater opportunities to extract value than the market may realise in this deal, both through asset optimisation in [Papua New Guinea]… and in being willing to sell operator-ship in Alaska.
Santos share price snapshot
Despite this week's poor performance, the Santos share price is doing well.
It has gained 3.5% year to date. It's also 19% higher than it was this time last year.
