The Santos Ltd (ASX: STO) share price is outperforming following reports that it may be looking to spin-off $5 billion worth of assets next year.
The ink has barely dried on the ASX energy company's $21 billion merger with Oil Search. But investment bankers hungry for their next big feast appear to be floating this divestment idea.
The talk is that Santos (and its investment bankers) could get a pretty penny for offloading infrastructure assets attached to its oil and gas projects, reported The Australian.
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Santos share price fires up on spin-off rumours
It's just speculation as the article didn't name sources. Nonetheless, the market may like what it heard as the Santos share price jumped 1.39% in afternoon trade to $6.20.
That's well ahead of its peers. The Woodside Petroleum Limited (ASX: WPL) share price has only managed a 0.33% advance, while the Beach Energy Ltd (ASX: BPT) share price is up 0.99% at the time of writing.
In contrast, the S&P/ASX 200 Index (Index: XJO) is barely in the black after Wall Street tumbled in overnight trade.
Hot M&A assets
There are many ways to crystallise value from divesting assets. This is particularly so for infrastructure assets as there are plenty of buyers looking for stable long-term returns in this market. Just ask Sydney Airport (ASX: SYD).
But Santos appears to be focusing on an initial public offering (IPO) for these assets, according to The Australian.
The paper quoted unnamed sources as saying that the company is "giving serious consideration to" the idea of a new float.
Other divestment options for the Santos share price
This could also be a way to force would-be acquirers to show their hands and to offer a higher price for the prize.
But there is more than one way of skinning a cat. Another alternative is for Santos to sell a stake in the infrastructure to a strategic buyer.
The Australian noted that Woodside did this with global infrastructure fund GIP, which purchased a 49% interest in its Pluto Train 2 project to strengthen its balance sheet and de-risk the project.
Can the Santos share price outperform in 2022?
The IPO route may be the lowest hanging fruit for Santos due to the complex nature of the assets. But the good news is that spin-offs or divestments often generate value for shareholders.
Selling the assets for cash will allow Santos to contemplate a capital return of sorts – and who doesn't like the sound of that?
If Santos chooses the IPO route, existing shareholders will get to own shares in the new listed entity too. One more recent example is Iluka Resources Limited (ASX: ILU) and Deterra Royalties Ltd (ASX: DRR).
History has shown that the combined value of the parent and child entity often beats the broader market. That sounds even better, in my view.
