Harbour Makes Final, Sweetened $10.9 Billion Santos Offer

(Bloomberg) -- Harbour Energy Ltd. made a final sweetened bid of $10.9 billion for Santos Ltd., claiming support from the Australian oil and gas producer’s biggest shareholders.

U.S.-based Harbour improved its bid 4.6 percent and indicated it could be raised further if Santos expanded its oil hedging program, the Australian company said in a statement Monday. At $5.21 per share, or the equivalent of A$6.95, it’s an 11 percent premium to Friday’s close.

Santos continues to trade below the offer. Shares in Sydney rose as much as 3.4 percent to A$6.46 after the bid was revealed, then pared those gains following Harbour’s announcement that it was “best and final,” trading up 1.7 percent as of 1:50 p.m. local time. The benchmark S&P/ASX 200 Index was little changed.

Harbour’s takeover blitz has faced criticism that it hasn’t accounted for the roughly 12 percent gain in Brent crude future since the original offer March 29. As well, there are concerns that foreign investment review may sink any deal as Australia’s struggle to ensure sufficient natural gas supply has raised sensitivity over control of domestic producers.

“We’ve still got uncertainty around the pricing environment around oil,” Adrian Prendergast, a Melbourne-based analyst at Morgans Financial Ltd., said by phone. “Given that uncertainty, we think it’s a really good offer.”

Hedging Condition

The stock is trading below the bid largely because it’s not clear how the Santos board views the proposal, and any agreement still needs foreign-investment approval in Australia, he said.

The revised offer is conditional on Santos undertaking additional hedging of oil-linked production in 2018 of about 30 percent and changes to hedging in 2019, according to the statement from Santos. Harbour could increase the offer to $5.25 per share if Santos agrees to hedge 30 percent of oil-linked production in 2020, according to statements from both companies. Typically, producers use hedging programs to lock in future sales through derivatives linked to the price of oil.

For more details on Harbour’s revised offer for Santos, click here.

The additional oil production hedging requirement will enable Harbour to reduce transaction costs and increase the offer price, Harbour said in its statement, adding that it’s not required to support its financing. The offer also has support of ENN Group and Hony Capital, it said. The Chinese companies hold a combined 15.1 percent of Santos.

‘Substantially More’

Harbour last week offered $4.98 per share for Santos -- its bid unchanged following five weeks of due diligence -- prompting the target to close down 1.9 percent in Sydney trading Thursday. Santos told investors earlier this month that it may be worth "substantially more" than Harbour’s original proposal because of a rise in oil prices.

Harbour Chief Executive Officer Linda Cook has said she would seek to expand Australia’s third-largest energy producer in Asia and Africa. She would also look to grow its gas assets in South Australia’s Cooper Basin, the ConocoPhillips-operated Darwin LNG plant in the Northern Territory and in Papua New Guinea.

©2018 Bloomberg L.P.