Woodside-Santos $52 billion merger clouded by competition, price concerns

By Scott Murdoch, Lewis Jackson and Renju Jose

SYDNEY (Reuters) -Australia’s Santos Ltd shares jumped on Friday on the prospects of a possible A$80 billion ($52 billion) merger with its bigger rival Woodside (OTC:), but investors were cautious about the competition and valuation hurdles to a deal.

Woodside and Santos after market hours on Thursday confirmed speculation they were in preliminary talks to create a major oil and gas company, with assets in Australia, Alaska, the Gulf of Mexico, Papua New Guinea, Senegal and Trinidad and Tobago.

Santos shares jumped nearly 11% in early trade to hit their highest level in five weeks, but pared gains to 6% around 0345 GMT. Woodside trimmed early losses and was down 0.5%.

Both companies’ have lagged the global energy share market boom amid struggles securing environmental approvals for major growth projects. UBS analysts say a deal would provide the scale required to fund the decades long energy transition and could unlock $200 million in cost savings.

“It’s a dramatic concentration of control,” said Tim Buckley, a director at think tank Climate Energy Finance. “But I would emphasize it’s coming from a point of weakness. It’s coming from a point of ongoing massive underperformance.”

A bid price with a sufficient premium to satisfy disappointed Santos shareholders is going to be the “biggest issue”, said Matthew Haupt, a portfolio manager at long-time Santos shareholder Wilson Asset Management.

“We’d like to see a very compelling offer from Woodside with a premium built in to entertain this idea,” he said.

“I just don’t know if Woodside are willing to pay up.”

UBS analysts modeled an implied bid price for Santos between A$8.20 and A$8.88, with the lower value reflecting a typical “control premium” of 20%. By comparison, Santos shares hit a high of A$7.58 on Friday, reflecting uncertainty about how a deal would be structured.

The mooted deal would complete the consolidation of Australia’s four biggest homegrown oil and gas companies. Woodside just last year combined with BHP Group’s (NYSE:.AX) oil and gas business, while Santos acquired Oil Search (OTC:) in 2021.

With the talks revealed, Santos could potentially attract interest from a major European player with interests in the region, UBS analyst Tom Allen said. French giant TotalEnergies (EPA:) co-owns LNG assets in Papua New Guinea and Australia with Santos.

COMPETITION CONCERNS

Analysts say a potential Woodside takeover of Santos would create a dominant player in Australia’s domestic gas market and prompt close scrutiny from the competition regulator, which is concerned about soaring local gas prices.

Selective divestments could assuage the regulator, with Santos’ Varanus Island and Cooper Basin assets likely candidates, according to Jarden analyst Nik Burns.

The issue will be getting agreement on price for mature assets in a market with only a handful of interested mid-sized players, for instance Beach Energy (OTC:), he said.

“What’s the market appetite to take these assets? It’s not like there is a large playing field of potential buyers,” said Burns, who was previously investor relations head for Beach.

The Australian Competition and Consumer Commission said on Thursday it would consider if a public merger review into the impact on competition was required if the deal goes ahead.

($1 = 1.5154 Australian dollars)

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