After many weeks of talks, Santos made its non-binding, all-scrip offer on June 25, offering Oil Search shareholders 0.589 new Santos shares for each of their shares, and a 37% stake in the merged group. Santos shareholders would have a 67% stake.
Despite the premium offered of 12.3% on its closing price June 24 and a 9.8% premium to the Mubadala block sale of 4.5% of its stake in Oil Search to Citi, the board, minus managing director Dr Keiran Wulff who was being investigated after complaints about his behaviour, knocked it back.
The Santos offer implied a price of $4.25 per share; while Oil Search stock currently sits at $3.85 per share after a 5% rise this morning on news of the offer, correcting a fall of the same yesterday on news of Wulff's departure and a calamitous conference call.
In January last year the stock price was close to $8 per share; unlike its peers the rising oil price hasn't restored value to the company.
The last takeover offer was by Woodside Petroleum in 2015.
Santos meanwhile received six offers from Harbour Energy in 2018, which it knocked back then went on to acquire Varanus Island and Devil Creek partner Quadrant Energy and later picked up ConocoPhillips' Northern Australia portfolio. This marks the third time in three years it has moved to acquire, buyout or merge with an existing project partner.
Santos said today the Oil Search board believed "the proposal did not offer appropriate value for Oil Search shareholders or a basis on which discussions could be progressed".
Yesterday chairman Rick Lee told analysts "We're obviously working very hard to create value for shareholders and we are well prepared for that and we are just as well prepared if someone were to approach us, but that hasn't happened".
He was also clear there had been no complaints about Wulff prior to June this year, despite the unexplained departure of its CFO-designate in late 2020 after just four months. The Australian reports today that there had been complaints about his management style from offices in Sydney, Papua New Guinea and Alaska.
It subsequently told the market it had received an offer, then Santos made public its own confidential, non-binding offer this morning, suggesting the merged entity would be "a regional champion of size and scale that is well-positioned to compete with larger global peers".
A Santos spokesperson declined to comment on either issue this morning.
The merger would turn Santos into a top 20 ASX company, it says, and one of the 20 largest global oil and gas companies. The two already share equity in the PNG LNG project operated by ExxonMobil, but it would also give Santos added PNG and LNG exposure, and Oil Search's undeveloped Alaskan oil project.
Credit Suisse analyst Saul Kavonic suggests the deal could present some downside risk for Santos and that "it could indicate Santos management sees little room to re-rate absent M&A".
Oil Search said its board, excluding the departed MD Wulff, had assessed the proposal
"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."
Santos has been in PNG over 40 years, which will likely help the necessary government relations, a key component of doing business in the nation.
"Santos is supportive of the backfill and expansion of PNG LNG through the development of the P'nyang field and other opportunities," it said.
"In relation to Alaska, we would be supportive of Oil Search working towards FEED and FID as publicly announced."
It made no mention of the planned 14-15% sell down of a stake, which acting MD Peter Fredricson said was a key component, along with financing, of any move towards sanction, which now has an open ended date after Oil Search previously suggested the back end of this year.
Santos has also said there would be an "opportunity" for Oil Search directors to join its board. Who might make the cut after the past 24 hours will be the question.
The upside is that the company would no longer need to conduct a search for a replacement to Wulff.
Santos is down today as oil prices fall of over 3% to $6.58 per share while Oil Search has now risen to by 6.4% to $3.90 per share on the Santos news.