April 3, 2018 / 6:18 AM / 21 days ago

Breakingviews - Harbour closes in on $10 bln Santos at a price

HONG KONG (Reuters Breakingviews) - Harbour Energy clearly has a bold view on liquefied natural gas. The private equity-backed outfit is closing in on a $10 billion-plus takeover of Australian producer Santos. The target’s board tactfully resisted, but is wise to engage with its eager suitor now.

A sign for Santos Ltd, Australia's No. 2 independent gas producer, is displayed on the front of the company's office building in the rural township of Gunnedah, located in north-western New South Wales in Australia, March 9, 2018. Picture taken March 9, 2018. REUTERS/David Gray

With its fourth unsolicited pitch, at roughly A$6.50 a share, Harbour is offering nearly 43 percent more than it originally did last August. Including debt, the proposal values Santos at about $12.6 billion.

It is rare for a single suitor to bid so aggressively against itself, and especially in such a volatile industry as energy. There are mitigating factors, though. Bidders rarely start with their best number. Australia’s currency also has dipped, making the sweeteners slightly lower in U.S.-dollar terms. Most importantly, energy prices have soared. At about $63 a barrel, U.S. crude is nearly one-third more expensive than it was some seven months ago. That greatly increases the value of Santos assets.

The market recovery also helped Harbour rustle up debt of nearly $7.8 billion, or almost 4.8 times the EBITDA analysts expect from Santos in 2018. That proportion of borrowing magnifies the risks – and potential rewards – for Harbour. At least most LNG is sold on long-term contracts, which helps reduce the choppiness seen in oil markets.

Add it all up and the result is generous. Harbour’s bid represents a 27 percent premium to the price target analysts have on average set for Santos, according to Eikon data, and a slightly larger mark-up to where the stock last traded.

Some of this gulf may be down to shareholder myopia. Closely held Harbour, under Chief Executive Linda Cook, takes a more bullish long-term view on LNG demand in Asia. And some of it probably reflects the strategic value of Santos to Harbour as the central plank of an envisioned larger Asia-Pacific business.

For Santos, there is enough enticement to move forward. The board shrewdly swatted away the first opportunistic entreaty and has wrung another 4 percent out of Harbour since mid-March. Whether or not the investment thesis holds up under the revised terms, Harbour looks increasingly likely to capture its quarry.

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