'Deep pockets' could help Abu Dhabi win regulatory approval for Santos bid, analysts say
SYDNEY: Abu Dhabi National Oil Company, preparing an $18.7 billion bid for Santos, is likely to face close scrutiny from Australian regulators worried about local gas supply, but could win them over with pledges to speed up new projects, analysts say.
Santos shares closed at A$7.73 on Tuesday, well below the $5.76 (A$8.89) per share proposed takeover offer for Australia's second largest gas producer announced on Monday, which analysts said indicated investors believe the deal will face trouble with regulators.
"It's not going to be smooth sailing yet," said Jamie Hannah, Deputy Head of Investments and Capital Markets at VanEck Australia, which owns shares in Santos. However, he added that the offer price "is very attractive and it's straight cash".
The bid, which would be the largest ever all-cash takeover in Australia, according to FactSet data, has landed at a time when Australia's Labor government is debating how to deal with a looming gas shortage on the country's east coast from 2027.
"We would expect the Foreign Investment Review Board (FIRB) to focus on Santos's key gas infrastructure as it relates to domestic gas supply," said Jarden analyst Nik Burns.
Santos' market share in eastern Australia is around 5%, with most of its gas output on that side of the country going to its Gladstone LNG export plant, analysts said. In Western Australia, where it runs two domestic gas plants and has a stake in a third one, it has a 24% market share.
The infrastructure assets were not major income-generating assets, so would be very hard to spin off to satisfy any regulatory concerns, said Hannah.
"This infrastructure is important for domestic gas supply in both markets. The government needs to decide if they are happy for this to sit in the hands of a foreign government," said MST Marquee analyst Saul Kavonic.
ADNOC BRINGS CAPITAL TO THE TABLE
On the positive side, Santos holds undeveloped resources, including the Narrabri project and Beetaloo shale gas, that could help fill the expected gas supply gap on the east coast.
The bidding consortium, headed by ADNOC's investment arm XRG, could argue it would develop those projects faster than Santos could under its plans to boost capital returns to shareholders, and reduce the risk of an east coast gas shortage.
"XRG might point to regulators that its larger balance sheet and funding capacity provides an opportunity to accelerate Santos' undeveloped growth assets," UBS analyst Tom Allen said in a research note.
Romano Sala Tenna, portfolio manager at Katana Asset Management, which owns Santos shares, said the market was being too pessimistic about regulatory hurdles.
"A large sovereign wealth fund effectively coming in with deep pockets" could pour money into Santos' undeveloped assets, he said.
"So I think that is a card that will be appealing to the Australian government."
XRG said on Monday that if the deal goes ahead, the consortium aims to build on Santos' legacy as a reliable energy producer "unlocking additional gas supply" and intends to "work closely with the existing management team to accelerate growth".
Another factor that could work in favour of the ADNOC-led consortium, which includes the Abu Dhabi Development Holding Company (ADQ) and U.S.-based private equity firm Carlyle, is a trade deal Australia signed last year with the United Arab Emirates, analysts said.
Australian Treasurer Jim Chalmers, who has the final say on approving major foreign transactions, said he would listen to the advice of the Foreign Investment Review Board on the deal.
Santos Chief Executive Kevin Gallagher declined to comment on the deal and regulatory concerns on the sidelines of a gas conference in Malaysia on Tuesday, other than to say he would "let the process take its course".
(Reporting by Scott Murdoch and Christine Chen in Sydney; Additional reporting by Sudarshan Varadhan in Kuala Lumpur; Editing by Sonali Paul)
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