Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>After <a href="http://www.asx.com.au/asxpdf/20171116/pdf/43p91h9rx1db4g.pdf" target="_blank">rejecting</a> a “confidential, non-binding conditional and indicative proposal” for a takeover from <a href="https://www.eigpartners.com/page/businesses" target="_blank">Harbour Energy</a> at A$4.55/share last August, <strong><a href="https://www.smartkarma.com/entities/711" target="_blank" data-smartkarma-citation="entities:711:1">Santos Ltd (STO AU)</a></strong> has <a href="https://www.asx.com.au/asxpdf/20180403/pdf/43sww1p1ng0tv3.pdf" target="_blank">granted</a> Harbour access to due diligence pursuant to Harbour's <strong>non-binding, indicative and conditional offer</strong> of US$4.98/share (A$6.50/share).  That non-binding offer comprises the cash equivalent of A$6.13/share PLUS a special dividend of A$0.37/share, which is <em>expected</em> to be fully franked.</p><table class="table table-striped"><tbody><tr><td>Datapoint</td><td>Data in the Datapoint</td></tr><tr><td><strong>Target</strong></td><td><p><strong><a href="https://www.smartkarma.com/entities/711" target="_blank" data-smartkarma-citation="entities:711:1">Santos Ltd (STO AU)</a></strong></p><p> </p><p>Mkt Cap: US$8.1bn; 3mth Liquidity: US$31.1mn</p></td></tr><tr><td><strong>Offeror</strong></td><td><p><strong>Harbour Energy</strong></p><p> </p></td></tr><tr><td><strong>Terms</strong></td><td><ul><li>US$4.70/share (A$6.13) in cash + a special dividend of US$0.28/share (A$0.37) which is expected to be fully franked. That full franked divi could represent an additional A$0.16/share over and above the offer, for those shareholders able to take advantage of the franking credit.</li><li>Harbour will fix the Aussie dollar offer price for the first 10,000 shares held by each shareholder.</li></ul></td></tr><tr><td><strong>Structure</strong></td><td><ul><li>Scheme of Arrangement</li></ul></td></tr><tr><td><strong>Other</strong></td><td><ul><li>Completion of confirmatory due diligence</li><li>Unanimous recommendation of the Harbour proposal by the Santos Board, in the absence of a superior proposal</li></ul></td></tr><tr><td><strong>Key conditions to this scheme</strong></td><td><ul><li>Typical of Scheme of Arrangements -  <strong>75% of shareholders</strong> would need to approve the offer.</li><li>Harbour is providing <strong>Santos shareholder the option of electing to accept unlisted scrip</strong> in a new private vehicle, subject to a <strong>minimum of 15%</strong> accepting, and a maximum participation cap of 20%. That 15% would be covered should both ENN and Hony Capital accept this option. </li><li>Reg approvals, including <strong>FIRB </strong></li></ul></td></tr><tr><td><strong>Funding</strong></td><td><ul><li>Fully funded. Included is a "material" equity contribution from <strong><a href="https://en.wikipedia.org/wiki/Mercuria_Energy_Group" target="_blank">Mercuria Energy Group</a></strong></li></ul></td></tr><tr><td colspan="2">Link: <a href="https://www.asx.com.au/asxpdf/20180403/pdf/43sww1p1ng0tv3.pdf" target="_blank">Announcement</a> </td></tr></tbody></table><h2><strong>What to do?</strong></h2><div><p>While A$6.50/share appears a full offer, pre-events in Australia have been a graveyard.  </p><p>Shares opened at A$6.10/share this morning. I'd look to set-up ~A$5.90/share (10% below the non-binding offer price) and short ~$6.30/share.</p><h2><strong>Valuations</strong></h2></div><p>The non-binding offer backs out an FY18E and FY19E EV/EBITDA of 7.9x and 7.8x.</p><ul><li><p>Of the following precedent transactions, the failed <a href="https://www.smartkarma.com/entities/773" target="_blank" data-smartkarma-citation="entities:773:1">Oil Search Ltd (OSH AU)</a> / <a href="https://www.smartkarma.com/entities/177" target="_blank" data-smartkarma-citation="entities:177:1">Woodside Petroleum Ltd (WPL AU)</a> deal is probably the most similar, where the deal was pitched at 10.4x EV/EBITDA. To test your own assumptions, please refer to our <a href="https://www.smartkarma.com/tools/mna-statistics?countries=%5B%22Australia%22%5D&amp;industries=%5B%22Energy%22%5D" target="_blank">database</a>.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/048/803/original/image%20%281%29.png?1522719623" class="editor-image img-responsive" data-smartkarma-image-id="48803"></figure><div class="content-caption">Source: SK, Capital IQ</div></li><li><p><a href="https://www.smartkarma.com/companies/146" target="_blank" data-smartkarma-citation="companies:146">Morningstar</a>'s fair value of $5.75 in its last note <a href="https://www.smartkarma.com/reports/no-moat-santos-2017-earnings-in-line-with-expectations-no-change-to-fve" target="_blank">No-Moat Santos’ 2017 Earnings In Line With Expectations; No Change to FVE</a> equates to an FY21E EV/EBITDA and PER of 6x and 18.8x. The consensus target price (2 Buys, 9 Holds, 2 Sells) is A$5.15/share. On balance, Harbour's offer appears fair.</p></li><li><p>Of note, Santos <a href="http://www.asx.com.au/asxpdf/20151022/pdf/4328mk0ck7f2g9.pdf" target="_blank">rejected</a> an A$7.1bn ($6.88/share – a 26% premium to the last close of $5.44) proposal in Oct 2015 from Brunei-backed <a href="http://www.scepterpartners.com/whoweare_overview.php" target="_blank">Scepter Partners</a>. That proposal translated to an EV/EBITDA of 15.6x. Santos was saddled with net debt of A$8.6bn in 2015 vs. ~A$3.5bn currently. </p></li></ul><div><div><h2><strong>On Harbour Energy</strong></h2></div><p>As per my previous insight <a href="https://www.smartkarma.com/insights/santos-harbour-energy-back-to-the-well" target="_blank">Santos – Harbour Energy Back to the Well?</a>:</p><ul><li>Harbour Energy was formed by private equity group <a href="https://www.eigpartners.com/" target="_blank">EIG</a> and <a href="https://www.smartkarma.com/entities/378" target="_blank" data-smartkarma-citation="entities:378:1">Noble Group Ltd (NOBL SP) </a>in <a href="https://www.eigpartners.com/news/press-releases/noble-group-and-eig-form-new-energy-company" target="_blank">July 2014</a>. <ul><li>In January of last year, Chrysaor, backed by EIG and Harbour Energy, paid US$3.8bn for around half of Shell’s UK North Sea assets. The completion of the deal on the <a href="http://www.shell.com/media/news-and-media-releases/2017/shell-completes-sale-of-uk-north-sea-asset-package-to-chrysaor.htm" target="_blank">1 November</a>, elevated Chrysaor to become the largest O&amp;G producer in the UK.</li><li>The MD &amp; CEO of Harbour Energy; and the chairwoman of Chrysaor, is <a href="https://www.eigpartners.com/team/linda-cook" target="_blank">Linda Cook</a>. Ms. Cook was a 29-year employee of Royal Dutch Shell, retiring in 2010. She was instrumental in Shell’s LNG investments/roll-out in Australia.</li><li>EIG also <a href="https://www.senexenergy.com.au/senex-announces-strategic-relationship-eig-capital-raising/" target="_blank">invested</a> in <a href="https://www.smartkarma.com/entities/18390" target="_blank" data-smartkarma-citation="entities:18390:1">Senex Energy Ltd (SXY AU)</a> in February last year via an A$55mn placement to accelerate the development of its Queensland gas project. </li></ul></li></ul><h2>On Hony and ENN</h2></div><p>In March 2016, Hony Capital <a href="http://www.asx.com.au/asxpdf/20160324/pdf/436213tq2dhv7j.pdf" target="_blank">sold</a> an 11.7% interest in Santos to ENN Group (via <a href="https://www.smartkarma.com/entities/16456" target="_blank" data-smartkarma-citation="entities:16456:1">Enn Ecological Holdings Co Ltd (600803 CH)</a>) for ~$4.85/share, 24% above the prior closing price.  Hony primarily acquired its stake in Santos in a <a href="http://www.asx.com.au/asxpdf/20151109/pdf/432tkkcv48fn9f.pdf" target="_blank">placement</a> (page 9/60) at $6.80/share and topped up its stake at $3.85/share in a rights issue.</p><ul class=""><li>As part of that deal, Hony subscribed for US$380mn new shares in ENN, securing a 17% stake. ENN's substantial shareholding disclosure in Santos is <a href="http://www.asx.com.au/asxpdf/20160324/pdf/4362vf4245jz2t.pdf" target="_blank">here</a>. </li><li>ENN's other Australian energy investments include Chevron’s <a href="https://www.chevron.com/stories/chevron-and-enn-sign-gorgon-lng-agreement" target="_blank">Gorgon project</a> and an <a href="https://www.originenergy.com.au/about/investors-media/media-centre/origin-and-enn-sign-lng-sale-and-purchase-agreement.html" target="_blank">LNG SPA</a> with <a href="https://www.smartkarma.com/entities/797" target="_blank" data-smartkarma-citation="entities:797:1">Origin Energy Ltd (ORG AU)</a>, both of which were announced in 2016.</li><li>The Santos swap/ENN stake was possibly perceived as a precursor to precluding a takeover of Santos. However that all changed with this June 2017 <a href="http://www.asx.com.au/asxpdf/20170627/pdf/43k6mfnxkw7l4t.pdf" target="_blank">agreement</a>. In summation, if a majority of the board agrees to a proposal, ENN &amp; Hony must tow the line. Provided the offer price is above the average entry price, and ENN gets shareholder approval.</li><li>Together, Hony and ENN hold 15.1% in Santos. The announcement is strongly worded, stating ENN/Hony opting for the scrip option is consistent with their "intention to be long-term investors". A pseudo-irrevocable or simply an idealistic statement? Harbour has <a href="https://www.asx.com.au/asxpdf/20180403/pdf/43swtq34zv185g.pdf" target="_blank">said</a> it has not reached "any agreement, arrangement or understanding" with ENN/Hony.  <ul><li>On the vote, provided the option of receiving cash OR unlisted equity in the private vehicle is available to all shareholders and not just Hony/ENN, presumably they should be able to vote. </li></ul></li></ul><div><h2><strong>Reg Approvals</strong></h2><p>FIRB's approval will be tricky. Energy security has been labeled a <a href="http://www.afr.com/business/energy/firb-hurdle-higher-for-santos-suitor-20171118-gzoa4i" target="_blank">top priority</a> by various politicians in Australia and Shell's acquisition of <a href="https://www.smartkarma.com/entities/177" target="_blank" data-smartkarma-citation="entities:177:1">Woodside Petroleum Ltd (WPL AU)</a> getting <a href="https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=text&amp;issuerId=1389&amp;announcementId=255250&amp;documentDate=2001-04-23&amp;documentNumber=194968" target="_blank">dinged</a> by FIRB in 2001 is foremost in investor's minds. </p><p>However, FIRB's <a href="http://www.asx.com.au/asxpdf/20170421/pdf/43hn8n1x35p1q9.pdf" target="_blank">approval</a> of <a href="https://www.smartkarma.com/entities/601" target="_blank" data-smartkarma-citation="entities:601:1">DUET Group (DUE AU)</a> last year muddies what is, and what is not, impacting national security. There is also a collective <a href="https://www.smh.com.au/business/companies/market-reveal-may-put-santos-takeover-out-of-reach-for-harbour-20171117-gznme9.html" target="_blank">disagreement</a> about just how dire the gas supply issues are, especially the east coast gas market, where EIG already has an exposure via its holding in Senex.  </p><h2><strong>Santos’ Registry</strong></h2></div><p>After ENN and Hony, Vanguard slots into 3<sup>rd </sup>place with a 2.8% stake, having reduced its stake from 3% last October. The remainder of the registry is fragmented. Dimensional Fund Advisor increased its stake to 1.87% from 1.5% in January this year.</p><div><h2>Counter/Competitive Offers?</h2></div><p>Possible suitors for Santos' key asset, the stake in the <a href="https://www.smartkarma.com/entities/811" target="_blank" data-smartkarma-citation="entities:811:1">Exxon Mobil Corp (XOM US)</a>-lead PNG LNG project, include:</p><ul class=""><li>Woodside and PNG LNG player <a href="https://www.smartkarma.com/entities/773" target="_blank" data-smartkarma-citation="entities:773:1">Oil Search Ltd (OSH AU)</a>, which withdrew their merger proposal in 2015;</li><li><a href="https://www.smartkarma.com/entities/811" target="_blank" data-smartkarma-citation="entities:811:1">Exxon Mobil Corp (XOM US)</a>, which in addition to the Santos project, also <a href="http://news.exxonmobil.com/press-release/exxonmobil-acquire-interoil-transaction-worth-more-25-billion" target="_blank">acquired</a> PNG player <a href="https://www.smartkarma.com/entities/23665" target="_blank" data-smartkarma-citation="entities:23665:1">InterOil Corporation (USA) (IOC US)</a> last year, a company in which both <a href="https://www.smartkarma.com/entities/812" target="_blank" data-smartkarma-citation="entities:812:1">Total Sa (FP FP)</a> and Oil Search expressed interest;</li><li>ENN and Hony can also counter any takeover offer that is higher than their own entry price.</li></ul>

After rejecting a “confidential, non-binding conditional and indicative proposal” for a takeover from Harbour Energy at A$4.55/share last August, Santos Ltd (STO AU) has granted Harbour access to due diligence pursuant to Harbour's non-binding, indicative and conditional offer of US$4.98/share (A$6.50/share).  That non-binding offer comprises the cash equivalent of A$6.13/share PLUS a special dividend of A$0.37/share, which is expected to be fully franked.DatapointData in the DatapointTargetSantos Ltd (STO AU) Mkt Cap: US$8.1bn; 3mth Liquidity: US$31.1mnOfferorHarbour Energy TermsUS$4.70/share (A$6.13) in cash + a special dividend of US$0.28/share (A$0.37) which is expected to be fully franked. That full franked divi could represent an additional A$0.16/share over and above the offer, for those shareholders able to take advantage of the franking credit.Harbour will fix the Aussie dollar offer price for the first 10,000 shares held by each shareholder.StructureScheme of ArrangementOtherCompletion of confirmatory due diligenceUnanimous recommendation of the Harbour proposal by the Santos Board, in the absence of a superior proposalKey conditions to this schemeTypical of Scheme of Arrangements -  75% of shareholders would need to approve the offer.Harbour is providing Santos shareholder the option of electing to accept unlisted scrip in a new private vehicle, subject to a minimum of 15% accepting, and a maximum participation cap of 20%. That 15% would be covered should both ENN and Hony Capital accept this option. Reg approvals, including FIRB FundingFully funded. Included is a "material" equity contribution from Mercuria Energy GroupLink: Announcement What to do?While A$6.50/share appears a full offer, pre-events in Australia have been a graveyard.  Shares opened at A$6.10/share this morning. I'd look to set-up ~A$5.90/share (10% below the non-binding offer price) and short ~$6.30/share.ValuationsThe non-binding offer backs out an FY18E and FY19E EV/EBITDA of 7.9x and 7.8x.Of the following precedent transactions, the failed Oil Search Ltd (OSH AU) / Woodside Petroleum Ltd (WPL AU) deal is probably the most similar, where the deal was pitched at 10.4x EV/EBITDA. To test your own assumptions, please refer to our database.Source: SK, Capital IQMorningstar's fair value of $5.75 in its last note No-Moat Santos’ 2017 Earnings In Line With Expectations; No Change to FVE equates to an FY21E EV/EBITDA and PER of 6x and 18.8x. The consensus target price (2 Buys, 9 Holds, 2 Sells) is A$5.15/share. On balance, Harbour's offer appears fair.Of note, Santos rejected an A$7.1bn ($6.88/share – a 26% premium to the last close of $5.44) proposal in Oct 2015 from Brunei-backed Scepter Partners. That proposal translated to an EV/EBITDA of 15.6x. Santos was saddled with net debt of A$8.6bn in 2015 vs. ~A$3.5bn currently. On Harbour EnergyAs per my previous insight Santos – Harbour Energy Back to the Well?:Harbour Energy was formed by private equity group EIG and Noble Group Ltd (NOBL SP) in July 2014. In January of last year, Chrysaor, backed by EIG and Harbour Energy, paid US$3.8bn for around half of Shell’s UK North Sea assets. The completion of the deal on the 1 November, elevated Chrysaor to become the largest O&amp;G producer in the UK.The MD &amp; CEO of Harbour Energy; and the chairwoman of Chrysaor, is Linda Cook. Ms. Cook was a 29-year employee of Royal Dutch Shell, retiring in 2010. She was instrumental in Shell’s LNG investments/roll-out in Australia.EIG also invested in Senex Energy Ltd (SXY AU) in February last year via an A$55mn placement to accelerate the development of its Queensland gas project. On Hony and ENNIn March 2016, Hony Capital sold an 11.7% interest in Santos to ENN Group (via Enn Ecological Holdings Co Ltd (600803 CH)) for ~$4.85/share, 24% above the prior closing price.  Hony primarily acquired its stake in Santos in a placement (page 9/60) at $6.80/share and topped up its stake at $3.85/share in a rights issue.As part of that deal, Hony subscribed for US$380mn new shares in ENN, securing a 17% stake. ENN's substantial shareholding disclosure in Santos is here. ENN's other Australian energy investments include Chevron’s Gorgon project and an LNG SPA with Origin Energy Ltd (ORG AU), both of which were announced in 2016.The Santos swap/ENN stake was possibly perceived as a precursor to precluding a takeover of Santos. However that all changed with this June 2017 agreement. In summation, if a majority of the board agrees to a proposal, ENN &amp; Hony must tow the line. Provided the offer price is above the average entry price, and ENN gets shareholder approval.Together, Hony and ENN hold 15.1% in Santos. The announcement is strongly worded, stating ENN/Hony opting for the scrip option is consistent with their "intention to be long-term investors". A pseudo-irrevocable or simply an idealistic statement? Harbour has said it has not reached "any agreement, arrangement or understanding" with ENN/Hony.  On the vote, provided the option of receiving cash OR unlisted equity in the private vehicle is available to all shareholders and not just Hony/ENN, presumably they should be able to vote. Reg ApprovalsFIRB's approval will be tricky. Energy security has been labeled a top priority by various politicians in Australia and Shell's acquisition of Woodside Petroleum Ltd (WPL AU) getting dinged by FIRB in 2001 is foremost in investor's minds. However, FIRB's approval of DUET Group (DUE AU) last year muddies what is, and what is not, impacting national security. There is also a collective disagreement about just how dire the gas supply issues are, especially the east coast gas market, where EIG already has an exposure via its holding in Senex.  Santos’ RegistryAfter ENN and Hony, Vanguard slots into 3rd place with a 2.8% stake, having reduced its stake from 3% last October. The remainder of the registry is fragmented. Dimensional Fund Advisor increased its stake to 1.87% from 1.5% in January this year.Counter/Competitive Offers?Possible suitors for Santos' key asset, the stake in the Exxon Mobil Corp (XOM US)-lead PNG LNG project, include:Woodside and PNG LNG player Oil Search Ltd (OSH AU), which withdrew their merger proposal in 2015;Exxon Mobil Corp (XOM US), which in addition to the Santos project, also acquired PNG player InterOil Corporation (USA) (IOC US) last year, a company in which both Total Sa (FP FP) and Oil Search expressed interest;ENN and Hony can also counter any takeover offer that is higher than their own entry price.

Santos – Harbour Energy Returns to the Well

<p>The Australian Financial Review <a href="http://www.afr.com/business/11b-us-play-for-santos-20171115-gzm139" target="_blank">reported</a> (pay-walled) on Wednesday night that <a href="https://www.eigpartners.com/page/businesses" target="_blank">Harbour Energy</a> was tabling an A$5.30/share offer for <a href="https://www.smartkarma.com/entities/711" target="_blank" data-smartkarma-citation="entities:711:1">Santos Ltd (STO AU)</a>, Australia’s second-largest natural gas producer.</p><p>Santos <a href="http://www.asx.com.au/asxpdf/20171116/pdf/43p91h9rx1db4g.pdf" target="_blank">responded</a> to that article stating it had rejected a “confidential, non-binding conditional and indicative proposal” for a takeover from Harbour Energy at A$4.55/share in August. The proposal was rejected by Santos’ board as it was inadequate and funding was deemed uncertain.</p><p><strong><em>In summary…</em></strong></p><h2><strong>What We Know<br><br></strong></h2><p><strong>The Rejection</strong></p><ul><li>Santos announced this morning it has received (&amp; rejected) an indicative, non-binding $4.55/share (A$9bn) offer from Harbour Energy, by way of a scheme. </li></ul><p><strong>On Harbour Energy</strong></p><p>Harbour Energy was formed by private equity group <a href="https://www.eigpartners.com/" target="_blank">EIG</a> and <a href="https://www.smartkarma.com/entities/378" target="_blank" data-smartkarma-citation="entities:378:1">Noble Group Ltd (NOBL SP) </a>in <a href="https://www.eigpartners.com/news/press-releases/noble-group-and-eig-form-new-energy-company" target="_blank">July 2014</a>.</p><ul class=""><li>In January of this year, Chrysaor, backed by EIG and Harbour Energy, paid US$3.8bn for around half of Shell’s UK North Sea assets. The completion of the deal on the <a href="http://www.shell.com/media/news-and-media-releases/2017/shell-completes-sale-of-uk-north-sea-asset-package-to-chrysaor.htm" target="_blank">1 November</a>, elevated Chrysaor to become the largest O&amp;G producer in the UK.</li><li>The MD &amp; CEO of Harbour Energy; and the chairwoman of Chrysaor, is <a href="https://www.eigpartners.com/team/linda-cook" target="_blank">Linda Cook</a>. Ms. Cook was a 29-year employee of Royal Dutch Shell, retiring in 2010. She was instrumental in Shell’s LNG investments/roll-out in Australia.</li><li>EIG also <a href="https://www.senexenergy.com.au/senex-announces-strategic-relationship-eig-capital-raising/" target="_blank">invested</a> in <a href="https://www.smartkarma.com/entities/18390" target="_blank" data-smartkarma-citation="entities:18390:1">Senex Energy Ltd (SXY AU)</a> in February this year via an A$55mn placement to accelerate the development of its Queensland gas project. </li></ul><h2><strong>What Is Speculated?</strong></h2><p>Apart from a forthcoming $5.30/share tilt, AFR's sources indicated Harbour Energy’s proposal is now fully funded via US, European and Asian capital pools.</p><h2><strong>Valuations</strong></h2><p>The rejected $4.55/share proposal backs out an FY17E and FY18E EV/EBITDA of 6.9x and 6.8x; while $5.30 equates to 7.8x and 7.6x.</p><ul><li>Santos also <a href="http://www.asx.com.au/asxpdf/20151022/pdf/4328mk0ck7f2g9.pdf" target="_blank">rejected</a> an A$7.1 billion ($6.88/share – a 26% premium to the last close of $5.44) proposal in Oct 2015 from Brunei-backed <a href="http://www.scepterpartners.com/whoweare_overview.php" target="_blank">Scepter Partners</a>, citing the offer to be opportunistic and highly conditional. That proposal translated to an EV/EBITDA of 15.6x. Santos was ladden with net debt of A$8.6bn in 2015 vs. A$3.6bn currently. <a href="https://www.santos.com/who-we-are/leadership-team/" target="_blank">Peter Coates</a>, the current chairman, was also the chairman at that time. </li><li><a href="https://www.smartkarma.com/companies/146" target="_blank" data-smartkarma-citation="companies:146">Morningstar</a>'s fair value of $5.752 based on DCF in its last <a href="https://www.smartkarma.com/entities/santos-ltd/insights" target="_blank">note</a>, equates to EV/EBITDA of 8.1x and 8.3x for FY17E and FY18E.</li><li><p>Of the following precedent transactions,  the failed <a href="https://www.smartkarma.com/entities/773" target="_blank" data-smartkarma-citation="entities:773:1">Oil Search Ltd (OSH AU)</a> / <a href="https://www.smartkarma.com/entities/177" target="_blank" data-smartkarma-citation="entities:177:1">Woodside Petroleum Ltd (WPL AU)</a> deal is probably the most similar, where the deal was pitched at 8.3x EV/EBITDA. To test your own assumptions, please refer to our <a href="https://www.smartkarma.com/tools/mna-statistics?countries=%5B%22Australia%22%5D&amp;industries=%5B%22Energy%22%5D" target="_blank">database</a>.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/038/370/original/image.png?1510826422" class="editor-image img-responsive" data-smartkarma-image-id="38370"></figure><div class="content-caption">Source: SK, Capital IQ</div></li></ul><h2>No Blocking, Thank You</h2><p>In March 2016, Hony Capital <a href="http://www.asx.com.au/asxpdf/20160324/pdf/436213tq2dhv7j.pdf" target="_blank">sold</a> an 11.7% interest in Santos to ENN Group (via <a href="https://www.smartkarma.com/entities/16456" target="_blank" data-smartkarma-citation="entities:16456:1">Enn Ecological Holdings Co Ltd (600803 CH)</a>) for ~$4.85/share, 24% above the prior closing price.  Hony primarily acquired its stake in Santos in a <a href="http://www.asx.com.au/asxpdf/20151109/pdf/432tkkcv48fn9f.pdf" target="_blank">placement</a> (page 9/60) at $6.80/share, and topped up its stake at $3.85/share in a rights issue.</p><ul class=""><li>As part of that deal, Hony subscribed for US$380mn new shares in ENN, securing a 17% stake. ENN substantial shareholding disclosure in Santos is <a href="http://www.asx.com.au/asxpdf/20160324/pdf/4362vf4245jz2t.pdf" target="_blank">here</a>. </li><li>ENN's other Australian energy investments include Chevron’s <a href="https://www.chevron.com/stories/chevron-and-enn-sign-gorgon-lng-agreement" target="_blank">Gorgon project</a> and an <a href="https://www.originenergy.com.au/about/investors-media/media-centre/origin-and-enn-sign-lng-sale-and-purchase-agreement.html" target="_blank">LNG SPA</a> with <a href="https://www.smartkarma.com/entities/797" target="_blank" data-smartkarma-citation="entities:797:1">Origin Energy Ltd (ORG AU)</a>, both of which were announced in 2016.</li><li>The Santos swap/ENN stake was possibly perceived as a precursor to precluding a takeover of Santos. However that all changed with this June 2017 <a href="http://www.asx.com.au/asxpdf/20170627/pdf/43k6mfnxkw7l4t.pdf" target="_blank">agreement</a>. The key points are: </li></ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/038/357/original/Agreement.PNG?1510822147" class="editor-image img-responsive" data-smartkarma-image-id="38357"></figure><ul class=""><li>In essence, if a majority of the board agrees to a proposal, ENN &amp; Hony must tow the line. Provided the offer price is above the average entry price, and ENN gets shareholder approval.</li></ul><h2><strong>Santos’ Registry</strong></h2><p>After ENN and Hony, Vanguard slots into 3<sup>rd </sup>place with a 2.8% stake, having reduced its stake from 3% according to a 31 October filing. The remainder of the registry is fragmented.</p><h2>Timing?</h2><p>According to <a href="https://www.smartkarma.com/profiles/263" target="_blank" data-smartkarma-citation="accounts:263">Pranav Rao</a>, going from a non-binding to a binding offer typically takes ~30 days, when the transaction is expected to be friendly. When it is non-binding, it could take longer or; with what has been happening recently in Australia, you don't even get to a binding proposal stage. Timing will also depend on the structure.</p><ul><li>A scheme on average takes ~120 days from announcement to completion. </li><li>And a decision from FIRB takes 67 days on average.</li></ul><h2>Counter/Competitive Offers?</h2><p>Possible suitors for Santos' key asset, the stake in the <a href="https://www.smartkarma.com/entities/811" target="_blank" data-smartkarma-citation="entities:811:1">Exxon Mobil Corp (XOM US)</a>-lead PNG LNG project, include:</p><ul><li>Woodside and PNG LNG player Oil Search, which withdrew their merger proposal in 2015;</li><li>Exxon Mobil, which in addition to the Santos project, also <a href="http://news.exxonmobil.com/press-release/exxonmobil-acquire-interoil-transaction-worth-more-25-billion" target="_blank">acquired</a> PNG player <a href="https://www.smartkarma.com/entities/23665" target="_blank" data-smartkarma-citation="entities:23665:1">InterOil Corporation (USA) (IOC US)</a> earlier this year, a company in which both <a href="https://www.smartkarma.com/entities/812" target="_blank" data-smartkarma-citation="entities:812:1">Total Sa (FP FP)</a> and Oil Search expressed interest;</li><li>While there is nothing in the June agreement from stopping ENN/Hony launching a counter offer.  </li></ul>

The Australian Financial Review reported (pay-walled) on Wednesday night that Harbour Energy was tabling an A$5.30/share offer for Santos Ltd (STO AU), Australia’s second-largest natural gas producer.Santos responded to that article stating it had rejected a “confidential, non-binding conditional and indicative proposal” for a takeover from Harbour Energy at A$4.55/share in August. The proposal was rejected by Santos’ board as it was inadequate and funding was deemed uncertain.In summary…What We Know  The RejectionSantos announced this morning it has received (&amp; rejected) an indicative, non-binding $4.55/share (A$9bn) offer from Harbour Energy, by way of a scheme. On Harbour EnergyHarbour Energy was formed by private equity group EIG and Noble Group Ltd (NOBL SP) in July 2014.In January of this year, Chrysaor, backed by EIG and Harbour Energy, paid US$3.8bn for around half of Shell’s UK North Sea assets. The completion of the deal on the 1 November, elevated Chrysaor to become the largest O&amp;G producer in the UK.The MD &amp; CEO of Harbour Energy; and the chairwoman of Chrysaor, is Linda Cook. Ms. Cook was a 29-year employee of Royal Dutch Shell, retiring in 2010. She was instrumental in Shell’s LNG investments/roll-out in Australia.EIG also invested in Senex Energy Ltd (SXY AU) in February this year via an A$55mn placement to accelerate the development of its Queensland gas project. What Is Speculated?Apart from a forthcoming $5.30/share tilt, AFR's sources indicated Harbour Energy’s proposal is now fully funded via US, European and Asian capital pools.ValuationsThe rejected $4.55/share proposal backs out an FY17E and FY18E EV/EBITDA of 6.9x and 6.8x; while $5.30 equates to 7.8x and 7.6x.Santos also rejected an A$7.1 billion ($6.88/share – a 26% premium to the last close of $5.44) proposal in Oct 2015 from Brunei-backed Scepter Partners, citing the offer to be opportunistic and highly conditional. That proposal translated to an EV/EBITDA of 15.6x. Santos was ladden with net debt of A$8.6bn in 2015 vs. A$3.6bn currently. Peter Coates, the current chairman, was also the chairman at that time. Morningstar's fair value of $5.752 based on DCF in its last note, equates to EV/EBITDA of 8.1x and 8.3x for FY17E and FY18E.Of the following precedent transactions,  the failed Oil Search Ltd (OSH AU) / Woodside Petroleum Ltd (WPL AU) deal is probably the most similar, where the deal was pitched at 8.3x EV/EBITDA. To test your own assumptions, please refer to our database.Source: SK, Capital IQNo Blocking, Thank YouIn March 2016, Hony Capital sold an 11.7% interest in Santos to ENN Group (via Enn Ecological Holdings Co Ltd (600803 CH)) for ~$4.85/share, 24% above the prior closing price.  Hony primarily acquired its stake in Santos in a placement (page 9/60) at $6.80/share, and topped up its stake at $3.85/share in a rights issue.As part of that deal, Hony subscribed for US$380mn new shares in ENN, securing a 17% stake. ENN substantial shareholding disclosure in Santos is here. ENN's other Australian energy investments include Chevron’s Gorgon project and an LNG SPA with Origin Energy Ltd (ORG AU), both of which were announced in 2016.The Santos swap/ENN stake was possibly perceived as a precursor to precluding a takeover of Santos. However that all changed with this June 2017 agreement. The key points are: In essence, if a majority of the board agrees to a proposal, ENN &amp; Hony must tow the line. Provided the offer price is above the average entry price, and ENN gets shareholder approval.Santos’ RegistryAfter ENN and Hony, Vanguard slots into 3rd place with a 2.8% stake, having reduced its stake from 3% according to a 31 October filing. The remainder of the registry is fragmented.Timing?According to Pranav Rao, going from a non-binding to a binding offer typically takes ~30 days, when the transaction is expected to be friendly. When it is non-binding, it could take longer or; with what has been happening recently in Australia, you don't even get to a binding proposal stage. Timing will also depend on the structure.A scheme on average takes ~120 days from announcement to completion. And a decision from FIRB takes 67 days on average.Counter/Competitive Offers?Possible suitors for Santos' key asset, the stake in the Exxon Mobil Corp (XOM US)-lead PNG LNG project, include:Woodside and PNG LNG player Oil Search, which withdrew their merger proposal in 2015;Exxon Mobil, which in addition to the Santos project, also acquired PNG player InterOil Corporation (USA) (IOC US) earlier this year, a company in which both Total Sa (FP FP) and Oil Search expressed interest;While there is nothing in the June agreement from stopping ENN/Hony launching a counter offer.  

Santos – Harbour Energy Back to the Well?

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Enn Natural Gas Co.,Ltd. offers natural gas engineering services. The Company provides natural gas engineering investment, gas station construction, and energy equipment distribution services. Enn Natural Gas also operates coal materials, chemicals,  and biopharmaceutical products trading businesses.

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ENN Natural Gas (600803 CH)

Santos – Harbour Energy Returns to the Well

After rejecting a “confidential, non-binding conditional and indicative proposal” for a takeover from Harbour Energy at A$4.55/share last...

David Blennerhassett

Santos – Harbour Energy Back to the Well?

The Australian Financial Review reported (pay-walled) on Wednesday night that Harbour Energy was tabling an A$5.30/share offer for Santos Ltd (STO...

David Blennerhassett

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