Oil Search rejects merger offer from Australia's Santos citing terms, valuation

Australia's second-largest independent oil and gas producer Santos confirmed July 20 that it made a merger proposal to fellow ASX-listed Oil Search on June 25, which was subsequently rejected.

"The potential merger of Santos and Oil Search is a logical combination of two industry leaders to create an unrivalled regional champion of size and scale," Santos said July 20.

"The combination would create greater alignment in Papua New Guinea supporting the development of key projects including Papua LNG," the company said.

The news of the proposal surfaced following a question raised during an investor briefing by Oil Search after the July 19 announcement relating to the resignation of managing director Keiran Wulff.

"[T]he proposal was rejected as it was determined to not be in OSH shareholders' best interests on the terms and value proposed," Oil Search said in a note to shareholders July 20.

"Santos continues to believe that the Merger Proposal represents an extremely attractive opportunity to deliver compelling value accretion to both Santos and Oil Search shareholders," Santos said.

The proposal was for Oil Search shareholders to receive 0.589 new Santos share for each Oil Search share held. Once approved, it would see Oil Search shareholders own 37% of the merged group and Santos shareholders own 63%.

"The ownership ratio implied a transaction price of A$4.25 per Oil Search share, based on Santos' closing price on 24 June 2021. This represented a 12.3% premium to the Oil Search closing price on 24 June 2021 of A$3.78 and a 9.8% premium to the Mubadala block trade sale price of A$3.865," Santos said.

UAE's state-owned Mubadala Investment Company is Oil Search's largest shareholder.

Oil Search announced July 19 that the company's managing director Keiran Wulff has resigned for health reasons and the company's chief financial officer Peter Fredricson was named acting CEO, effective immediately.

Fredricson is a recent recruit to Oil Search, having joined the company earlier this year.

Oil Search's chairman Rick Lee said the board had entered into discussions with Wulff following the receipt of concerns and complaints about his behaviour, noting he "behaved in a manner inconsistent with the standards expected."

There were limited internal candidates within the company due to which Oil Search will have to search outside to fill the role, which could take more than six months, RBC Capital Markets analyst Gordon Ramsay said in a July 19 note.