Santos Ltd (STO AU): FIRB Approval For XRG's Tilt Will Be No Pushover

• Aussie O&G producer Santos Ltd (STO AU) has announced a non-binding Scheme from XRG, which comprises Abu Dhabi's National Oil Company, Abu Dhabi Development Holding Company, and Carlyle

• The consortium is offering US$5.76 (A$8.89)/share, a 28% premium to last close. Initial Offers were pitched at US$5.04/share, followed by US$5.42/share.

• Confirmatory due diligence has been afforded. A firm bid would require a multitude of reg approvals in Australia, PNG, and the US.

Conclusions First:

• A break-up or sale has been tied to Santos for over a year.

  • Santos previously attempted to strike a deal with Woodside Petroleum (WPL AU) to create a global oil and gas giant; but discussions were abandoned on the 7th Feb last year.

• XRG's bid arrives at a time of heightened volatility in the wake of the Israel/Iran conflict.

  • Brent gaiend ~13% to clear $US78/barrel, the largest intraday gain since March 2022.

• Santos' board are supportive of XRG's terms. However FIRB is another issue.

• Santos operates significant critical energy infrastructure in Australia.

  • The establishment of the Critical Infrastructure Centre, a pseudo-bolt-on to FIRB in 2017, and the passing of the Security of Critical Infrastructure Act in 2018, were enacted to help protect critical infrastructure from specifically targeted transactions, such as the 2018 CKI proposal, which ultimately failed: see APA/CKI: ACCC Maybe, But FIRB Unlikely

  • And as seen in Santos' merger with Oil Search Ltd (OSH AU) in 2021, the PNG government is no slouch either in running a ruler over deals: see Oil Search/Santos: PNG a Potential Party Pooper

  • Hiving off Santos' domestic ops is a possibility, but likely a complicated process.
    

    • This is probably the key area where the deal will get up or not.

    • It's quite possible Carlyle is waiting in the wings for the domestic spin-off.

• This is a bumper/full Offer. A competing bid is unlikely.

• Expect Santos to trade wide to terms given the regulatory risk.