Santos fires up with Eastern Star takeover

Santos is offering its shares to Eastern Star Gas shareholders, valuing the company at $924 million based on Friday's share price close.

Once the deal is completed, Hong Kong-owned TruEnergy, an electricity generator and energy retailer, will pay $284 million for 20 per cent of Eastern Star Gas's assets.

As well as operating a gas-fired power station at Tallawarra, near Wollongong, with power generation and retailing in Victoria, TruEnergy recently paid $2.1 billion to buy the electricity retailing operations of EnergyAustralia from the NSW government along with output from Delta Electricity and some power station development sites.

Santos said yesterday it will spend $500 million to prove up and expand the known gas reserves in the Gunnedah Basin over the next three or four years. Of this total, Santos's share will be $400 million, with TruEnergy to pay the balance.

It will also review the plans of Eastern Star Gas, which had included developing a gas export facility at Newcastle. This is expected to be abandoned, since Santos, with partners, is building an LNG export base at Gladstone.

The initial focus of Eastern Star Gas after Santos takes control will be to supply the domestic gas market where rising demand and prices are expected as gas is a cleaner fuel than coal, especially with the proposed carbon tax.

A number of gas-fired power stations are being planned for NSW, from Wellington in the state's west, to Marulan south of Sydney and also a further power station at Tallawarra. Both of these power stations are planned by TruEnergy.

Eastern Star Gas, along with other coal seam gas explorers in NSW, has encountered an increasingly active campaign seeking to block exploration and development plans, with one council, at Moree, going so far as to impose a two-month moratorium.

Admitting that Eastern Star Gas may have not handled its community relations as well as it could have, Santos said yesterday it is anxious to work closely with the community.

"The key is to explain to farmers what we are doing and to obtain their feedback," Santos's chief executive, David Knox, said yesterday. Santos said it wants to "bring the local community" along with its plans, effectively admitting that the industry may have not kept farmers and other affected locals fully abreast of their plans and the technology to be used.

Santos is offering 0.06803 of its shares for every share held in Eastern Star Gas.

Santos shares closed down 53? at $12.70 yesterday, valuing Eastern Star Gas shares at 86.4?. Shares in the target company closed up 24? at 83.5?, almost directly in line with the offer price.

Eastern Star Gas directors have recommended unanimously that shareholders accept the offer.

The bid will make seriously wealthy men out of Eastern Star's founding director David King, who holds 30.47 million shares in the company worth $26.3 million. Managing director David Casey holds 8 million shares valued by the Santos offer at $6.9 million.

Santos said it is paying 50? per gigajoule of gas reserves held by Eastern Star, which compares with 66? paid by Shell when it bought the domestic assets of Arrow Energy. Santos's Knox said the price lower reflects the comparative "immaturity" of the Eastern Star Gas assets with those of Arrow Energy.

Santos bought into Eastern Star Gas in mid-2009, taking a direct 20 per cent shareholding for $172 million, as well as paying $300 million for a 35 per cent stake in the company's exploration acreage.