Santos rejects takeover offer

Private equity firm Scepter Partners has made a $6.88 per share takeover bid for Santos, sending its share price soaring 15%. The all-cash bid, at a 24% premium to the pre-bid price, values the business at $7.1bn and was swiftly rejected by Santos's board. It is a reminder that, although it is deeply wounded, there is value here.

Whether it will be realised, however, depends on a program of asset sales which aims to lower a mountainous $9bn of debt. That the bid was swiftly rejected suggests the sales process is on track.

Reports suggest the stake in PNG LNG is most highly prized and the Asian and WA businesses are attracting attention too. Asset sales will need to be large to matter so the business that emerges from the sales process could look very different from the business that went in.

Our best guess is that the Asian business, along with the Cooper Basin and WA assets, will be sold at decent prices. It is possible Santos will also sell a small share of its PNG LNG interest, perhaps to existing partners. Doing all this should release at least $5bn in cash to lower debt and resurrect the company from near death.

This proposal is likely to be the first of several. In our view, it is a cheap shot that undervalues the business but, given the existential threat faced by Santos, any takeover is unlikely to realise full value. Existing shareholders needn't do anything until the sales process is complete. For new investors, Santos is visibly cheap but high risk. Speculators might look at it but we're happy to wait to examine the business that emerges following asset sales. HOLD.