Adnoc’s $19 Billion Santos Bid Exposes Australian Energy Dilemma

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(Bloomberg) — One of the biggest foreign takeovers in Australian history will force regulators and politicians to weigh who controls critical energy infrastructure against the need to address a looming domestic gas shortfall.

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Santos Ltd.’s board agreed this week to back a $19 billion takeover bid from a group led by Abu Dhabi National Oil Co., a cash-rich but state-owned company that is seeking to become a top producer of liquefied natural gas. Yet the ASX-listed company’s shares are still at a significant discount to the offer, reflecting investor uncertainty around approval by Australia’s regulators, who have a history of blowing up multibillion-dollar deals.

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Santos’s share price has languished since surging after Monday’s announcement. On Wednesday, it was about 13% below the offer price, implying a roughly 40% probability of success, Wilsons Advisory analysts including Greg Burke said in a note. 

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“The regulators will be worried about critical infrastructure control, and they’ll be worried about domestic gas supply security,” said Rick Wilkinson, a former Santos executive who is now chief executive officer of industry consultant EnergyQuest. “The Australian government would need to be confident that domestic gas supply security is not worse off, and is potentially better off than before the deal went through.”

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Adnoc is an ambitious Middle Eastern player but it is also opaque, releasing little financial information.

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While Santos gets most of its income from selling LNG to buyers in Asia, the company is also a major source of gas for Australia, and is in the process of developing a vast project that could meet half the needs of New South Wales, the most populous state. That domestic supply is crucial and politically sensitive — the nation, which supplies about a fifth of the world’s LNG, may be forced to import fuel into its southeast to avoid shortfalls predicted toward the end of this decade.

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The Foreign Investment Review Board, an adviser to the Treasurer, is crucial to this deal — the ASX’s largest all-cash takeover including debt — but may also be its most troublesome hurdle. The FIRB is prone to delays and has previously shown itself willing to block takeover bids in the resources sector, particularly when state-owned entities are involved.

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Notable energy deals hampered by the FIRB include Hong Kong-based CK Infrastructure Holdings Ltd.’s attempted purchase of gas pipeline operator APA Group in 2018 and Shell Plc’s attempt to buy Woodside Energy Group Ltd. at the start of the century.

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There are also other hurdles to clear. The Adnoc-led takeover needs approval from the Australian Securities and Investments Commission, the National Offshore Petroleum Titles Administrator, and the South Australian government, where Santos is headquartered. Regulators in the US and Papua New Guinea, where the company also has major assets, could also throw spanners in the works.

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The consortium led by Adnoc’s XRG — which also includes investment firm Carlyle Group Inc. and Abu Dhabi Development Holding Co. — will now complete its due diligence on Santos. The group has said it intends to keep the company’s headquarters in Adelaide and invest in the development of gas and LNG assets.