Santos leaders in firing line after blockbuster deal collapses

Australia’s second-largest fossil fuel producer, Santos, is facing questions about the future of its leadership team and strategic direction after a $30 billion takeover deal collapsed abruptly just 48 hours before it was due to be finalised.

Shares in Santos dropped as much as 14 per cent on Thursday – their biggest fall since 2020 – after a consortium led by Abu Dhabi National Oil Company (ADNOC) walked away from its blockbuster offer to acquire the Adelaide-based oil and gas company, ending months of negotiations.

The deal, if it proceeded, would have been the biggest all-cash takeover in Australian corporate history, and among the biggest in the global energy industry ever.

Santos and its suitors reached an indicative takeover agreement in June, but a “combination of factors” encountered in the due diligence process had altered the bidding consortium’s original assessment of Santos’ value and discouraged it from making a final binding offer, said XRG, the foreign investment arm of ADNOC.

“While disappointed not to move forward, XRG and its consortium partners are responsible, disciplined investors with a clear focus on creating value for our shareholders and driving long-term growth,” it said.

The breakdown in talks marks the third time in seven years that a potential suitor has walked away from Santos after carrying out due diligence, sparking questions about the negotiating tactics used by chief executive Kevin Gallagher and the board of directors. Perth-based Woodside Energy abandoned takeover talks with Santos last year, while US private equity-backed Harbour Energy also held talks with the company in 2018 that ended without a deal being reached.

“Santos’ board and management team will come under scrutiny, given this transaction has not reached the ‘binding stage’,” said Adam Martin, an analyst at E&P Financial Group.

It also raises the prospect that Santos may have to sell assets or break up its business to boost shareholder returns, he said.

“Another failed transaction creates doubt in the market,” Martin said. “It’s unlikely Santos remains in its current form.”

Jarden analyst Nik Burns said Santos shareholders would be “bruised” by the shock withdrawal of the takeover bid. MST Financial’s Saul Kavonic said Santos might be forced to consider a “refreshed leadership and strategy going forward”.

“There should still be an opportunity for Santos to sell down some assets to realise value and fund more growth … but it’s unclear if this can happen under the current leadership,” he said.

Sources briefed on the failed takeover talks, who requested anonymity to discuss confidential details, outlined a series of issues they said had emerged during due diligence that led to the bidding consortium rethinking its indicative $US5.76 ($8.66) a share takeover offer.

These issues included a surprise letter received from Santos on Monday, which indicated Santos would not be willing to grant the consortium a further extension to continue conducting due diligence beyond Friday. XRG and its partners had been given two extensions to the exclusivity process already.

“The [Santos] board wanted to put a timeline on it,” one source said. “They weren’t just going to keep extending it out into the never-never.”

Others familiar with the negotiations pointed to friction caused by Santos’ push for the consortium to shoulder the liability for a multimillion-dollar tax bill the company must pay the Papua New Guinea government in 2026.

In a statement, Santos said it had “expressed its concern” to the consortium about the delays in locking in a binding agreement.

“The XRG consortium would not agree to acceptable terms which protected the value of the potential transaction for Santos shareholders, having regard to the likely extended time frame to completion and the regulatory risk associated with the transaction,” Santos said.

Even before the talks broke down, there were doubts about whether the Abu Dhabi-led takeover would have been able to secure clearance from the Foreign Investment Review Board as it scrutinised the potential risks of handing over Santos’ Australian energy infrastructure to foreign owners at a time when domestic shortfalls are looming.

Santos, which makes most of its money producing and exporting super-chilled LNG from Queensland, Darwin and Papua New Guinea, is also a key supplier of domestic gas used by millions of homes and businesses in Australia, with operations across eastern and Western Australia.

“The likely focus on LNG markets by ADNOC may put it at odds with Australia’s energy security and economic interests,” the Institute of Energy Economics and Financial Analysis, a research group advocating for a faster global shift to clean energy, has warned.

Australian governments and major gas users have long been concerned that too much LNG is being shipped offshore from the Santos-led GLNG venture in Queensland, which sucks more gas out of the local market than it contributes, and is worsening a domestic supply crunch in Victoria and NSW.

Trade union officials representing workers on Australia’s offshore oil and gas platforms have also argued that Santos should not be sold to ADNOC because it is owned by the Abu Dhabi government in the United Arab Emirates. Offshore Alliance, a partnership between the Australian Workers Union and the Maritime Union of Australia, said in a post on social media that the United Arab Emirates had banned trade unions, prevented collective bargaining and outlawed strikes.

“The Australian government needs to keep Santos in Australian hands and block the sale of Santos to a government which is one of the world’s worst perpetrators of labour exploitation,” it said.

ADNOC and XRG may still return with another offer for Santos or seek other deals to pursue their expansion into Australia, which they consider an integral part of the global gas market. Australia is one of the biggest exporters of LNG in the world, behind the US and Qatar.

The reporter travelled to Abu Dhabi from September 14-16 as a guest of the Abu Dhabi National Oil Company.

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