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Oil Search accepts Santos merger offer to form top 20 oil company

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Sydney-based Oil Search has accepted a revised A$21bn (US$15.4bn) merger offer from fellow Australian company Santos that would create one of the 20 biggest oil and gas companies in the world.

Under the sweetened Santos offer, Oil Search shareholders would own 38.5 per cent of a combined company with a portfolio of oil and gas assets spanning Australia, the Pacific and the US.

The new offer, which was disclosed on Monday, represented a 6.5 per cent premium on Santos’s original merger proposal on June 25, which was rejected by Oil Search’s board last month.

Oil Search told investors there was strategic logic to the merger, which would create a regional energy champion in the Pacific. The company’s board said it planned to unanimously recommend the offer in the absence of a superior proposal.

Oil Search shares surged more than 5 per cent to A$4.01 on the Australian Securities Exchange.

Analysts said Oil Search’s rapid U-turn on the merger proposal reflected the company’s weakened position following recent management turmoil and concerns about its expansion in Alaska.

“Oil Search’s board has raised the white flag, having been weakened in the wake of management churn and governance concerns, and pressured into a merger by increasingly frustrated investors,” said Saul Kavonic, an analyst at Credit Suisse.

“The acceptance of the offer can essentially be viewed as a capitulation by Oil Search that their Alaska asset is not worth what they hoped it would be.”

Oil Search chair Rick Lee announced last month that chief executive Keiran Wulff had resigned for health reasons, but added the board had also received complaints about his behaviour. Lee had faced criticism from investors following his failure to disclose Santos’s initial approach to Oil Search during an investor day.

Oil Search and Santos each own stakes in PNG LNG, a highly profitable liquefied natural gas facility in Papua New Guinea that is operated by ExxonMobil.

Neil Beveridge, an analyst at Bernstein, said Santos’s offer for Oil Search could elicit interest from ExxonMobil or Total, both of which have assets in PNG.

“I think acceptance of this offer could trigger both of these companies to evaluate whether or not they will bid [for Oil Search],” he said.

“Going back a few years, I think it would be almost inevitable that you would get both of those companies interested. I think the question now is in the current era, where oil majors are more willing to divest assets than acquire assets, is there an appetite there for a counterbid.”

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