Before we get too excited about the prospect of an approximately $80 billion energy juggernaut, we should remember that it’s still early days in the process, and in the words of the two companies: “there is no certainty that the discussions will lead to a transaction”.
But it is a tantalising prospect! The combination of the two biggest ASX-listed energy companies would put it among the biggest in the world, possibly somewhere between BP (8th-largest) and Schlumberger (11th-largest). Additionally, the synergies across the two companies are expected to be substantial.
Needless to say, the big brokers have weighed in on the possible tie up today. Here’s a summary of their respective views:
Merger could have ramifications for energy sector as could trigger increased M&A activity
Synergies likely constrained by fact there is actually limited overlap between two businesses
Merged entity would have attractive scale and reach given quality assets and jurisdictions
ACCC may not green light deal unless some divestments are made, and this could impact the attractiveness of the merged entity
If the merger doesn’t eventuate, there could be longer lasting scrutiny on Santos as a potential takeover target
Woodside has some valuable experience in taking on new assets (e.g., recent acquisition of BHP’s energy assets)
Woodside may need to offer a premium for Santos to get the deal over the line, perhaps in the order of magnitude of 30% above the last price prior to the announcement, an all scrip offer is the logical option
The deal is unlikely to be blocked by the ACCC, but some divestments are likely
A 20-30% premium to Santos 7 December closing price ($8.20-$8.88) would be required, giving Santos shareholders 0.273-0.296 Woodside shares
The merged company would “create a giant” in the APAC region with respect to LNG (greater than 70% in product mix), and it would have a “well diversified asset base”
Synergies could be $150-$300 million (“$200 million base case”)
EPS accretive from the first year, free cash flow accretive from 2027
ACCC would likely scrutinise east coast assets, divestments are a “key risk” as could “drag on merger economics”
Santos appears undervalued, and for deal to proceed, Woodside must “pay up for that value” – the prospect of this not occurring is the “biggest risk” to deal not proceeding
The dividend yield of the combined entity would likely decline to around an average of 5% p.a. until 2026, afterwhich EPS accretion from the merger and lower capex will push it up to over 7.5% p.a. by the end of the decade.
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