How we are playing Santos
The chronology of events this past 24 hours is rather curious and provides somewhat of a conundrum as to how to play the current machinations. Santos has stated today that on the 14th of August the company received a confidential, non-binding, conditional and indicative proposal to acquire all the shares in Santos at AUD$4.55 by way of a scheme of arrangement.
The approach was from Harbour Energy, which a media report claims is being backed by EIG. EIG previously expressed interest in Santos back in late 2015. This was around the same time the Board rejected a cash takeover from Scepter at $6.88 per share on the grounds that it did not reflect the underlying value of the company and that too many conditions were attached. If only we could get in a time machine and re-visit that one?!
The AFR’s article has however stated that the bid was set at/around $5.30 cash. But what’s even more interesting is the timing of this ‘leak’. It would not be unreasonable to determine that this was made public at a time and in a way to pressure the Santos Board to engage.
And this is paramount to the success of any bid. Under the various agreements entered into by the major shareholders ENN and Hony, they are not permitted to block a takeover if the Santos Board recommends it. There is a proviso which requires that the bid price be above ENN/Hony’s average cost, but any bid above $5 would be well north of this.
Which leads us to the question we spend most of our time on: what should we do now?
There are a lot of things to consider in order to answer this, but as with most decisions, much of it is noise. 2 things aren’t:
- What is Santos fundamentally worth?
- Will a bid eventuate?
In respect to the first question, we believe that Santos is fully valued on current measures but undervalued on a medium term time horizon. So a 50:50 on that one.
In terms of the likelihood of a bid eventuating and being recommended by the Board, its important to note that this is (at least) the 3rd bid of sorts for the company and the first 2 were at higher prices and did not get up. The probability of anything progressing further is as we see it also a toss of the coin.
So in summary neither valuation nor the likelihood of success or failure provide a clear lead. In this situation the clearest course of action would appear to be to hedge our bets. To lock in some profit and provide scope to re-purchase on weakness, but also keep the larger portion for any takeover should it eventuate.
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Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.