What Mattered Today; Understanding the Santos bid

The market was sold hard early today with the SPI Futures unwinding down around 50pts before buyers really stepped up into the low volume post Easter trade – so although we closed in the red (only just) the market did rally +27points from the daily cash lows with some big corporate news led by another takeover bid for Santos (STO)… That helped sentiment across the board and despite the Oil price dropping ~2.5% overnight most of the main energy players were firm today – STO up +16% to $5.89 and Woodside +0.72% to $29.45 while  Oil  Search (OSH) was tad lower despite news that their PNG operations would resume post the Earthquake.

Elsewhere, A2 Milk (A2M) remains a talking point – the stock hit hard early (-5.5%) only for buyers to step in and force it higher by days end – up  +1.22% to $11.60 with the company feeling pretty relaxed about Nestles’ tilt into their patch – the company basically saying that it proves the validity of their approach and will only expand the market in aggregate – which is true, however it’s hard not to see some teething / competitive issues arise when dealing with such a goliath like Nestle.

On the market today, the Energy sector was the clear standout thanks to Santos, while the Material stocks followed a good overseas lead to finish well in the black – BHP putting on +1.77% a clear winner as was RIO which added +2.05% to close at $74.19. By the close the ASX 200 had fallen -7pts or -0.13% to 5751 – a good result overall given the negativity first up.

Banks were down but not by much and they all recovered well from early weakness – a sign that some are dipping their feet into the recent sell off in the market / banking sector . Here’s a quick look at bank PEs and yields at the moment. Also shows weak top line revenue growth but okay earnings growth. The short version here is that bank earnings are flat, but the stocks are cheap with massive yields which will provide support in time. The sector average on 6.72% fully franked with a sector PE sub 12 BUT earnings growth of just +2%. April is a good month for banks – I know I said that about March however nothing happens without exceptions and the fact that March was weak actually improves the likelihood for a bullish April…

As we suggested this morning – and worth re-iterating this afternoon – we think it’s time to go out on a limb.

• We are short-term bullish local stocks liking the ASX200 between 5650 and 5700 and especially if it tests major support ~5600.

The current correction in the ASX200 resembles extremely closely to that experienced by the local market in 2016 prior to the market finding a significant low in November, following the surprise US election result. If the pattern similarity continues a spike down towards 5650/5700 will become a buying opportunity which will be confirmed by a close back above 5800.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Santos (STO) $5.89 / $16.17; Another bid for STO today from Harbour Energy – their third attempt and I get the feeling that this will be their last, one way or another. Below are the details however the value of the bid at $6.50 and last close of $5.89 shows that holders are concerned that the STO board will again rebuke the persistent suitor… We know that they rejected a bid at $6.88 back in 2015 only to see the stock trade as low as $2.46 in early 2016.

Harbour Energy has now made three attempts with the first starting at $4.55 so in hindsight STO who were quick to rebuff that did the right thing but now we have a bid of around $6.50 which seems strong. Today’s ‘underperformance’ of the bid price shows that sellers are not waiting around – selling into the prevailing strength – probably with recent scares from the last doomed approach.

Harbour Energy has lobbed an indicative, non-binding offer:

• for 100% of the company
• cash offer of US$4.70 (= A$6.13)
• dividend of us28c FF  (=A$ 37c)

For a total of $6.50 +/- depending on exchange rate. Santos Board advises it is “in the interests of shareholders to engage with Harbour” and a CA has been given to Harbour to engage in DD

So what matters here?

1. Will some-one else overbid ? Hard to believe, as with bids of this magnitude you need to get in to the books and Harbour will have that heads-up
2. Would Harbour be forced into paying more ? Hard to believe given they started out at A$4.55 and this is the third attempt.  There is a limit to their firepower
3. Are their conditions. Apart from DD and regulatory approvals, its subject to Harbour financing, but expect they will get that with support from Morgan Stanley and JPM which have underwritten a US$7.75B debt facility
4. FIRB: will be required, and is probably the only serious hurdle we see, as Santos were or are an icon and a material domestic and export gas player. FIRB would need to consider whether a bid would alter the domestic market dynamics in any way, and this is obviously a sensitive topic right now.

Although it’s a non-bonding offer,  it’s hard to see Harbour walking away at this point – sort of like the 5kg Snapper that kept nibbling my bait on the weekend, once, twice then bank, it took it an ran. Let’s hope Santos has a big hook and doesn’t let them off the line!

If we owned the stock (and we don't), we’d be looking for a sell level closer to the bid price – anywhere around $6.20 or above – which is about a 5% risk ‘discount’ to the bid price.

Santos Chart   

Have a great night

James & the Market Matters Team

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