Analysts say that 'deep pockets' may help Abu Dhabi gain regulatory approval for Santos' bid.

Analysts say that the Australian regulators who are concerned about gas supplies in Australia will be closely monitoring Abu Dhabi National Oil Company's bid of $18,7 billion for Santos. However, they could be won over by promises to accelerate new projects.

Analysts say that Santos' shares closed Tuesday at A$7.73, a far cry from the $5.76 per share (A$8.89), which was the proposed takeover bid for Australia's 2nd largest gas producer, announced on Monday. This indicates investors believe that the deal will be rejected by regulators.

Jamie Hannah, the Deputy Head Investments and Capital Markets of VanEck Australia which owns Santos shares, said that it was not going to be a smooth ride. He added, however, that the price was "very attractive and it is straight cash".

FactSet data shows that the bid would be the largest all-cash acquisition in Australia. It has come at a moment when the Australian Labor government is discussing how to address a gas shortage looming on Australia's east coast by 2027.

Nik Burns, Jarden analyst, said: "We expect the Foreign Investment Review Board to focus on Santos’s key gas pipeline as it relates domestic gas supply."

Analysts said that Santos has a 5% market share in Eastern Australia, and the majority of its gas production on this side of Australia goes to its Gladstone LNG plant. Analysts say that Santos has a market share of 24% in Western Australia where it operates two domestic gas plants, and also has a stake on a third.

Hannah said that because the infrastructure assets did not generate major income, it would be difficult to spin them off in order to satisfy regulatory concerns.

This infrastructure is crucial for the domestic gas supply on both markets. "The government must decide whether they want this infrastructure in the hands a foreign government," MST Marquee analyst Saul Kavonic said.

ADNOC BRINGS CAPITAL TO THE TABLE

Santos has undeveloped resources such as the Narrabri Project and Beetaloo Shale Gas, which could fill the anticipated gas supply gap along the East Coast.

The bidder consortium, led by ADNOC’s investment arm XRG could argue that it could develop these projects faster than Santos under its plans to increase capital returns to shareholders and reduce the risk an east coast gas supply shortage.

Tom Allen, UBS analyst in a research report, said that XRG could tell regulators about its larger balance sheet as well as funding capacity to help accelerate Santos undeveloped growth assets.

Romano Sala Tenna is the portfolio manager of Katana Asset Management which owns Santos. He said that the market was too pessimistic regarding regulatory hurdles.

He said that a large sovereign wealth fund could inject money into Santos undeveloped assets.

"I think this is a card which will appeal to the Australian Government."

XRG stated on Monday that if this deal is approved, it will build on Santos’ legacy as a reliable producer of energy by "unlocking more gas supply". It also plans to "work closely" with the current management team in order to accelerate growth.

Analysts said that a recent trade agreement Australia signed with the United Arab Emirates could also work in the consortium's favor. This includes the Abu Dhabi Development Holding Company and the U.S. based private equity company Carlyle.

The Foreign Investment Review Board, which has the final approval on major foreign transactions, will advise the Australian Treasurer Jim Chalmers on this deal.

Kevin Gallagher, Santos' Chief Executive Officer, declined to comment about the deal or regulatory concerns at a gas conference held in Malaysia on Tuesday. He did say that he would let the process "take its course".

(source: Reuters)