Abu Dhabi’s XRG Walks Away From $19 Billion Santos Takeover

By Anthony Di Paola and Keira Wright

Abu Dhabi National Oil Co. dropped its planned $19 billion takeover of Australian natural gas producer Santos Ltd., walking away from an ambitious effort to expand overseas after failing to agree on key terms.

A “combination of factors” discouraged the company’s XRG unit from making a final bid, it said Wednesday. The decision was strictly commercial and reflected disagreement over issues including valuation and tax, people familiar with the matter said, asking not to be identified discussing private information.

It’s a notable retreat for XRG, the Adnoc spinoff launched to great fanfare last year and tasked with deploying Abu Dhabi’s billions into international dealmaking. The firm has been looking to build a global portfolio, particularly in chemicals and liquefied natural gas, and nixing the Santos transaction may slow an M&A drive aimed at diversifying the Middle Eastern emirate away from crude.

The company made its indicative offer in June with a consortium that included Abu Dhabi Development Holding Co. and Carlyle Group Inc. The board of Santos, Australia’s second-largest fossil-fuel producer, recommended the $5.76-a-share proposal, which represented a 28% premium to the stock price at the time.

Read More: Adnoc Makes $19 Billion Takeover Bid for Australia’s Santos

But although the shares surged that day, they have remained well below the offer price, potentially indicating investors were skeptical the consortium could land the deal. Santos extended an exclusivity period for a second time last month, saying the group had sought more time to complete due diligence and obtain approvals.

“The market will ask questions about Santos’ valuation after this,” Saul Kavonic, an energy analyst at MST Marquee, said by email. Investors may be wary about “any skeletons that may be lurking there, all the more so because XRG was a less price-sensitive buyer than most, yet still couldn’t make it work.”

Santos’ American depositary receipts slumped as much as 10% to $4.66 on Wednesday.

Covestro Hurdles

Following agreements for LNG supply in the US and Africa, the Santos acquisition would have given Adnoc greater heft and access to Asia. But it’s relatively new to large, cross-border deals, and closing them can be a challenge.

A planned XRG takeover of German chemical maker Covestro AG, which took more than a year to negotiate, has run into trouble amid regulatory hurdles. XRG said this month that the transaction risks being torpedoed by a European Union competition probe.

Read More: UAE’s Adnoc Says EU Probe Risks Derailing Covestro Deal

The company’s play for Santos wasn’t the first. The gas producer’s Chief Executive Officer Kevin Gallagher has rebuffed several approaches from peers over the last few years. He has spearheaded an aggressive investment plan to increase output by about 50% by the end of the decade, which at times has frustrated investors seeking higher returns instead.

In 2018, the Adelaide-based company rejected multiple offers from US-based Harbour Energy Ltd., while talks with Woodside Energy Group Ltd. broke down last year.

Union Opposition

There has also been opposition in Australia to an acquisition by a foreign player. Offshore Alliance, a group representing two major labor unions, this week urged the government to keep Santos “in Australian hands” and block the sale to Adnoc.

Read More: Australian Unions Call for Government to Block Adnoc-Santos Deal

Santos said in a statement that its board had expressed concerns about delays in reaching a so-called scheme implementation agreement that would protect the value of a potential deal for shareholders and adequately share the risks.

“The XRG Consortium would not agree to an appropriate allocation of risk between the XRG Consortium and Santos shareholders under the SIA,” Santos said.

The failure of XRG’s bid wasn’t due to regulatory issues, nor did major due-diligence concerns arise, one person with knowledge of the matter said. Santos had wanted XRG and its partners to pay any capital gains tax liability resulting from the sale, which was among obstacles to completion, the person said.

Adnoc and XRG said Wednesday they’re not done seeking M&A. The parent firm this month bestowed about $120 billion of assets on the startup by transferring all the stakes in listed energy companies it’s spun off.

The firm won’t be short of acquisition targets. Among its plans, the company aims to invest in gas-producing assets in the US, as well as power supply and energy services for data centers there.

“XRG remains dedicated to pursuing value-accretive opportunities across gas and LNG, chemicals and energy solutions,” it said in a statement. It “has a rich and deep pipeline of investment opportunities.”

— With assistance from Stephen Stapczynski and Carlos Caminada

Updates with Santos statement from 13th paragraph.

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