Woodside, Santos End $52 Billion Merger Talks Over Valuation Dispute

(Reuters) — Australia's Woodside Energy and Santos said on Wednesday they had ended talks to create a possible A$80 billion ($52 billion) global oil and gas giant, and Santos flagged it would look for other ways to bolster its value.

Woodside, which is more than twice as large as Santos by revenue and market capitalization, said it would only pursue a deal that would clearly benefit its shareholders.

Santos shares fell nearly 9% after the announcement and closed down 5.8% while Woodside's stock ended up 0.5%.

The talks, first announced in December, fell apart as the two companies could not agree on a valuation level, according to two sources with direct knowledge of the matter who could not be named discussing confidential information.

A firm bid did not emerge from Woodside following the almost two months of due diligence and negotiations that the parties undertook, one of the sources said.

Woodside declined to comment on those points and Santos did not immediately respond to a request for comment.

Santos said in a statement that after "an initial exchange of information, sufficient combination benefits were not identified to support a merger that would be in the best interests of Santos shareholders".

If the merger had taken place, it would have created a major global liquefied natural gas (LNG) producer that could attract more offshore investors as gas is seen as a key bridging fuel in the shift to cleaner energy.

"While the discussions with Santos did not result in a transaction, Woodside considers that the global LNG sector provides significant potential for value creation," Woodside CEO Meg O’Neill said in a statement.

Woodside had faced pressure from some investors not to pay a premium for Santos in what would have been one of the largest corporate takeovers in Australian history.

"Woodside's decision to walk away is a relief," said Simon Mawhinney, chief investment officer at Allan Gray which holds about A$700 million worth of Woodside stock. The fund last week wrote to management warning against pursuing a deal.

"We had hoped this would be the outcome," Mawhinney said. "It was unclear to us where there was much merit in a tie up."

For Woodside, this is the second time in just over eight years that it has ditched a deal that would have given it gas assets in Papua New Guinea, prized for their low production costs and proximity to big LNG buyers in north Asia.

What Next for Santos

Santos, which has long underperformed the wider energy sector, said on Wednesday it would continue a months-long review into ways to unlock value for shareholders.

Analysts and investors said Santos could try to sell all or part of its 51% share of the Pikka oil project in Alaska.

Doing so would free up cash for new projects and reduce exposure to an asset of questionable value, said Mawhinney.

Shoring up Santos' share price last month, an Australian court removed a major legal hurdle to its $4.3 billion Barossa gas project off the country's northwest coast.

The focus now turns to whether Santos can deliver on the promise of projects like Barossa or Pikka, said Neil Beveridge, an analyst at Bernstein Research.

"With Barossa approval, there will be increased confidence in their ability to execute the growth strategy ... But while there is long term upside, execution remains a key risk with projects in Alaska, PNG and Australia," he said.

($1 = 1.5319 Australian dollars)

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