Harbour hikes Santos bid to $13.5 billion

The US private equity firm aiming to buy Santos has raised its bid for a third time, valuing the local oil and gas producer at about $13.5 billion.

Santos says Harbour Energy – an investment vehicle formed by American private equity firm EIG Global Energy Partners - is proposing an all-cash bid worth $6.50 per share, which represents a 28 per cent premium on last week's closing price.

Santos has granted due diligence to Harbour but warned shareholders the proposal may still not result in an acceptable offer.

"Directors therefore advise that Santos shareholders take no action in relation to the Harbour proposal at this time," the company said on Tuesday.

"Regardless of the outcome of engagement with Harbour, the board and management remain focused on continuing to deliver shareholder value through the transformation of Santos into a low cost, reliable and high performance business with strong growth potential."

Wood Mackenzie principal analyst Saul Kavonic said Harbour was looking to acquire a global LNG growth platform, at a point in the LNG market cycle where sentiment was rebounding.

"For a new player looking to establish itself in LNG, Santos is a uniquely attractive target given its portfolio of three LNG assets, growth options, and a attractive price tag by LNG standards," he said.

Mr Kavonic said the prize asset was the Santos stake in PNG LNG, followed by Gladstone LNG and the ageing Darwin LNG plant.

"Santos's peripheral South-East Asian assets will likely remain candidates for divestment," he said.

"The domestic gas assets on the west coast would also appear a nice cash generator, but could be a candidate to spin off later, as they are peripheral to an LNG focus."

Santos is a partner with private equity-backed Quadrant Energy in several major gas assets supplying the Western Australian domestic market, and has been named as a potential bidder for Quadrant.

Asia-focused private equity giant Affinity Equity Partners has also been named as a potential investor in Quadrant, which was also a candidate for an ASX float. 

Harbour's latest bid for Santos follows its initial proposal of $4.55 per share put forth in August last year; that was rejected by the Santos board on the grounds  the bid was inadequate and the sources of funds were uncertain.

Santos said two more offers were put forward at $6.25 and $6.37 last month. 

The current proposal is subject to a number of regulatory and financing conditions.

Rothschild & Co, JB North & Co and Deutsche Bank are acting as financial advisers to Santos and Herbert Smith Freehills is acting as legal adviser to the company.

Harbour's financial advisers are JP Morgan, Highbury Partnership, Morgan Stanley and its legal advisers are Gilbert + Tobin and Davis Polk & Wardwell.

Shares in Santos were up more than 20 per cent at $6.15 each at 12pm AEDT.