(Reuters) – Woodside  should walk away from its proposed $57 billion merger with Santos rather than pay a premium for its smaller rival, a large shareholder said on Thursday, a sign of the deep divide between both sides over fair value.
Fund manager Allan Gray Australia owns a roughly A$700 million ($460 million) stake in Australian oil and gas producer Woodside, according to CIO Simon Mawhinney.
In a letter sent to Woodside management on Thursday, the fund manager said paying a premium for Santos would destroy value at Woodside and is not in the best interests of its shareholders, Mawhinney told Reuters in an interview.
Mawhinney did not provide Reuters with a copy of the letter.
“We like both companies but its about relative value. Woodside shareholders would be diluted even at today’s share price,” he said.
“If they paid a premium it would be even a greater dilution. We think they should walk away, we don’t think this transaction should happen.”
Thursday’s letter to Woodside’s management and board follows several emails outlining Allan Gray’s concerns, Mawhinney said. The fund manager also owns a roughly A$300 million stake in Santos.
Woodside declined to comment on whether it had received the letter.
Woodside and Santos in December confirmed speculation they were in preliminary discussions to create a joint entity that would have oil and natural gas assets stretching from Australia to Alaska, the Gulf of Mexico, Papua New Guinea, Senegal and Trinidad and Tobago.
While both parties said last month talks remain at an early stage, price has emerged as a major concern for Santos shareholders, who have repeatedly called for a significant premium.
Their case received a boost last month when a court dismissed a key legal hurdle to Santos’ $4.3 billion Barossa natural gas project.
However, days later Woodside CEO Meg O’Neill appeared to hose down expectations of a large premium, saying the precedent set by recent oil and gas deals in the U.S. and Europe was for a “low to nil premium”.
Allan Gray’s own calculations suggested a discount to Santos’ close on Wednesday of A$7.85 would be appropriate, Mawhinney said.
The Woodside-Santos tie-up comes amid a wave of consolidation in the global energy sector at relatively skinny premiums.
Exxon Mobil’s $59.5 billion stock deal for Pioneer Natural Resources and Chevron’s $53 billion acquisition of Hess were at premiums of 18% and 5%, respectively.
($1 = 1.5235 Australian dollars)
Reporting by Lewis Jackson; Editing by Praveen Menon and Christian Schmollinger
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