It’s easy to understand why Origin Energy rejected the higher, $13.6 billion takeover offer from BG Group of Britain.
It was too cheap: that’s not me saying it, it’s the valuation implied by Thursday’s huge deal that will see Petronas of Malaysia investing $2.6 billion in Santos’ Queensland coal seam methane gas business and export gas plant in Gladstone.
That deal surprised the market and pushed Santos shares to a record of more than $21. In morning comment some brokers wondered if the deal might signal problems for BG, which had been widely tipped by business writers to have won the hand of Origin.
Origin asked for its shares to be suspended on Wednesday and business writers tipped approval yesterday of today. But the Santos deal caught everyone off guard.
That’s the same area that BG has invested in through a 9.9% stake (plus more over time) in Queensland Gas’s ambitious plans for an export LNG plant.
Origin was the biggest reserves holder in Queensland’s rapidly expanding coal seam gas business which is emerging as the major source of energy for the East Coast of Australia and for export markets in the region. Now there is no dispute, its reserves position doubled as a result of a review commissioned after the BG offer was received.
In rejecting the offer this morning, Origin pointed out that its gas reserves (which Origin boosted by 121% in a separate announcement) were in the same area as the Santos reserves).
“This certified assessment (Of Origin’s reserves) confirms Origin’s preeminent position as the largest holder of CSG reserves and contingent resources in Australia and demonstrates Origin’s unparalleled record of converting Resources into reserves.”
“The Santos announcement establishes a new and higher benchmark for the value of CSG and, along with the proposed BG LNG project, demonstrates confidence in the use of CSG for LNG production. It is particularly relevant to the valuation of Origin’s CSG interests, which includes acreage covered by and adjacent to the acreage being acquired by Petronas.”
Origin’s rejection was despite BG lifting its price to $15.50 a share from the original $14.70. The market responded by sending Origin shares up by over a $1.35 to a high of $15.97, before they settled back around $15.96 in the expectation that BG Group will come again with another offer.
Thanks to the Santos deal, and Origin’s huge boost in its reserves, a new bid will have to be higher.
“The board of Origin has given careful consideration to all of the relevant information available to it, particularly the substantial increase in the company’s coal seam gas resource base and the demonstrably higher value now placed on coal seam gas resources,” Origin Chairman Kevin McCann said in a statement to the ASX.
Origin shares last closed on May 27 at $14.60.
According to Investment bank, Credit Suisse, Origin, which is also Australia’s second-biggest electricity and gas retailer, may be worth $16.62 a share.
But there were also worried about competition problems: the ACCC had already blocked Santos from buying Queensland Gas for competition reasons and some brokers reckoned that BG would be up against it getting approval, even if it sold off Origin’s retail and distribution businesses.
It is the second huge takeover rejected by a leading Australian company: Insurance Australia Group said no to an $8.6 million suggested “offer” from rival insurer, QBE, saying it was opportunistic and undervalued the company. That cost Michael hawker his CEO’s gig at IAG.
But St George Bank has said yes to a huge takeover from Westpac, even though it could be called as ‘opportunistic’.