Australia's second-largest oil and gas company Santos has made an all-share merger proposal for Papua New Guinea company Oil Search that has so far been rejected by the target company.

Both companies made announcements today that provided details on the proposal.

Santos said it submitted a confidential, non-binding indicative all-scrip merger proposal to the Oil Search board on 25 June 2021.

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A scheme of arrangement was proposed whereby Oil Search shareholders would receive 0.589 new Santos shares for each Oil Search share held.

If implemented, Oil Search shareholders would own 37% of the merged company and Santos shareholders 63%.

Santos said the ownership ratio implied a transaction price of A$4.25 per Oil Search share, based on Santos’ closing price on 24 June 2021.

This represented a 12.3% premium to the Oil Search closing price on 24 June 2021 of A$3.78. Oil Search traded at A$3.84 on the morning of 20 July 2021.

Santos said it received a response from Oil Search on 9 July 2021 that acknowledged the strengths of the combined company and the rationale for the merger proposal but noted that the proposal did not offer appropriate value for Oil Search shareholders or a basis on which discussions could be progressed.

Oil Search confirmed today it had carefully assessed Santos' proposal but it was rejected "as it was determined to not be in Oil Search shareholders' best interests on the terms and value proposed".

"Oil Search notes that, based on Friday's closing share prices for Oil Search and Santos, the proposed terms represent a premium of only 6.8% despite Santos shareholders owning 70% more of the equity than Oil Search shareholders," said the PNG company.

Both sides open to further engagement

Santos said it is seeking to engage further with the Oil Search board and "continues to believe that the merger proposal represents an extremely attractive opportunity to deliver compelling value accretion to both Santos and Oil Search shareholders".

Oil Search replied that it is open to receiving a revised proposal that "more appropriately reflects the value which Oil Search would bring to any combined entity. At this stage no such proposal has been forthcoming".

Santos has a significant business in Papua New Guinea where Oil Search is the operator of all PNG's producing oilfields. The pair are co-owners in the PNG LNG asset and the proposed P'nyang development, among other interests.

"A logical combination"

Santos said the potential merger of the two was "a logical combination of two industry leaders to create an unrivalled regional champion of size and scale", and would have a number of features including:

• Pro forma market capitalisation of A$22 billion which positions the merged entity in the top-20 ASX-listed companies and the 20 largest global oil and gas companies

• Diversified portfolio of high-quality, long-life assets across Australia and Papua New Guinea

• Robust balance sheet with strong liquidity that can self-fund growth options and an investment grade credit rating.

Shock resignation

Oil Search was in the news earlier this week due to the resignation of managing director Keiran Wulff following concerns about his state of health and recent complaints about behaviour.