Oil Search rejected an unsolicited takeover proposal from Santos Ltd that valued the Papua New Guinea-focused oil and gas producer at A$8.8 billion ($6.5 billion), the two companies said on Tuesday.
Oil Search said the offer was not in the best interests of shareholders, but its shares rose 7% after Santos said it still wanted to pursue talks to create a group that would rival Australia's top independent gas producer Woodside Petroleum in market value.
The approach comes at a tricky time for Oil Search as it is searching for a new chief executive to replace Keiran Wulff, who quit on Monday following just 17 months in the job due to ill health and a whistleblower complaint. It also just put on hold a final decision on a $3 billion oil project in Alaska.
Santos made the approach on June 25, but the proposal was only revealed on Tuesday after Oil Search Chairman Rick Lee a day earlier, on a call about Wulff's resignation, told analysts the company had not received any approaches.
Oil Search said the proposal, which was assessed by its advisers, board and senior management, was determined not to be in the best interest of shareholders.
Santos said it proposed to offer 0.589 new Santos shares for each Oil Search share held. Based on Santos' closing share price on June 24, that was worth A$4.25 per Oil Search share, a 12% premium to Oil Search's share price at the time.
"Santos continues to believe that the merger proposal represents an extremely attractive opportunity to deliver compelling value accretion to both Santos and Oil Search shareholders," Santos said in a statement.
Oil Search shares were up 7% in afternoon trade in a broader market that was trading lower. Santos shares were down 3.5%
"The bid comes at a pretty opportune time (for Santos), but it's unlikely to get up at that level of premium," said Andy Forster, a portfolio manager at Argo Investments, which holds shares in both Santos and Oil Search.
Oil Search's former top shareholder, Abu Dhabi state investor Mubadala, sold nearly half its 9.5% stake in Oil Search for A$3.865 a share in June, just before Santos made its takeover approach.
Santos declined to comment on whether it picked up any of Mubadala's shares.
A takeover of Oil Search would give Santos a bigger stake in the Exxon Mobil Corp-led PNG LNG project in Papua New Guinea, considered one of the world's lowest cost liquefied natural gas producers, and give it a stake in the Papua LNG project, on track to be developed by TotalEnergies.
Santos would also become operator of the Pikka oil project in Alaska.
Santos, advised by Citi and JB North & Co, said it has sought to engage the Oil Search board on the rationale for merging. Oil Search is being advised by Goldman Sachs and Macquarie Capital.
Oil Search previously rejected a takeover from Woodside Petroleum in 2015.
($1 = 1.3622 Australian dollars)
(Reporting by Sonali Paul in Melbourne and Nikhil Kurian Nainan in Bengaluru; Editing by Lincoln Feast and Richard Pullin)