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Santos role in domestic gas market poses tough regulatory

hurdle

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ADNOC could appease regulators with plans to accelerate

gas

projects

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Santos shares trade 13% below proposed offer, reflecting

potential hurdles

By Scott Murdoch and Christine Chen

SYDNEY, June 17 (Reuters) - Abu Dhabi National Oil

Company, preparing an $18.7 billion bid for Santos, is

likely to face close scrutiny from Australian regulators worried

about local gas supply, but could win them over with pledges to

speed up new projects, analysts say.

Santos shares closed at A$7.73 on Tuesday, well below the

$5.76 (A$8.89) per share proposed takeover offer for Australia's

second largest gas producer announced on Monday, which analysts

said indicated investors believe the deal will face trouble with

regulators.

"It's not going to be smooth sailing yet," said Jamie

Hannah, Deputy Head of Investments and Capital Markets at VanEck

Australia, which owns shares in Santos. However, he added that

the offer price "is very attractive and it's straight cash".

The bid, which would be the largest ever all-cash takeover

in Australia, according to FactSet data, has landed at a time

when Australia's Labor government is debating how to deal with a

looming gas shortage on the country's east coast from 2027.

"We would expect the Foreign Investment Review Board (FIRB)

to focus on Santos's key gas infrastructure as it relates to

domestic gas supply," said Jarden analyst Nik Burns.

Santos' market share in eastern Australia is around 5%, with

most of its gas output on that side of the country going to its

Gladstone LNG export plant, analysts said. In Western Australia,

where it runs two domestic gas plants and has a stake in a third

one, it has a 24% market share.

The infrastructure assets were not major income-generating

assets, so would be very hard to spin off to satisfy any

regulatory concerns, said Hannah.

"This infrastructure is important for domestic gas supply in

both markets. The government needs to decide if they are happy

for this to sit in the hands of a foreign government," said MST

Marquee analyst Saul Kavonic.

ADNOC BRINGS CAPITAL TO THE TABLE

On the positive side, Santos holds undeveloped resources,

including the Narrabri project and Beetaloo shale gas, that

could help fill the expected gas supply gap on the east coast.

The bidding consortium, headed by ADNOC's investment arm

XRG, could argue it would develop those projects faster than

Santos could under its plans to boost capital returns to

shareholders, and reduce the risk of an east coast gas shortage.

"XRG might point to regulators that its larger balance sheet

and funding capacity provides an opportunity to accelerate

Santos' undeveloped growth assets," UBS analyst Tom Allen said

in a research note.

Romano Sala Tenna, portfolio manager at Katana Asset

Management, which owns Santos shares, said the market was being

too pessimistic about regulatory hurdles.

"A large sovereign wealth fund effectively coming in with

deep pockets" could pour money into Santos' undeveloped assets,

he said.

"So I think that is a card that will be appealing to the

Australian government."

XRG said on Monday that if the deal goes ahead, the

consortium aims to build on Santos' legacy as a reliable energy

producer "unlocking additional gas supply" and intends to "work

closely with the existing management team to accelerate growth".

Another factor that could work in favour of the ADNOC-led

consortium, which includes the Abu Dhabi Development Holding

Company (ADQ) and U.S.-based private equity firm Carlyle, is a

trade deal Australia signed last year with the United Arab

Emirates, analysts said.

Australian Treasurer Jim Chalmers, who has the final say on

approving major foreign transactions, said he would listen to

the advice of the Foreign Investment Review Board on the deal.

Santos Chief Executive Kevin Gallagher declined to comment

on the deal and regulatory concerns on the sidelines of a gas

conference in Malaysia on Tuesday, other than to say he would

"let the process take its course".