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In one of the largest foreign-led takeover bids in Australian corporate history, Abu Dhabi National Oil Company (ADNOC) has lobbed a A$36.4 billion all-cash offer for Santos Limited (ASX: STO). Despite the 28% premium to last close, shares only rose ~11% in Monday trading, closing at A$7.72. This 13% spread between trading price and offer price suggests that the market isn’t convinced the offer will pass the numerous hurdles necessary to complete. ABSI this week explores the latest takeover attempt of Santos. 

Led by ADNOC’s newly formed investment arm, XRG, a bidding consortium of global private equity powerhouse Carlyle and the Abu Dhabi Development Holding Company has made a play for Australian energy giant Santos. If successful, the takeover would not only rank as the largest all-cash corporate acquisition in ASX history but also mark a bold move by ADNOC to secure a foothold in Asia-Pacific’s LNG corridor.

The deal is fraught with political risk. To soothe these sensitivities, the bidders have committed to retaining Santos’ Adelaide headquarters, keeping its name and workforce, and investing further in growth. But despite the commitments and the cash on offer, investors are clearly not pricing in a clean runway to deal completion.

Source: Google Finance

For the uninitiated, ADNOC is the state-owned oil and gas giant of the United Arab Emirates and one of the world’s largest energy companies. With over 10 million barrels of oil equivalent produced per day, ADNOC is central to the UAE’s economic engine. Traditionally a domestic upstream operator, ADNOC has recently begun expanding into global LNG and downstream investments. The XRG investment vehicle, launched in late 2024, is part of that pivot to become a top-five global LNG player by 2030. Santos, with stakes in Papua LNG, Gladstone LNG, and Barossa gas, offers an instant springboard into the region.

In the world of ASX large-cap merger arbitrage, a deal spread would typically range between 2% to 8%. Despite a 28% bid premium, the 13% spread between Santos’ close on June 16 and the proposed bid price suggests investors are pricing in substantial deal execution risk.

The top hurdle is the FIRB. The Foreign Investment Review Board (FIRB) plays a crucial role in assessing whether foreign acquisitions are in Australia’s national interest, and it’s known to be particularly vigilant when it comes to strategic infrastructure and energy assets.

Santos operates and owns significant gas assets across both the east and west coasts of Australia, including pipelines, LNG terminals, and gas fields that supply domestic markets. It also has growing international assets, but the heart of its business remains deeply entwined with Australia’s energy security.

Source: Santos

While ADNOC is positioning itself as a long-term investor, not a hostile acquirer, its status as a foreign government-controlled entity brings added scrutiny.

Moreover, FIRB’s track record offers mixed signals. In 2001, it allowed Shell to acquire Woodside but only under tight conditions. In 2020, it blocked Chinese group China Mengniu from acquiring Lion Dairy & Drinks amid diplomatic tension. And most notably, in 2009, FIRB imposed limitations on Chinalco’s proposed stake in Rio Tinto.

This means that while ADNOC’s UAE origin may be geopolitically less fraught than China, government ownership alone raises red flags, especially in a current political environment where energy affordability is a hot-button issue.

Ultimately, Treasurer Jim Chalmers will decide whether the bid passes FIRB’s tests. Critics will argue against allowing a Middle Eastern state to control critical gas supply; others will point to the benefits of deep-pocketed foreign capital investing in future gas development. But the political cost of a misstep is high. If energy prices rise and outages occur under ADNOC’s ownership, Chalmers may wear the blame. 

Another critical reason for the steep discount to the offer is that this isn’t Santos’ first dance with a takeover. In 2018, US-based Harbour Energy made a series of all-cash offers for Santos, culminating in US$5.21 per share (about A$6.86). The Santos board rejected the final offer, citing undervaluation and funding risk. The oil market was recovering at the time, and the board believed it could extract more value by remaining independent.

Then, in early 2024, Woodside Energy entered merger talks with Santos to create an $80 billion LNG powerhouse. While initially welcomed by investors, those talks quietly fell apart by mid-year. Valuation differences, strategic divergence, and challenges integrating two major ASX-listed companies ultimately proved too great.

The ADNOC bid for Santos represents more than just a corporate transaction; it’s a real-world stress test of Australia’s openness to foreign investment, particularly in politically sensitive sectors. The outcome now lies in Canberra, not Adelaide or Abu Dhabi. As Santos enters due diligence and the political narrative intensifies, the price gap on screen reflects a complex reality that cash on the table means nothing if the gatekeeper won’t open the door.

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