CASE STUDIES IN FINANCE ASSIGNMENT
CASE STUDY - FINANCIAL STATEMENT ANALYSIS AND SECURITY VALUATION
On 3rd April 2018, Australia's second biggest independent oil and gas producer Santos Limited (ASX:STO) released that the company received a takeover bid by US energy player Harbour Energy values Santos at US$4.98 per share, which is equivalent to AU$6.5 dollar per share. The offer is made up of a $6.13 per share cash and a 37-cent per share full-franked dividend. On the day prior to the receipt of the merger proposal, the closing price of Santos Limited shares was $5.07. The offer is about 30 percent higher than its current market capitalisation. The proposed acquisition is to unsolicited, no binding and indicative. The STO Board committee encourage shareholders to read the proposal and engage further with Harbour. However, at this time there is no certainty that the Harbour Proposal will result in a formal offer that is capable of being considered by shareholders.
Santos Limited (STO) is an Australian natural gas company established in 1954. The company operates in the exploration, development, production, transportation and marketing of hydrocarbons. Santos produces natural gas to Australian, Indonesian and other Asian markets, and develops oil and liquids businesses in Australia, Indonesia and Vietnam. Santos also focuses on transformational liquefied natural gas (LNG) strategy and has interests in four LNG projects in Australia.
Harbour Energy is a global oil and gas company founded by EIG Global Energy Partners ("EIG"). EIG specialises in private investments in energy and energy-related infrastructure. EIG as invested over US$25.3 billion in more than 320 portfolio investments across 36 countries on six continents. Different from typical private equity backed companies, Harbour is funded with permanent capital and has the objective to build a global portfolio of successful, growing, long-term oil and gas business. Harbour's first transaction - the acquisition of a US$3.0 billion package of producing assets in the U.K. North Sea - was completed in 2017.
The attached Table 1 provides a summary of financial, structural and performance information for Santos Limited for the Dec 31th financial year ends from 2013 to 2017 (All figures, except for per share, issued capital and percentage statistics). The attached Table 2 provides information on Australian listed peer companies operating in the same industry as Santos Group Limited as at December 31th 2017 (figures are in A$ unless otherwise stated).
Other relevant information relating to Santos Limited or the wider corporate and share market sectors is:
- The beta coefficient for Santos Limited is 1.11, compared to the average beta coefficient for the energy industry of 1.08.
- The 10-year Australian Government Bond yield was 2.75% on December 31th 2017.
- The S&P/ASX 200 Accumulation Index has provided an average annual return of 10.16% over the most recent 10-year period.
- Consensus analyst forecasts for the EBITDA approximately $250 million, while earnings per share (EPS) for the 2018 and 2019 per financial year are 0.294 and 0.32 per share, respectively.
- Analysts expect that Santos will keep its dividend payment offered by Harbour Energy after the acquisition at 0.37 per share in the 2018 financial year. Long-term earnings (including residual earnings) and dividend growth forecasts for Santos Limited are 2% and 3.00%, respectively.
- The issued share capital for Santos Limited at the end of 2018 financial year is expected to be unchanged.
- Assume that the analysis is being undertaken on December 31th 2017.
In relation to recent acquisition activity in the telecommunications sector in Australia, Table 3 also provides deal information for target companies from the telecommunications sector involved in acquisitions in the last 7 years.
As the lead financial advisor to Santos Limited on the acquisition proposal from Harbour Energy, the Independent Board Committee has requested your firm to prepare an independent expert's report to assist them in forming a response and recommendation for shareholders relating to the proposal. This expert's report should include the following content:
The results and conclusions from a financial analysis of Santos Limited, with particular focus on operating, efficiency and performance aspects of the business and, from this, identification of potential sources of value creation from acquiring Santos Limited.
An estimate of the current intrinsic (fundamental) market value of Santos Limited's equity shares. This valuation estimate should be determined from using a number of valuation metrics and approaches, and can either be presented as a point or range estimate.
Based on the above analysis and any other relevant information or considerations, the provision of a recommendation as to whether the price offered in the acquisition proposal is fair and reasonable or otherwise.
Required:
This independent expert's report is due to be submitted to the Independent Board Committee (IBC) of Santos Limited by 6.00pm on Monday 28rd May 2018, via the FIN3CSF subject LMS site. This case study contributes 20% to the overall final assessment in the FIN3CSF subject. This case study is to be completely individually, and the maximum word limit, excluding calculations and financial analysis reporting (such as tables) is 1,500 words.
Attachment:- Assignment Files.rar