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0:35

Australian Financial Review. Hello,

0:39

I'm James Thompson, Senior Chanticleer Columnist at

0:41

the AFR. Welcome to our

0:43

weekly news breakdown of all things business,

0:45

finance and markets. And with me

0:48

today, as always, is my Chanticleer colleague and

0:50

the man whose parents chose very

0:52

apt initials for this week's show. It's Anthony

0:54

MacDonald. How are you, Anthony?

0:56

Yeah, M&A, you're right, James. Fantastic.

1:04

This week, we dive into the staggering burst

1:06

of deal making at Woodside, Santos

1:08

and Chemist Warehouse. We see what

1:10

the economic data is saying about Australia's economy.

1:13

But first, Anthony, we must admit we got it wrong

1:15

last week. The

1:17

deals are back! We went off a bit early

1:19

talking about the challenges, only to see a flood

1:21

of year-end proposals

1:23

flying around. It

1:26

seems to happen every year, doesn't it? One last shot at

1:28

M&A to get in before Christmas. And

1:31

we've got a question about Origin Energy's failed $20 billion takeover.

1:35

We've got a question about Origin Energy's

1:37

failed $20 billion takeover. We've got a question

1:39

about Origin Energy's failed $20 billion takeover. M&A

1:41

to get in before Christmas. That's right,

1:43

James. You've got all these people that have been working on

1:45

stuff all year. And yeah, so we

1:47

always get a few non-binding bids lobbed around this time

1:49

of year. Maybe they get up, maybe

1:52

they don't. But, you know, it's one last

1:54

push before the summer holidays. These

1:57

bankers never like to take it easy at the end of the

1:59

year, do they? Good for us

2:01

to have a few things to write about late

2:03

in the year. Alright, let's start by having a

2:05

look at a few other bits of news before

2:07

we come to these big deals. The

2:10

RBA met on Tuesday and as

2:12

widely expected, including on the podcast

2:14

last week, the Michelle Bullock

2:16

and her team kept the cash rate on

2:18

hold at 4.35%. And

2:22

a day later, quarterly GDP numbers came out

2:24

and showed why they did that. Australia's

2:27

economy grew by just 0.2% in

2:29

the September quarter and 2.1% on a

2:32

year-on-year basis.

2:34

But where is this growth coming from, Anthony? A fair

2:37

bit of public spending, James. The

2:40

tax receipts are up for

2:42

the government. They're really injecting a

2:44

bit of money into the economy. I

2:46

mean, on the private sort of side,

2:49

the mining sector is investing pretty heavily.

2:51

The consumer was quite flat. Net exports

2:53

are down. So, yeah, it's a bit

2:55

of a mixed picture, but I think the overall story is

2:57

the same as it has been for the past couple of

2:59

quarters. And it's this GDP

3:01

per capita recession. So, the

3:03

population is growing faster than the economy. So,

3:06

the economy is still growing, but

3:08

maybe everyone's not feeling as well off as they

3:10

used to. Yeah. I

3:12

mean, this is a real sort of

3:15

developing story here. The

3:18

only thing keeping the Australian

3:20

economy in the black, so to

3:23

speak, growing is immigration. If

3:26

you adjust for population, we're going backwards

3:28

on a per GDP basis and it

3:30

doesn't feel good. I think

3:32

that's the thing people can feel in the economy.

3:36

What we're seeing is real household disposable

3:38

income continues to fall. I mean, John

3:40

Keough, our economics editor, had a great

3:43

column on this this week where he

3:45

sort of explained that you've

3:47

got high inflation, rapidly increasing

3:49

interest rates, federal

3:51

government taxes going north. It

3:56

all feels like a

3:58

lot of pressure building up. in

4:00

the economy broadly but on households. Where

4:03

do we end up here, do you think? Well,

4:06

I think as we discussed last week, I

4:08

think we end up with companies trying to jam through 10 to

4:10

15% price increases

4:13

again next year and consumers pay

4:15

them while they can but there's going to come a time,

4:17

I think, where consumers are just going

4:19

to have to cut back more

4:21

dramatically and that's when the economy is really

4:23

going to struggle. Yeah, RBA done for the

4:25

year as we said last week. I

4:28

guess we look to February's

4:31

meeting where they'll have another

4:33

set of inflation figures for December,

4:35

a bit more data on the economy.

4:38

Do they go once more? But

4:40

we're probably, once more it'd be

4:42

it. My question,

4:44

Anthony, is when do you

4:46

think we start seeing rate cuts?

4:49

Now, I've boldly put it a few times,

4:51

it's not till 2025 and

4:54

I confess I'm feeling a little bit

4:56

less sure of myself there just because of

4:58

the weakness in GDP.

5:01

If that starts to translate through to

5:04

weakness in employment, maybe we

5:06

see the cuts coming earlier than 2025 or late 2024. Yeah,

5:12

I mean, we'll probably get to this later in the pod

5:14

but it feels like we've consistently been about six months behind

5:16

the US and the US is going

5:19

through this when do

5:21

the cuts come debate at the moment. So

5:23

I think it's definitely going to flare up

5:26

early next year. Yeah, absolutely. Maybe next year will

5:28

be the year of waiting around for the cuts

5:30

or not. And James, there was new news on

5:32

the hot potato topic of financial advice this week

5:34

when the government announced reforms that will

5:37

allow banks, insurers and super funds to

5:39

give customers personal financial advice. Now,

5:42

James, that sounds simple and

5:44

sensible, but is it? Oh,

5:47

I think this is a bit of a late year

5:50

victory for the government. We've

5:53

got a lot of people retiring in the next

5:55

10 years, something like 2.5 million

5:57

people are going to retire. They're going to retire

5:59

with... big super balances and houses that have

6:01

worth a lot of money. They

6:04

need financial advice. Retirement is a complex

6:06

thing. It's hard to work out. What

6:08

bit of the pension do I get?

6:10

How do I make sure my super

6:12

doesn't, you know,

6:14

I don't run out before I die. How do

6:17

I make sure my family's provided for whatever that

6:19

looks like? So my

6:21

sense here is that everyone's

6:24

going to need some form of advice.

6:26

Maybe not really detailed advice, but some

6:28

form of advice. So what

6:30

we saw after the Royal Commission was the pendulum

6:32

swing. Advisors

6:34

were basically, you know, written

6:38

off as conflicted. The sector was,

6:41

you know, reduced in number. The

6:44

price of advice went through the roof about

6:46

three and a half grand to get

6:48

a statement of advice at the moment. The

6:51

reforms here will allow more

6:54

advisors to be brought

6:57

into the market with slightly lower qualifications,

6:59

but we're not going to lose any

7:02

of those safeguards around conflicted advice. And

7:04

I think, importantly, the best

7:07

interest duty which requires advisors

7:09

to put their client's

7:12

financial interest first, again, sounds simple,

7:14

but not always has been, that's

7:17

staying and I think that's a good thing. So, kudos

7:19

to the government. I reckon they've balanced this one really

7:21

well and let's get

7:23

the advice flowing again. Yeah, 100%. And if we're

7:26

all going to need financial advice, which we do,

7:28

why not do it through a platform that we

7:30

all have, which is superannuation, right? I mean, the

7:32

last thing that people like you or I or

7:35

all of our listeners want is to have to

7:37

go to someone else for some other product when

7:39

there's groups that already have all our financial details.

7:41

They've got all their paperwork, everything set up

7:43

and just ready to go. So surely we just

7:46

need to get the regulatory settings right and then

7:48

make the most of it. Yeah,

7:50

I think that's right. And I mean, we've seen

7:52

that the super funds were all up in Canberra

7:55

this week, sort of talking about how

7:57

do we use super money to get the

7:59

biggest... bang for it I guess and

8:01

while still making sure that it's focused

8:04

on delivering for savers. This

8:07

is all sensible stuff to me.

8:09

We've got a big super sector. It's

8:11

getting bigger. Let's make it

8:13

as productive and efficient and as

8:17

good as it can be I guess. Alright

8:19

Anthony, let's get to the first topic of the

8:21

week and the first of this week's big deals.

8:24

Chemist Warehouse, the blue and yellow

8:26

pharmacy group and a stunning Australian

8:28

business success story is finally headed

8:30

to the ASX boards. After

8:33

a decade of people like us speculating

8:35

it would float, Chemist Warehouse has found

8:37

a back door to the ASX via

8:39

a much smaller company and one of

8:41

its suppliers called Sigma Healthcare.

8:44

Now Sigma which is worth nearly a billion

8:46

dollars will buy Chemist Warehouse for about eight

8:48

billion dollars, pay for it

8:50

in Sigma shares and see the combined

8:52

group worth nearly ten billion. It

8:55

is a bit unusual but the main

8:57

thing here is that Chemist Warehouse is

8:59

set to be an ASX listed company.

9:01

It's a huge win for the ASX

9:03

finally attracting the country's biggest private equity

9:05

owned retailer and a very much household

9:07

name. Anthony, where will

9:10

Chemist Warehouse fit in terms of

9:12

the ASX and particularly the ASX

9:14

retail sector? It will be a

9:16

big banana James, one of the big yellow and blue banana.

9:20

It's one of the big retailers in Australia.

9:22

I mean we're still waiting to see the

9:25

exact structure and how it deals with this whole

9:27

franchise system it's got, how it treats the franchisees

9:29

and I expect we'll hear

9:31

more about that on Monday when we'll

9:34

actually see the deals. But in

9:36

terms of what Chemist Warehouse is, I mean there's about 500 stores

9:38

in its network. The

9:41

head company makes about 3.1 billion

9:43

dollars revenue a year, 300 million dollars profit.

9:46

The combined sales and profit through the network

9:48

though I imagine would

9:51

be multiples of that. So

9:53

it would be interesting to see how they treat

9:55

all the franchisees and everything. But I mean in

9:57

terms of the ASX, if you look at the

10:00

consumer staples companies on the ASX, we're

10:02

looking at Woolworths and Coles and

10:05

then your alcohol companies Endeavor Group and Treasury. Chemist

10:08

warehouse would be almost as big as

10:10

Endeavor and Treasury. If you

10:12

look on the consumer discretionary side, it'll

10:14

also be sort of a top three

10:16

or four retailer. So yeah, it'll definitely

10:19

be a significant player on

10:21

the ASX and I think

10:24

fund managers and just regular

10:26

retail punters will actually

10:29

enjoy the chance to look at it

10:31

and consider investing in it because it's

10:33

a business that a lot of us are familiar

10:35

with and use. Yeah. And it's it'll be a

10:38

good time to have sort of look

10:40

under the bonnet. But James, who do you think will buy

10:42

shares in the new Sigma slash

10:44

Chemist warehouse? What's the attraction

10:48

there? I think there's a few attractions. A,

10:51

the founders, Jack Gants and Mario Verocco.

10:53

I mean from what

10:55

we can see, they're two of the

10:57

better retailers in this country and it's

10:59

always good for public market investors to

11:01

get access to smart entrepreneurs

11:03

who've been smart for a really long time.

11:06

So that's point one. But you do

11:08

have a few good tailwinds here. You've

11:11

got an aging demographic, you've got

11:14

increased health spending, you've

11:16

got an expanded pharmaceutical benefit scheme

11:18

that keeps a, you know, the

11:21

steady drumbeat of interest and

11:23

people coming through the door. I'd

11:25

also point out you've got this

11:27

really fascinating media business inside this,

11:30

inside this company. Anyone who's been inside a

11:32

chemist warehouse recently will

11:34

know that you get bombarded with

11:36

advertising. There's screens everywhere, there's sounds

11:39

everywhere. Now that business is

11:42

reported to have 600 million dollars in

11:44

revenue. Wow. That alone would make it a

11:47

sizable business by itself. But it's going to be

11:49

inside this even bigger empire. So I think there's

11:51

going to be lots of interest like this in

11:54

this company. I think you're

11:56

right Anthony. There is a benefit

11:59

in that Chemist warehouse is going to

12:01

have to explain the story. It's not one of those

12:03

businesses where you go, and what do they do? It's

12:07

obvious, and I think the interest

12:09

will be there. One

12:11

thing about this, Anthony, the

12:14

method that they've used to get to

12:16

the ASX board, it's a bit convoluted.

12:19

A reverse takeover is not the

12:22

usual way particularly large companies come

12:24

to the ASX. Why

12:26

have they done the sort of somersault

12:29

with the triple park here? Yeah,

12:31

this is a messy way to do it, and I can't imagine it would

12:33

have been their first choice. The

12:36

reason they've had to do it is the IPO market

12:38

is constipated. There's just not much getting through there. We've

12:42

seen two IPOs worth more than

12:44

a billion dollars in the past five years, and

12:47

both of those happened at the height of the floats window,

12:50

which was in late 2021, and since then

12:53

it's really turned down and gone sour.

12:56

It probably ended up this was just the easiest way to do

12:58

it. If it wanted to get to the ASX boards, it had

13:01

to think outside the box. Going

13:03

out and raising $2 billion, $3 billion, $4

13:05

billion, $5 billion, $6 billion, whatever, that's

13:09

a really, really big

13:11

IPO, and it's just not the

13:13

market for it. If I think back

13:16

over the past 10 years, or even

13:19

been a bit longer, we've had two big

13:21

IPOs since the GFC, basically,

13:23

and they're both privatizations. We had

13:25

Verizon and Medibank Private. Both

13:28

came out of government hands. Both raised a

13:30

$5 to $6 billion mark, which would

13:32

put them on a similar scale

13:34

to Chemist Warehouse. They

13:37

took huge global efforts, big

13:39

retail offers, price to

13:42

go. It took a

13:44

lot and a lot of work to get them over the

13:46

line, and a very committed seller being in the government. For

13:49

Chemist Warehouse to float, yes, there's huge

13:51

interest in this business, but

13:53

it's just such a chunky deal that

13:56

I don't think the market was ready

13:58

for it. But James,

14:00

you've always taken an interest

14:03

in these chemist's warehouse founders, the Gants and

14:05

Verocchi families. Is this a

14:07

payday for them or a path to payday or

14:09

how should we think about it? I think so.

14:12

I mean, you referenced that

14:14

we've been waiting for this deal for like a

14:17

decade. This is the white whale of Australian capital

14:19

markets. I think you wrote a great column this

14:21

week saying every banker in town has had a

14:23

go at trying to get this

14:25

one to the ASX in some way. And

14:28

to me, that says that the Gants and Verocchi

14:30

families do, but they have wanted

14:32

to find some way to

14:35

sell down. Now, it might not be

14:37

a full sell down. I doubt it will be, but it

14:39

might be a partial sell down. Now, they're

14:41

worth $2.4 billion each. So

14:44

are their shares locked

14:46

up for a period? Imagine

14:48

they would be. But I think this

14:50

is the path to a payday of some

14:52

description. I think once

14:54

they're here, they're going to retain

14:56

control of this business. From

14:59

what we know of them, they're very hands

15:01

on. They're very involved in the thing. I

15:03

can't see them sort of pulling

15:06

back from that too far. So I

15:08

reckon expect to see them heavily

15:12

involved and having very large publicly

15:14

listed, very large stakes in a

15:16

publicly listed business. Just

15:19

one question, Anthony. Do

15:22

you think this deal reopens

15:24

the IPO window? Does it unblock the

15:26

constipation in the IPO window or will

15:28

people see this as a special case

15:31

perhaps not exactly IPO related?

15:33

No, that's nothing for the IPO window.

15:36

I think this is not a proper

15:38

IPO. I mean, there's a $350 million

15:40

raising that's going to accompany

15:42

this. I mean, that's just to fund the bigger

15:44

business. So that's

15:46

not a proper IPO. This

15:50

is a chemist's warehouse coming

15:52

up with an innovative solution to get

15:54

onto the ASX boards. I

15:57

don't think it counts. Although we are seeing in the

15:59

US, aren't we James? I saw you wrote early this week.

16:01

There's a couple of IPOs over there, aren't there, that

16:04

maybe show some green shoots? Yeah, a

16:06

couple of IPOs. Remarkably

16:08

Kim Kardashian's got an underwear business

16:10

that's apparently worth $4 billion and

16:13

might be floated. But

16:15

I'm with you. I think investor

16:18

appetite is still gonna be a bit

16:20

tepid into the new

16:23

year when everyone's figuring out where the economy's

16:25

going, where rates are going, what

16:27

the state of play is. That's

16:30

not a great environment for people to be trying

16:32

to back a new company. So yeah,

16:35

I think you're right. IPO window's

16:37

still shut, but a hats

16:39

off to Jack and Mario

16:42

and David DePilla, who's the other deal

16:45

maker involved here, for coming

16:47

up with something innovative to get something done.

16:55

To our second topic, James, and gee,

16:57

this one's a doozy. Australia's two biggest

16:59

listed oil and gas companies, Woodside and

17:02

Santos, are in talks to merge and

17:04

create an $80 billion listed oil, gas,

17:06

and LNG company that would be of

17:08

global significance and become one of the

17:10

10 biggest companies on the ASX. While

17:13

our snouts tell us the news broke a bit

17:15

early and the companies themselves said on Thursday night

17:17

that there is no guarantee the deal gets done,

17:20

it would be one of the biggest ever

17:22

mergers in Australia and cap a remarkable period

17:24

of consolidation in our energy

17:26

sector. A few years ago,

17:29

James, we had three big players, Woodside, Santos, and

17:31

Oil Search, and there was a fourth as well,

17:33

which was BHP's petroleum business. Now

17:35

two years ago, they all started merging and

17:37

now it could be down to one. James,

17:40

this deal's been brewing for a while. Where

17:43

does it fit though in terms of the

17:45

global landscape and what else has been happening

17:47

this year? Oh, it fits perfectly with the

17:50

narrative of this year and the

17:52

last few years, which is the big get

17:54

bigger. There is a

17:56

view in global oil that to

17:58

be able to navigate the next... 20-30

18:01

years, you need scale. Why?

18:04

Because A, there's

18:07

going to be a market of undersupply and so

18:09

you want to be a

18:11

big player to maximise

18:14

the benefits of that undersupply. We haven't

18:16

been investing in new oil and gas

18:18

capacity really for a

18:20

decade. We still have high demand for oil

18:22

and gas to spot the energy transition and

18:24

so there's fat returns to be made. You

18:26

want to be as big as possible to

18:28

maximise those returns. The other thing

18:30

about being big is that it helps

18:33

you pay for decarbonisation down the track.

18:35

It's going to be a massively expensive

18:37

thing. The bigger you are, the more

18:39

your balance sheet can support that. So what

18:41

we've seen this year is Exxon and Chevron,

18:43

two of the biggest oil companies in the

18:46

world, have done a series of big deals

18:48

culminating in October within a couple of weeks

18:50

of each other. They both paid

18:52

about $100 billion Australian for

18:54

an individual deal.

18:57

So this is

19:00

the backdrop for Woodside Santos. They're

19:02

getting bigger and if Woodside and

19:04

Santos want to stay globally relevant

19:06

and there's no reason they can't

19:09

be a globally relevant LNG giant,

19:12

they probably need to get

19:14

bigger too. That's the rationale

19:16

here. So you're right

19:18

Anthony, I think we're very early on in the

19:20

process. There are some hairs

19:23

on this deal or some hurdles

19:25

that need to be overcome, not

19:27

least of which is the

19:30

price. But just to start

19:32

at the start of that, Anthony, how would

19:34

a deal like this be funded? Well, it's

19:36

got to be shares. There's no way

19:39

that Woodside Energy on

19:41

December the 8th is

19:44

thinking about raising $25 billion to

19:46

acquire Santos, either in cash or

19:48

debt. It just won't happen. It's

19:50

got to be a script

19:52

deal. That would just be considering issuing a

19:55

ton of Woodside shares to Santos shareholders and

19:57

say, come over, be part of the combined

19:59

group. and say own about 30% of

20:01

the combined entity. I

20:05

mean, this deal will be all about that merger ratio, which

20:08

set of shareholders end up owning how much. So

20:10

I expect if talks

20:13

do progress, I mean, how

20:15

progressed they are does depend a little bit on who you talk

20:17

to at the moment, but if

20:19

they do progress, there's gonna be arguing

20:21

about percentages and it'll come down to

20:24

say maybe Santos 31%, Woodside 69,

20:28

or maybe it's 32 68, 33 67. Yeah.

20:32

It feels like it's gonna be that sort of deal

20:35

where they're arguing about a percent here or

20:37

a percent there, as you said,

20:39

James, it's all about get big or

20:41

get out. And we see this in

20:44

the sunset industries. Yeah. Broadly,

20:46

I mean, we only have to look at our

20:48

own employer when nine acquired Fairfax, it was pretty

20:50

much a nil premium deal. And

20:52

it was all about traditional media

20:55

companies getting bigger together

20:57

to try and fight the digital

20:59

challenges or evolve into a more

21:01

digital business. And it's the

21:03

same things going on in oil and gas. I mean, clearly

21:06

these businesses aren't gonna be around forever in

21:08

their current form. So they kind

21:10

of fit into that run for cash, make as much

21:12

money now while you can and

21:14

either distribute it back to shareholders

21:16

or find your transition plan and

21:19

reinvest the future. So yeah, this thing is all

21:21

gonna be just about capex funding,

21:23

free cash flow, how

21:27

to sort of create a bigger,

21:30

leaner, cash

21:32

rich machine for shareholders. James,

21:36

you've done a fantastic job covering Santos

21:38

in the past month or so. And

21:41

it's funny how these talks pop up

21:43

now because there's been a bit of

21:45

chat around Santos and it's under some

21:48

serious pressure from shareholders, some activist investors

21:51

who've been out there with some ideas

21:53

talking about sweating the assets harder. How

21:57

do you think this bid or potential

21:59

bid or talk... whatever you want to call it. How

22:01

does that fit in with the activism? I

22:04

think it's related to the activism.

22:07

The activists, and they're led by a fund

22:09

manager in Melbourne called L1 Capital, they

22:12

suggested breaking Santos up, breaking it

22:14

into an LNG business and more

22:16

of a conventional oil and gas

22:18

business because they thought that could

22:20

unlock value. Santos is

22:22

trading at $6.83 or something

22:24

at the moment. They reckon it could be

22:26

worth $10.50 a

22:29

share doing this breakup. By

22:32

going to Santos and putting pressure

22:35

on them, I think the

22:37

activists kicked open the door.

22:40

Kevin Gallagher, the CEO of Santos, has said,

22:43

come at me. Come and talk

22:45

to me about deals. Everything's for sale.

22:47

I'm happy to discuss any

22:49

of this. I think Woodside's probably taken

22:51

him at his word. That's

22:53

how these discussions go now. I

22:57

wonder about whether these activists are going to

22:59

be really thrilled with the idea of a

23:01

merger, a script merger,

23:03

where the

23:05

premium, and this has become

23:07

very clear on Friday

23:10

morning, the premium that's being discussed

23:12

is pretty small and it might

23:14

even be zero. If

23:16

you're a Santos shareholder who feels

23:18

the company's undervalued, do you really

23:21

want to go into become

23:23

a Woodside shareholder when

23:26

Woodside's telling you, we're not going to give

23:28

you any more money for your shares now,

23:30

but stick with us. In

23:33

five to 10 years, this is all going

23:35

to work out brilliantly when the fat returns

23:37

are there for the taking. I

23:40

don't think that's what the activist shareholders in Santos

23:42

had in mind. What do you reckon? Yeah,

23:44

I agree with you on that front. It all

23:46

depends on the synergies, how much you believe the

23:48

synergies are realistic. If this thing

23:50

can save 300 million bucks a year and

23:55

you think the business is worth six

23:58

or eight times that, that's a way to... to

24:00

create a couple of billion dollars worth of value. It

24:03

also depends on what you think Woodside shares

24:05

are worth and whether they're overvalued or undervalued

24:07

at the moment compared to Santos's. So

24:09

if you own Santos shares and you think

24:11

you're undervalued, which these activists clearly do, and

24:14

you think Woodside is either at fair value

24:16

or overvalued, then there's no way you're

24:19

gonna want their shares, right? You're not gonna

24:21

trade your cheap shares for someone else's overvalued

24:24

shares. So yeah, I think

24:27

bottom line is, yeah, plenty to play out. Let's

24:30

pretend that this deal gets up at $80 billion

24:33

or using that round number. Where would

24:35

that rank in terms of Australian M&A

24:37

history? Depends how you look at it,

24:39

James. I mean, if you look at it just at

24:41

the value of Santos, this would be

24:43

a top five deal by value in Australia. I

24:46

mean, if you look at it in terms of the value

24:48

of the combined thing and there'll be people involved in this

24:50

deal that'll ask us to look at it as

24:53

an $80 billion deal, then

24:55

that'll be the biggest ever by

24:57

far. It's an

24:59

extremely significant transaction, just the

25:02

sheer size of it, and

25:04

also what it means for our energy sector. But if I

25:06

just, just to go back, I mean, what are the

25:08

other biggest deals that it's competing with? Well,

25:11

afterpay, when you got a bid by

25:13

the US company Square, which was only

25:15

two years ago, that valued afterpay at

25:17

$39 billion Australian dollars at the time.

25:20

Now, there's no way that $39 billion's still

25:22

worth $39 billion, but

25:24

when it landed, it was worth $39

25:26

billion. So that's at the top of my

25:28

list. Then you've got Sydney Airport, which got

25:30

a $30 billion cash bid. You've got Westfield

25:32

Corporation, which was just under that. It

25:35

was Cash and Script from Unibuy probably

25:37

five years ago now. I

25:40

mean, the big one was always this company

25:42

called Rinker Group, which was spun out of

25:44

CSR in the early 2000s. And

25:47

in 2006, it got a bid from

25:49

Semex, which was big Mexican

25:51

cement business. Anyway,

25:53

I mean, that was worth like $15 billion. I

25:56

called when I went to Westfarmers, another one of

25:58

a... that time that's

26:00

one of the big ones. But yeah, this,

26:03

if you look at the combined value of

26:05

the deal, it's one of the big

26:07

ones. But as you sort

26:09

of said, James, there's a big, big

26:11

difference between the value of an announced

26:13

deal and then the value of an

26:15

actual deal. And

26:18

don't be fooled. Don't put this on

26:20

your biggest deals ever list just

26:22

yet because there's no

26:25

list for the biggest announced deals because, you

26:28

know, they pretty quickly get forgotten in

26:31

history. It's just all about what

26:34

actually gets signed. Now, James, what

26:37

do you reckon the prospects are? Does

26:39

this deal get done or where

26:41

do you think it heads? Well, you're the

26:43

deal master, Anthony, and you've taught me that

26:47

two things kill a deal time

26:49

when a deal drags on and

26:52

the early leak. And

26:54

we've got the early leak here. I

26:56

don't think any of the parties were

26:58

ready to ready for

27:01

this to be in the market. I think

27:03

and as a result, I think there's going to be,

27:05

you know, people lining up to knock

27:08

this deal over between

27:10

now and Christmas. So

27:12

look, it feels unlikely at the

27:14

moment, but this deal might

27:17

not get done. The Woodside Santos deal, but

27:19

maybe another deal gets done. Maybe someone comes

27:21

out of the out

27:23

of the shadows and tries to buy

27:25

Santos or part of Santos. So maybe

27:28

we get some deal, maybe

27:30

not V deal, but we get some deal.

27:34

You sound a bit negative, but what's

27:36

your verdict? No, I'm with you

27:38

on that, James. I mean, the number one

27:40

takeaway from this week's

27:43

leak and the confirmation, those talks

27:45

is there's talks underway. So you've got a

27:47

potential seller and you've got a potential buyer

27:50

in talks, right? So both sides

27:52

of the equation at the moment, actually

27:56

thinking about doing something like this is not

27:58

an unrequited love story. actually

28:00

two players that want to be at the table

28:02

at the table. Now that tells you that there's

28:04

potential for a deal. Whether it's

28:06

Woodside acquiring Santos with Scripp and

28:09

creating an 80 billion dollar Australian

28:12

oil and gas company, who

28:15

knows? I don't know. I

28:17

tend to agree with what you said earlier James. You know just

28:20

one back to what you're saying about what

28:22

the activists were saying about creating, maybe

28:25

splitting Santos and creating a

28:27

domestic gas business and then an LNG business.

28:30

I kind of wonder whether we're going

28:33

to get to the stage where we sort

28:35

of have that split and maybe the LNG

28:37

business goes to Woodside, domestic gas business can

28:39

stay on the ASX or trade in some

28:41

other form. Because there are

28:43

some hurdles here which I think

28:45

we should probably talk

28:48

about. In deals like this there's always

28:50

soft issues right? Who's

28:52

going to run what?

28:54

For example where's the company going

28:57

to be based? All right, Santos

28:59

is a proud South Australian company. One of

29:01

the few. There's no way

29:03

the South Australian government is going to let

29:05

Santos go without getting

29:08

something. Yep, good point. So what? We're

29:10

going to have a company with two head offices because WA is

29:12

not going to let go of Woodside. And

29:14

then you've also got Pup in New Guinea as well.

29:16

So the sort of the crown jewel at

29:18

Santos is the P&G LNG project.

29:22

When Santos bought oil search the P&G government made

29:24

it pretty clear that they still wanted to have

29:26

a say in that project, directors on the board,

29:28

that sort of stuff. Yep. So

29:30

you've got those politics too. You've got

29:33

the ACCC. Both of

29:35

them are big plays in East Coast Gas Market. Woodside

29:38

has the Gippsland Basin, JV, which supplies a

29:40

lot of the East Coast Gas. Santos

29:43

has got the Cooper Basin. How do

29:45

you think ACCC would feel about two of

29:47

the big East Coast Gas suppliers being owned

29:49

by the one company? Indeed. I don't know.

29:52

What other issues are on your mind? Oh

29:54

look, I think the evaluation one is the

29:57

main one. The size of the...

30:00

synergies and I guess the

30:02

quality of the synergies, how

30:04

complimentary these businesses are, yes, I think you

30:07

got good savings, $300, $400 million from

30:09

duplication savings, as you say, one head

30:17

office, hopefully, one board, one

30:19

set of executives, that

30:22

all helps. The

30:24

assets aren't greatly complimentary. There's

30:26

no asset sitting, no wood side asset

30:29

sitting next to a Santos asset, for

30:31

example. The

30:33

synergies are at the corporate level rather than

30:35

at the operational level. I think

30:37

that's a hurdle. Yeah,

30:40

I think the main hurdle is

30:42

the level of frustration

30:44

with Santos. These

30:47

Santos shareholders are feeling

30:50

really under

30:52

the ... They're feeling like they've got

30:54

this undiscovered gem and

30:56

they want that gem to be

30:58

polished up. They're

31:02

out there for a good return out

31:04

of this. They've been long suffering and they want

31:06

their patients to be rewarded. That's the main

31:08

thing for me. Yeah, just while we're spitballing,

31:11

James, have you

31:13

thought about who else is out there with

31:15

a bit of money, looking to spend money on

31:17

Australian gas that's been involved in a deal that's

31:20

got a big funding package that's previously

31:22

tried to buy Santos? Remember,

31:25

what about EIG partners? EIG, yeah. Which

31:28

was in the Origin Consortium that had

31:30

a big funding package together to buy

31:32

Origin stake in APLNG. Mate,

31:36

it's hot to try. It tried to

31:38

buy Santos five years ago, albeit Santos

31:40

obviously was smaller back

31:42

then. I wonder whether it's

31:44

going to turn up in some way, shape or

31:47

form. Maybe have a look

31:49

at Santos as a GLNG or PNG

31:51

LNG or whatever. Great

31:54

idea. I think

31:56

there's plenty to play out here.

31:58

Yeah, absolutely. Well, it's

32:01

going to make the end of the year busy for

32:03

us which is great. We love a big chunky deal

32:05

to chew over and we'll be doing that all next

32:07

week. We'll take a break now

32:10

and come back and look at the biggest

32:12

bit of data I reckon for

32:14

the remainder of the year. Welcome

32:29

back if you want to know more about what we're

32:31

talking about today and a whole lot more. AFR

32:34

subscribers can sign up to

32:36

the Chanticleer newsletter at join.afr.com.com.

32:41

Every Friday the newsletter pulls together the

32:43

best Chanticleer columns from the week and

32:45

the best bits of this podcast and

32:47

delivers them straight to your inbox. Alright

32:50

Anthony, a quick look at the week ahead. The

32:53

action starts tonight, Friday night our

32:55

time. I reckon this is the

32:57

most important bit of data maybe of the

32:59

entire year for financial markets. It's

33:01

the US job numbers. They're called

33:04

the non-farm payrolls. We've

33:06

had this incredible, incredible rally

33:08

on markets in November. Everybody's

33:11

getting excited because they think rate cuts are coming. The

33:14

jobs data in the US could

33:17

go either way. If it's really

33:19

soft, that confirms rate

33:21

cuts are coming but it also could confirm that the

33:25

US economy is going for a hard landing.

33:28

If the job numbers are better

33:30

than expected, we could see people

33:33

revise their rate cut predictions and think,

33:35

oh no, we're back in higher for

33:37

longer and markets could dive. So there's

33:40

a bit riding on this one. Geez, sounds

33:42

like Christmas has come early at the conference now.

33:46

Sorry kids, it's not Santa this year,

33:48

it's non-farm payrolls in the US. You're

33:52

going to get excited. Yeah, no, you've got me

33:54

pumped and I'm not going to sleep tonight. Yeah,

33:58

here I was just reading economists. factor

36:01

behind the challenges related to the

36:03

origin deal and understanding kind

36:05

of you know future cost of capital and where

36:07

that will land. The confusion I have

36:09

around that is given the origin deal has sort

36:11

of 20, 30, 40 year time horizons,

36:15

why does the sort of short-term interest rate

36:17

movements of the next you know 6, 12,

36:19

18 months, why would that have such

36:21

a significant impact on the

36:23

cost of capital for the deal over

36:26

the long-term horizon? Look forward

36:28

to your reflections and feedback. Thanks guys, bye.

36:31

Anthony you're a resident deal doctor, help

36:33

Mark out here. Well first thing

36:35

Mark, keep an eye out for

36:37

Tony Boyd, a former senior

36:39

shuntically columnist, that's one of his favorite

36:42

breaks. I'm sure you'll find him down

36:44

there. But as for the

36:46

cost of capital, Mark you're completely right. I

36:48

mean if you're coming in to buy something

36:50

like Origin Energy you should be having a

36:52

long-term view on the cost of capital and

36:55

in spreadsheets yes they'll use like 10

36:57

year average top rates which should help

36:59

derive the value of the business. But

37:02

the reality is though the decision has to be

37:04

made today and has to be funded today and

37:07

it's only as good as equity investors ability or

37:09

willingness to invest today as well and the sentiment

37:11

and the mood at the time. So

37:14

it's highly relevant what's happening in

37:16

interest rate markets right now as

37:19

well as sort of how it gets funded through

37:22

the life. Yeah absolutely. Well

37:24

Anthony it's been a fascinating week

37:26

of deals. I'm starting

37:28

to wonder if there'll be a takeover offer for

37:30

the Shuntockly podcast this week. It's getting so willing

37:33

out there. What do you think we're valued at?

37:37

Not as much as Santos. But

37:40

one thing I will say like obviously we

37:42

spoke about the death of deal last week.

37:45

I mean the stuff we've seen this week

37:47

I mean Sigma, Sigma's a done deal. But

37:49

you know the action around perpetual, the action

37:51

around Santos, this is that sort of just

37:53

product Christmas, non indicative, bonding, talks sort of

37:55

stuff. Whether it progresses into more we'll have

37:57

to wait and see. Absolutely but we're gonna

37:59

be revelling in it over the next

38:01

week. So we'll see you next week with more

38:04

on these big deals. Yeah

38:06

enjoy the non-farm payrolls tonight James. Thank you

38:08

Anthony. If

38:13

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38:15

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38:23

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