What went wrong with the Santos Ltd (ASX: STO) deal? Inside the failed XRG Consortium bid

Santos Limited (ASX: STO) became the center of attention on the Australian Securities Exchange on September 18, 2025, after its share price dropped 11.90 percent in midday trading to AUD 6.74. The steep fall followed confirmation that the long-running takeover talks with the Abu Dhabi-backed XRG Consortium had collapsed. The consortium, which included Abu Dhabi National Oil Company through its XRG subsidiary, Abu Dhabi Development Holding Company, and U.S. private equity firm Carlyle, had been in exclusive negotiations since June. Its decision to walk away from the deal removed the takeover premium that investors had been pricing in for months, forcing the stock to reset to levels more in line with operating fundamentals.

The news sparked a sharp reaction across trading desks. Hedge funds and arbitrage players who had positioned for a deal exit rushed to sell, while retail sentiment turned negative on online forums. The result was one of Santos’ worst single-day share performances in 2025, despite management’s efforts to highlight the resilience of the company’s underlying business.

What led to the collapse of the XRG Consortium takeover bid for Santos Ltd?

Santos confirmed in its September 18 filing to the ASX that the XRG Consortium had withdrawn its non-binding, indicative proposal, first announced on June 16, 2025, to acquire 100 percent of the company via a cash scheme of arrangement. The original proposal carried an offer price of US$5.626 per share, which would have valued Santos significantly above its then trading levels. Over the summer, Santos twice extended its exclusivity agreement with the consortium, most recently on August 25, to allow both sides to finalize a Scheme Implementation Agreement.

Despite those extensions and assurances that due diligence had not uncovered any material red flags, the consortium ultimately declined to sign a binding agreement. The Santos Board explained that the sticking points were not about valuation, but about terms that would safeguard shareholder value in the face of extended regulatory approvals. Specifically, the consortium was unwilling to accept obligations around securing foreign investment approvals and providing commitments on the development and supply of domestic gas. Santos also flagged concerns about the time it was taking to close out key legal protections in the agreement.

The board said it could not proceed without an equitable allocation of risk between shareholders and the acquiring consortium. With the two sides unable to reconcile these positions, the XRG Consortium walked away from the deal just days before the deadline to finalize terms.

Why were regulatory approvals and domestic gas obligations such a major hurdle?

Foreign investment in Australia’s energy sector is subject to intense scrutiny by both regulators and policymakers. The involvement of a state-owned Middle Eastern company, coupled with a U.S. private equity investor, heightened sensitivities about the control of critical LNG and domestic gas assets.

Santos insisted that any takeover must include binding commitments to meet domestic gas supply obligations, a politically sensitive issue given Australia’s efforts to balance LNG exports with local energy affordability. The consortium, while expressing respect for Santos and its management team, would not accept those conditions in a form that satisfied the board.

Market observers noted that similar pressures have been seen in other recent foreign investment reviews in Australia, Canada, and the United States, where regulators have slowed or blocked energy deals over national interest concerns. For Santos, the insistence on binding terms was both a defense of shareholder value and a recognition of the heightened political environment.

How did the share price react, and what does it signal about investor sentiment?

The immediate 12 percent sell-off reflected disappointment that the takeover premium investors had been banking on evaporated overnight. Santos had been trading with a support floor above AUD 7.50 in recent weeks, sustained by speculation that a binding deal was close. With the premium gone, the stock quickly corrected to the AUD 6.70–6.80 range, aligning more closely with its underlying valuation based on operating cash flows and project timelines.

Institutional data showed heavy sell-side activity in the morning session, particularly from funds specializing in merger arbitrage strategies. Analysts also pointed out that domestic institutional investors and superannuation funds were less aggressive sellers, suggesting that long-term holders continue to see value in Santos’ low-cost operating model and LNG leverage.

On retail forums, sentiment was far more volatile. Traders who had entered purely on takeover speculation expressed frustration, while longer-term retail investors questioned whether the company could attract new suitors or if it would now rely solely on organic growth.

Brokerage desk notes indicated a shift in short-term sentiment toward a “hold” stance, with some reducing their target prices to reflect the absence of a takeover catalyst.

What does Santos’ growth pipeline look like without a takeover boost?

Santos sought to reassure investors by emphasizing its major development projects. The Barossa gas project in the Northern Territory and the Pikka Phase 1 oil project in Alaska remain on track and are described as materially de-risked. The company reiterated its projection of a 30 percent increase in production by 2027 as these projects come online.

Management also underscored its disciplined low-cost operating model, which has reduced unit production costs over the past decade and positioned the company to generate strong free cash flows. The capital allocation strategy remains centered on shareholder returns, reinvestment into sustaining infrastructure, and disciplined growth in production.

Chairman Keith Spence stated that Santos has a clear strategy, strong leadership, and high-quality growth opportunities across its portfolio. The company believes these strengths will deliver long-term value even without the support of an external buyer.

How does Santos compare with peers like Woodside Energy and Origin?

The collapse of the takeover proposal puts Santos back into direct comparison with its Australian peers. Woodside Energy has been pursuing organic expansion in LNG while strengthening its position through the BHP Petroleum merger, giving it scale that Santos has not matched. Origin Energy, by contrast, has been reshaping its portfolio through divestments and renewable pivot strategies, making it less exposed to global LNG cycles.

From a valuation perspective, Santos trades at a discount to Woodside on both EV/EBITDA and price-to-cash flow multiples. This reflects investor concerns about project execution risks and regulatory hurdles, which the failed takeover has amplified. Analysts note, however, that if Barossa and Pikka deliver on time and on budget, Santos’ multiple could close the gap with peers by the late 2020s.

What is the outlook for M&A in the energy sector, and could Santos attract new bids?

The Santos situation is part of a broader wave of energy sector consolidation in 2025. State-owned companies like ADNOC and sovereign wealth funds are aggressively targeting LNG assets, while private equity continues to pursue upstream investments in search of stable cash flows. However, the failure of the XRG deal underscores the increasing difficulty of closing large cross-border transactions in politically sensitive industries.

While the XRG Consortium formally withdrew, it also emphasized that it continues to hold a positive view of Santos. This leaves open the possibility that another bid, whether from the same group under revised terms or from a different strategic partner, could materialize in the future. For now, however, investor focus will return to Santos’ execution of its growth projects and the trajectory of LNG markets.

What are analysts recommending for Santos investors after the failed deal?

Analysts are divided. Some believe the current price correction presents a buying opportunity, arguing that Santos’ fundamentals remain intact and that the company is undervalued relative to its global LNG peers. Others caution that with the takeover premium gone, the stock may trade sideways until there are clearer signals on project execution and cash flow delivery.

Institutional commentary suggests that short-term flows will continue to be dominated by arbitrage funds exiting their positions, while longer-term investors may cautiously rebuild exposure once the dust settles. On the buy-sell-hold spectrum, consensus leans toward “hold” in the near term, with upside contingent on Barossa and Pikka execution milestones.

Foreign institutional investor (FII) participation is expected to remain muted in the short term, while domestic institutional investors (DIIs), including superannuation funds, could take advantage of lower valuations to incrementally add to positions.

What does the collapse of this bid mean for the future of Santos?

The failed takeover may prove to be a double-edged sword. On the one hand, it removed the possibility of a quick valuation uplift through acquisition. On the other, it compels Santos to prove its ability to deliver long-term value independently, a narrative management is already pushing aggressively.

With a disciplined cost base, major projects nearing completion, and steady cash flows from its existing LNG portfolio, Santos retains the capacity to generate shareholder returns. However, the lack of an external catalyst places a heavier burden on management to execute flawlessly.

In the broader energy transition context, Santos also faces the challenge of balancing its hydrocarbon growth projects with increasing pressure to invest in low-carbon initiatives. Failure to show progress here could weigh on investor sentiment, particularly as ESG mandates tighten across global capital markets.