By Robb M. Stewart

MELBOURNE, Australia--A group led by oil-industry veterans edged closer to sealing one of the largest energy deals backed by private equity in history after bidding more than $10 billion for Australia's Santos Ltd.

On Tuesday, Santos said it agreed to open its books to Harbour Energy Ltd. after the U.S.-based investor returned with a better offer. Santos had rejected previous bids since Harbour's first approach in August. A deal would land Harbour stakes in two big liquefied natural gas plants in Australia and another in Papua New Guinea.

Private-equity firms are showing fresh interest in major energy assets beyond American shale fields as global oil prices recover, despite a patchy record in the sector in recent years. Many bought stakes in companies when oil prices were higher than $100 a barrel in 2014 only to see the value of their investments fall sharply.

Harbour, which was set up by EIG Global Energy Partners in 2014 to hunt for oil and gas assets outside the U.S., last year paid $3 billion to buy energy assets off the U.K. from Royal Dutch Shell PLC. A takeover of Santos would top that and rank ahead of the 2011 leveraged buyout worth $7.2 billion of closely held Samson Investment Co. by a KKR & Co.-led consortium, according to data compiled by Dealogic.

"There is increased appetite for private equity to pursue LNG thematically, but it tends to be more patient capital given the long time horizons of the industry," said Saul Kavonic, an analyst at consultancy Wood Mackenzie in Australia.

While the oil industry includes hundreds of small explorers and producers, often worth just several million dollars, the LNG sector is dominated by major energy producers like Shell and Chevron Corp., in addition to state-owned energy companies.

"Santos is quite unique in being so heavily weighted to LNG yet still at a price tag under $15 billion," Mr. Kavonic said.

Santos has long been considered vulnerable to a takeover after drawing criticism from shareholders for several expensive bets that left it with a large amount of debt. The company's reputation also took a hit when the Australian government accused operators of east coast natural gas plants of making worse a domestic shortage by prioritizing exports.

Santos has taken steps to lower its debt, in part by attracting Chinese natural-gas distributor ENN Group Co. and private-equity firm Hony Capital as investors. Last year, ENN and Hony Capital raised their collective stake in Santos to 15.1% and agreed to act in concert as investors.

In an interview, Harbour CEO Linda Cook said financial backing for the takeover is in place and management has its sights on several additional deals it could pursue through Santos.

Ms. Cook retired in 2010 after a 29-year career at Shell during which she was a board member, head of its gas and power division and CEO of the Canadian business. Among other industry veterans working for Harbour, Chief Operating Officer Terence Jupp was previously vice president of international operations for Anadarko Petroleum Corp., director G. Steven Farris served as chairman and CEO of Apache Corp. and board member Jim Blackwell was a past vice president at Chevron Corp.

Harbour offered $4.98 a share for Santos, representing a 28% premium to its last closing price before the bid was made public, valuing Santos at nearly $10.4 billion. The Australian company has set up a board committee to consider the bid.

The offer comprises cash and a special dividend of 28 cents a share, though Harbour said it would also offer an option for Santos shareholders to accept unlisted shares in a new private company, up to a maximum 20% stake. The offer of stock is aimed in part at securing the support of the Chinese investors.

Harbour said it wants to use Santos's core assets to grow in Australia and throughout Asia.

"There is a lot of capital around, so maybe we'll see more deals...but we may be more ambitious than others," Ms. Cook said.

Any deal for Santos remains subject to due diligence by Harbour and regulatory approvals, including from Australia's Foreign Investment Review Board. Harbour, which has lined up equity for its Santos bid from investors including commodities trader Mercuria and $7.75 billion in debt through J.P. Morgan and Morgan Stanley, said its strategy doesn't rely on job cuts and it has no plans to move Santos's headquarters from the Australian city of Adelaide.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

April 03, 2018 03:59 ET (07:59 GMT)

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