Oil Search rejected an unsolicited takeover proposal from Santos Ltd. valuing the Papua New Guinea-focused oil and gas producer at A$8.8 billion (US$6.5 billion), but both companies said on July 20 they wanted to pursue further talks.

Oil Search said the offer was not in the best interests of shareholders, but its shares rose 8% after both companies said it made sense to create a group that would rival Australia’s top independent gas producer Woodside Petroleum in market value.

“Oil Search agrees with Santos that there is strategic logic in a combination of the two companies,” Oil Search said in a statement, but added that Santos had yet to come back with a fair offer.

The approach comes at a vulnerable time for Oil Search as it is searching for a new CEO to replace Keiran Wulff, who quit on July 19 following just 17 months in the job due to ill health and following a whistleblower complaint. It also just put on hold a final decision on a $3 billion oil project in Alaska.

Santos made the approach on June 25, but the proposal was only revealed on July 20 after Oil Search Chairman Rick Lee a day earlier, on a call about Wulff’s resignation, told analysts the company had not received any approaches.

Santos said it proposed to offer 0.589 new Santos shares for each Oil Search share held. Based on Santos’ closing share price on June 24, that was worth A$4.25 per Oil Search share, a 12% premium to Oil Search’s share price at the time.

“Santos continues to believe that the merger proposal represents an extremely attractive opportunity to deliver compelling value accretion to both Santos and Oil Search shareholders,” Santos said in a statement.

Oil Search shares were up 7% at A$3.93 in afternoon trade in a broader market that was trading lower. Santos shares were down 4%.

“The bid comes at a pretty opportune time [for Santos], but it’s unlikely to get up at that level of premium,” said Andy Forster, a portfolio manager at Argo Investments, which holds shares in both Santos and Oil Search.

Oil Search’s former top shareholder, Abu Dhabi state investor Mubadala, sold nearly half its 9.5% stake in Oil Search for A$3.865 a share in June, just before Santos made its takeover approach.

Santos declined to say whether it bought any of Mubadala’s shares.

A takeover of Oil Search would give Santos a bigger stake in the Exxon Mobil Corp.-led PNG LNG project in Papua New Guinea, considered one of the world’s lowest-cost LNG producers, and give it a stake in the Papua LNG project, on track to be developed by TotalEnergies.

Santos would also become operator of the Pikka oil project in Alaska.

Santos, advised by Citi and JB North & Co., said it has sought to engage the Oil Search board on the rationale for merging. Oil Search is being advised by Goldman Sachs and Macquarie Capital.

Oil Search rejected an $8 billion all-share takeover plan from Woodside in 2015. (US$1 = 1.3622 Australian dollars)

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