Oil Search said that its board has rejected an AUD8.8bn ($6.5bn) all-stock takeover offer from Santos, citing that the terms and proposed value are not in the best interests of company’s shareholders.

The company, which is incorporated in Papua New Guinea (PNG), said that the decision was made after a careful evaluation by its board and senior management along with advisers Goldman Sachs and Macquarie Capital and legal adviser Allens.

Oil Search is listed on the Australian and PNG security exchanges. The company is engaged in the PNG LNG and the Papua LNG projects and in oil and gas upstream operations in PNG and Alaska.

Santos had submitted its confidential, non-binding indicative all-scrip merger proposal to Oil Search in late June.

As per the proposal, the Australian oil and gas company offered a price of AUD4.25 ($3.11) per share to Oil Search’s shareholders.

The company offered to implement the deal via a scheme of arrangement under which Oil Search’s shareholders will be issued 0.589 new Santos shares for each share held in Oil Search.

If executed, the deal would see legacy Oil Search shareholders hold a stake of 37% in the combined company, while Santos’ shareholders would own the remaining 63% stake.

Santos claimed that its proposal offers an extremely attractive opportunity for generating compelling value accretion to shareholders of both the firms.

The company stated that the proposed merger will combine two industry majors to create a regional champion of size and scale. With a pro forma market capitalisation of AUD22bn ($16.1bn), the combined entity is expected to be placed among the 20 largest oil and gas companies in the world.

Besides, the combination will result in greater alignment in PNG for supporting the development of the Papua LNG project and other key projects, said Santos.

The company stated: “Santos has put forward the prospect of a genuine merger where the ownership of the merged entity is based on relative contribution and value. Oil Search shareholders continue to participate in the merged entity and retain the opportunity to realise a premium for control as part of the merged entity.

“The strategic rationale for a merger is clear and offers superior value to Oil Search shareholders rather than continuing on a standalone basis.”