The Santos offer, made last Thursday, was at a 24% premium to QGC’s closing price on Tuesday October 3. But it is now well below the QGC share price.

However, some analysts have already said the proposed acquisition looks expensive.

“The acquisition price of $A1.38 on current 2P (proven plus probable) reserves represents a pretty rich price at a significant premium to recent transactions in this arena,” Macquarie Research said.

“Santos previously acquired Tipperary coal seam gas assets in July 2005, paying $A612 million for 1.36 trillion cubic feet of reserves or 0.45 per gigajoule.”

Deutsche Bank said the last major acquisition in coal seam methane was Australian Gas Light taking a 50% share in the Moranbah project from BHP Billiton for 49c/GJ in June.

Since 2002, various transactions in coal seam gas have been completed between 27c and 71c/GJ, Deutsche Bank said.

But Merrill Lynch thought the deal’s strategic importance made it worthwhile, despite the expense.

“In our view, the main benefit for Santos is the opportunity to aggregate supply sources to enhance value across its central and southwest Queensland gas fields,” the analyst said.

Merrill Lynch maintained a Buy recommendation on Santos, in contrast with the other brokers’ Neutral or Hold recommendations.

Macquarie Research noted that the bid is based on the assumption that QGC’s aggressive exploration and reserves upgrade plan will prove successful.

On the basis that this was possible, the transaction price would be a “more respectable” 60c/GJ, Macquarie said.

Santos may be more inclined to sit tight than to raise its offer, as the most likely counterbidders – AGL and Origin Energy – are preoccupied in bidding for Queensland electricity retail assets.

It would be difficult for these companies to acquire both these assets and QGC at the same time, but either or both of them could consider taking a strategic stake in QGC in order to make the Santos acquisition more difficult.

Alternatively, if Santos fails to win control of QGC it is still likely to become a major shareholder, take a place on the CSM company's board and be in a poistion to thwart any possible takeover moves by AGL or Origin.