Energy giant Woodside Petroleum has announced an $11.6 billion all-scrip bid for Papua New Guinea-focused Oil Search in one of the Australian market's largest takeover deals.
Woodside shares closed three per cent lower at $29.66 after the announcement of the proposed bid, with market speculation that the company may be forced to improve the premium it has offered to take over Oil Search.
The target company's shares jumped more than 17 per cent to $7.90 each.
Woodside has offered one share for every four shares held in Oil Search, implying a premium of around 14 per cent based on the companies' closing prices on Monday.
"Maybe the market expects the bid terms to be sweetened," said Morningstar resources analyst Mark Taylor.
"It's modestly dilutionary to Woodside share value, but it corrects the situation of an underleveraged balance sheet and will boost reserves and production," he said.
"Overall, the timing is good and it seems to make reasonable sense."
Global crude oil prices have slid over the last year to below $US50 a barrel, as rising supplies and lacklustre demand have prompted a steep decline since mid-2014, when crude fetched more than $US100 a barrel.
The decline has battered energy-company shares, and both Woodside and Oil Search have seen their share prices fall around 30 per cent each over the past 12 months.
On Tuesday, Oil Search managing director Peter Botten said its board would review the offer, but warned the proposal would need to reflect growth potential of its low cost liquefied natural gas development opportunities.
Oil Search operates an LNG project in Papua New Guinea, which started producing last year and also holds stakes in the Elk and Antelope gas fields in the country.
"Clearly, Oil Search shareholders are entitled to an offer which adequately reflects this value potential," Mr Botten said in a statement.
Woodside last month posted a 39 percent drop in first half net profit to $925 million, amid slumping oil prices, forcing it to slash dividend sharply. However, the Perth-based company's focus on cutting costs has helped it maintain a strong financial position and it has repeatedly indicated its keenness to make acquisitions.
Its bid for Oil Search would be subject to Papua New Guinea regulatory approval, as well as shareholder and court approvals.
Woodside would also need support from the PNG government, which holds a 10 percent stake in the target company.
The company is being advised by Merrill Lynch, while Oil Search has appointed Morgan Stanley as its financial adviser.
Woodside's takeover bid, would rank as one of the largest deals in Australia, if successful.
Earlier this year, Japan Post acquired Toll Holdings in a $6.5 billion deal, followed by Federation Centres $US11 billion merger deal with Novion Property Group in February.
Shares in other energy sector players Santos and Origin Energy rose more than seven per cent and 3.5 per cent respectively.
