CNOOC drops $18.5 billion Unocal bid amid opposition

Loretta Ng and Wing-Gar Cheng

Tuesday, Aug. 2, 2005 | 9:13 a.m.

CNOOC Ltd. abandoned its $18.5 billion bid for Unocal Corp., the largest overseas acquisition attempted by a Chinese company, because of political opposition from U.S. lawmakers. The decision leaves Chevron Corp. as the sole bidder for the U.S. oil and gas producer.

The Chinese company, 71 percent owned by its state- controlled parent, said in a statement that it would withdraw the offer made on June 23 to acquire El Segundo, Calif.-based Unocal. Unocal shares fell 47 cents to $63.90, even with the value of the Chevron cash and stock deal.

CNOOC Chairman Fu Chengyu's effort to take over Unocal stoked concern among politicians about compromising economic and national security at a time when crude oil is trading near a record. The announcement is likely to spur gains in CNOOC shares, which lagged behind other energy stocks since the bid was made.

"The Chinese are not going to stop trying to acquire American oil assets," said Stephen Leeb, who manages $100 million of stock including PetroChina and Chevron, at Leeb Capital Management in New York. "The Chinese believe oil is an ever-more-dear commodity that is going to just get harder and harder to find."

Unocal would have doubled CNOOC's oil and gas output and raised its reserves 79 percent. Chinese oil companies such as CNOOC, the country's third-largest, are seeking overseas deposits because domestic production has failed to keep pace with soaring demand. Chinese oil demand more than doubled in the past 10 years as the economy surged, making the nation the world's second- largest oil user after the United States.

U.S. lawmakers, including U.S. Rep. Richard Pombo, a Republican from the California district that includes Chevron's headquarters, backed a measure that would have delayed any Chinese acquisition of a U.S. oil company by at least 120 days. The measure was added to President Bush's energy bill, which Congress approved last week.

Any delay in government approval of CNOOC's offer would make it less attractive. San Ramon, Calif.-based Chevron has said its bid is superior because all necessary U.S. approvals are in hand. The deal will close immediately should shareholders approve it in a vote set for Aug. 10, according to Chevron.

Interest-free financing that CNOOC's parent would have provided for a Unocal acquisition drew fire as an unfair trade subsidy.

Two U.S. Senators asked Commerce Secretary Carlos Gutierrez on July 11 to look into whether the financing amounts to a violation by China of its World Trade Organization commitments.

CNOOC had said it would borrow $16 billion to help finance a takeover of Unocal, including $7 billion in two loans from its parent, China National Offshore Oil Corp., to be paid over 30 years. The loans consisted of $2.5 billion at zero interest and $4.5 billion at 3.5 percent a year. Interest payments on the larger loan would have been waived if CNOOC's credit rating fell below a certain level, Unocal said in a July 25 filing.

Chevron's offer

Unocal's board on July 20 said it favored a sweetened $17.3 billion cash-and-stock offer from Chevron, the second-biggest U.S. oil company.

Chevron on July 19 increased the portion of cash in its bid and effectively raised the price compared with the April 4 agreement it reached with Unocal. The offer was worth $63.71 per Unocal share based on Chevron's closing price Monday.

CNOOC's prospects of overcoming Chevron's rival offer waned after Institutional Shareholder Services, the biggest adviser to fund managers on merger votes, Monday said it favored Chevron. CNOOC's offer wasn't enough to offset the risk that politicians could scuttle any deal with the Chinese company, the group said.

'Good sign'

"That recommendation is probably a pretty good sign of which way the vote will go," said Christopher Edmonds, managing director at Pritchard Capital Partners, a New Orleans-based investment banking firm that specializes in energy. "For some people this involves more than just price."

CNOOC shares may rise because the Chinese company's withdrawal removes concern among some investors about the cost of bidding for Unocal, said Mona Chung, who helps manage $800 million including Chinese oil stocks at Daiwa Asset Management Ltd. in Hong Kong.

"Uncertainty over the Unocal bid has become an overhang weighing on CNOOC's share price performance," Chung said. "It's not bad news for CNOOC to give up on Unocal. The $18.5 billion offer wasn't cheap."

CNOOC stock has risen 32 percent since the beginning of the year, lagging behind a 77 percent gain in PetroChina Co., the country's biggest oil producer. CNOOC's American depositary receipts, each worth 100 ordinary shares, rose $4.89, or 7.1 percent, to $74.23.

"This is the happy ending we would want to see," Agnes Deng, who helps manage $1.2 billion of Asian stocks including CNOOC shares at Standard Life Investments in Hong Kong, said before the announcement. "There's no point in insisting on this deal, given we all know their bid stretched the valuation and that winning wasn't a sure thing, even with an expensive offer."

Fu told Unocal Chief Executive Charles Williamson on July 16 that he would only raise his $67-a-share offer by $2 to $69 a share, as authorized by his board, if he was released from an obligation to pay a $500 million breakup fee to rival bidder Chevron, Unocal said in a filing to the U.S. Securities and Exchange Commission on July 25.

CNOOC transferred $2.5 billion to the company's U.S. accounts on July 15 to establish an escrow fund to compensate Unocal if CNOOC failed to close the deal.

Negative opinion

Unocal's board expressed concern that the company wouldn't be entitled to any of the $2.5 billion if the deal failed because of new U.S. legislation or a negative opinion from the Committee of Foreign Investment in the United States, Unocal said.

CNOOC has been buying stakes in oil and gas projects in Indonesia and Canada for the past three years to boost access to supplies as consumption soars in China, the world's fastest- growing major economy.

Other takeover targets might be Amerada Hess Corp. or Murphy Oil Co., Louis Gagliardi, an analyst with John S. Herold Inc., an oil industry research firm in Norwalk, Conn., said on July 20.