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Now the hard part as CNOOC chases
Unocal
BEIJING - Fu
Chengyu, chairman and CEO of China National
Offshore Oil Corporation (CNOOC) Ltd said Friday
that his corporation was braced to participate in
a review by the Committee on Foreign Investment in
the US (CFIUS) of its proposed merging transaction
of Unocal.
In a public statement, Fu said
that CNOOC Ltd was pleased that Unocal had
indicated its readiness to engage in talks
concerning CNOOC's all-cash offer, and that CNOOC
was prepared to start immediately.
CNOOC,
China's largest offshore oil and gas producer,
announced on June 23 that it had proposed a merger
with Unocal, a major US oil company, offering
US$67 in cash per Unocal share. The offer values
Unocal at about US$18.5 billion, representing a
premium for Unocal's shareholders of about US$1.5
billion over the value of Chevron Corporation's
offer, based on its closing price on the New York
Stock Exchange on June 22.
Fu reiterated
that CNOOC believed its offer brought superior
value to Unocal shareholders. "It is important to
know that 70% of Unocal's current reserves are
located in Asia, and that is one of the reasons
why this transaction makes sound business sense
for our company," he said. In the statement Fu
reaffirmed that substantially all of the oil and
gas produced by Unocal in the US would continue to
be sold in the US, and the development of
properties in the Gulf of Mexico would provide
further supplies of oil and gas for American
markets. Fu also restressed the commitment by
CNOOC to retain the jobs of substantially all of
Unocal's employees, as opposed to Chevron's plan
to lay off employees, especially in the United
States.
According to him, in preparing the
bid, CNOOC always anticipated that its merger with
Unocal would be reviewed by the CFIUS, and the
company was fully prepared to participate in such
a review with assurances to Unocal to address
concerns relating to energy security and ownership
of Unocal assets located in the US. CNOOC has said
it was prepared to sell or take other actions with
respect to Unocal's minority pipeline interests
and storage assets as long as such a sale did not
cause substantial economic harm to Unocal, and
would reiterate this commitment to the CFIUS
committee at the proper time, said Fu. "We are
also open to discussing with CFIUS placing
non-exploration and production assets under
American management, through arrangements that
CFIUS has approved often in the past, and are
prepared to enter into talks with the CFIUS
committee as soon as the committee is ready to do
so," Fu said.
Unocal gets waiver from
Chevron
Unocal Corp said on June 23 that
it had received a waiver from Chevron Corp
enabling it to negotiate with CNOOC for the US gas
and oil company. The waiver was required because
Unocal had already concluded an agreement in April
for Chevron to purchase Unocal.
Unocal
said it intended promptly to commence discussions
with CNOOC on its proposed merger offer, which was
$2 a share higher than Chevron's April bid for
Unocal. Unocal said it had received permission
from Chevron, which offered US$65 a share for
Unocal, to engage in discussions with CNOOC and
its representatives at any time until the date of
the Unocal stockholders voting on the proposed
merger with Chevron. Unocal said the date of the
stockholders meeting had not yet been set, but it
said its board of directors had recommended the
Chevron bid to Unocal stockholders, and that this
recommendation remained in effect.
Chinese experts see difficulty
Chinese experts said June 23 that whether CNOOC
could acquire Unocal was still not clear, despite
the high bid price. For a normal international
acquisition, it would take two or three months
before a final deal was made, said Xing Houyuan, a
senior researcher with the Chinese Academy of
Trade and Economic Cooperation of the Ministry of
Commerce. But even if Unocal's shareholders were
to accept CNOOC's bid, this alone could not assure
the deal's success, since "in today's world, the
trading of non-recyclable resources such as oil
and natural gas has [become politicized]."
Since China began its economic reforms in
1978, more and more domestic enterprises are
participating in international competition.
However, the expanding international profile of
Chinese enterprises had often met with resistance
from their overseas counterparts, sometimes due to
their inability to adapt to market rules, while at
other times for political reasons, said Xing.
"There are two factors affecting the
results of the negotiation," said Long Guoqiang,
an expert from the Development and Research Center
of the State Council. "The first one is market
[considerations], which [are] favorable for CNOOC
Ltd because of the high bid price it has offered;
however, the other [factor] of policy may become
the biggest obstacle [to] CNOOC's bid," said Long.
Even before CNOOC made its bid, two
Republican members of Congress appealed to US
President George W Bush to review the deal for
possible security threats. In recent days, 41
lawmakers asked the Bush administration to
investigate and possibly stop the CNOOC proposal
if it was found to threaten US national security.
Ron Wyden, a Democrat, called on Treasury
Secretary John Snow to conduct a thorough review
of the attempted takeover under the Defense
Production Act. "I don't think being a free trader
is synonymous with being a patsy," he said. And
Richard d'Amato, chairman of the US-China Economic
and Security Review Commission, said: "This is not
a free market deal, this is the Chinese government
acquiring energy resources."
CNOOC head Fu
insisted on June 23 that national security was not
an issue. "This transaction is purely a commercial
transaction," he said in a conference call with
reporters. "We are confident that the US
government will support this project," Fu said,
calling the bid friendly and saying it would be
good for Unocal shareholders.
But Chevron
spokesman Don Campbell attacked CNOOC's bid,
saying that "CNOOC's bid is hostile and not being
conducted on a level playing field. This is a play
by the Chinese government for global energy assets
working through a government-controlled oil
company." Ironically, even as Campbell made his
statements, commercial cooperation between Chevron
and CNOOC continued elsewhere.
The two
firms have joint oil operations in the South China
Sea, and a joint project in China's Bohai Gulf.
Chevron and other partners also negotiated the
sale of liquefied natural gas from a project in
Australia to CNOOC, which also bought an interest
in the field from which the gas originates. Fu
also said the two companies were more
collaborators than competitors, and Peter J
Robertson, Chevron vice chairman, echoed these
sentiments, saying that the two companies had
maintained good relations and expressing his hope
that the tone did not sour over the Unocal
competition. Robertson noted that simultaneous
cooperation and competition is frequent in the oil
industry; for example, Chevron often finds itself
in that position with Exxon.
Wang Gongli,
president of the Planning and Engineering
Institute of PetroChina, said that as strategic
resources, both oil and natural gas were
indispensable for a country. So it was not
surprising that the bid by CNOOC would arouse a
response from the US, as occurred with the recent
acquisition of the PC unit of IBM, a famous brand
in the US, by China-based computer giant Lenovo.
Chevron said June 23 that it would not
raise its initial bid and maintained that it was
still a better choice for Unocal shareholders
because of its attractive value, clear regulations
and high efficiency.
Skepticism
abounds
In London on June 22,
credit-rating firm Moody's placed CNOOC's A2
issuer rating on review for a possible downgrade.
Moody's officials said they were concerned about
the huge debts CNOOC would incur to finance the
merger. "In addition, the review for downgrade
reflects the considerable integration challenges
that CNOOC Ltd is expected to face in bedding down
such a large acquisition, given its lack of track
record in this area," Moody's said in a report.
The price of CNOOC shares in Hong Kong
tumbled earlier this month when the company
announced it would counter Chevron's bid, made in
April. At that time, investors believed that
CNOOC's offer price was too high and that Unocal,
which is the same size as CNOOC, was too big to
swallow. Chevron's market valuation, at $118.95
billion, is almost seven times greater than
CNOOC's.
But analysts said the
long-awaited offer was better than expected
because the price offered for Unocal was
"surprisingly" cheap. CNOOC said it would finance
the acquisition with its own cash resources of $3
billion, and with loans from its parent company,
China National Offshore Oil Corporation, and
investment banks, including Goldman Sachs, JP
Morgan, and the Industrial and Commercial Bank of
China. In addition, "The financing cost can be
cheap because the interest of US$7 billion in
loans provided by the parent company can be low,"
said Liu Gu, an analyst with Guotai Jun'an
Securities (Hong Kong) Corp.
The deal, if
it goes ahead, would increase CNOOC's revenue by
roughly 122% compared with last year, according to
the company. Predictions say the merger would more
than double CNOOC's oil and gas production and
increase its reserves by nearly 80% to 4 billion
barrels of oil equivalent.
"Both Unocal
and CNOOC are already primarily Asian businesses.
Together we will be one of the regional leaders,"
CNOOC chief financial officer Yang Hua has said.
The deal would also help CNOOC to overtake Sinopec
as the second-largest oil company of any kind in
China after PetroChina. CNOOC's executives said
the merger would help it achieve a more balanced
oil and gas portfolio, enabling it to reduce the
risk from the fluctuation of crude oil prices.
In return, China's fast-growing liquefied
natural gas (LNG) market would allow Unocal to
accelerate the exploration and development of gas
resources and position it as a long-term supplier
to the Bontang LNG plant in Indonesia, the
executives said. "This is a superior and friendly
offer to Unocal's shareholders, and we believe
they will seriously consider it," Fu said.
Bidding war possible
Many
experts expect Chevron to raise the terms of its
bid to forestall CNOOC's move. "The US$18.5
billion may just be a start; there will be a
second round of wrangling, when CNOOC will
probably lift its bid to US$20 billion," said a
senior official with PetroOverseas who declined to
be named. "This is not a knock-out blow from
CNOOC, but the tacit entrance of the Chinese
government means that Chevron has gone from
fighting David to fighting Goliath," said Deutsche
Bank analyst Paul Sankey. "It is crucial that
[Chevron] does not enter a bidding war. If they do
start chasing [Unocal], it's going to be a
problem, since they're going up against the
Chinese government."
But other analysts
predicted Chevron would have to sweeten its offer.
"Chevron may be forced to come up with a little
higher offer than they initially did," said Phil
Davidson, fund manager at American Century
Investments, which owned about 2.3 million shares
in Unocal as of March 31. "All [Chevron would]
have to do is sweeten it. In my opinion, frankly,
they wouldn't have to top it by much and I think
[the merger] would go on through."
Bruce
Edward, analyst for AG Edwards, said that Chevron
was likely to sweeten the deal by increasing the
cash portion of the offer, or providing downside
protection to a decline in the company's share
price that might follow a large outlay of cash to
pay for Unocal. But Davidson maintained that
Chevron still had the upper hand over CNOOC, even
if the simple deal between two California-based
oil companies had suddenly turned into a riskier
bidding war with international implications.
"[Unocal is] Chevron's to lose," Davidson said.
(Asia Pulse/XIC/wire services) |
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