CNOOC Ltd. on June 22 bid $67/share for Unocal Corp. in an unsolicited offer worth about $20 billion after payment of a $500 million break-up fee to rival bidder Chevron Corp. and assumption of Unocal debt.
The offer topped the value of Chevron’s pending acquisition of Unocal by an estimated $2 billion, which varies with stock prices (OGJ Online, Apr. 4, 2005).
In a letter to Unocal Chairman and Chief Executive Officer Charles R. Williamson, CNOOC Chairman and Chief Executive Officer Fu Chengyu stressed that its approach of Unocal was “friendly” and that his company seeks a consensual transaction with Unocal. He added that CNOOC’s proposal was submitted in accordance with the sale process initiated by Unocal.
“CNOOC Ltd. believes that the combined company would have a leading position in the Asian energy market and an expanded role in the development of China’s...LNG market,” CNOOC said in a statement. CNOOC expects the transaction to more than double its oil and natural gas production and to increase its reserves by nearly 80% to 4 billion boe.
CNOOC said the combined company would become an “Asia-focused energy company,” noting that both companies are primarily Asian businesses with an estimated 85% of their combined reserves in Asia and the Caspian region.
About 70% of Unocal’s current proved oil and gas reserves are in Asia and the Caspian region, CNOOC noted. The merged company would have a reserves balance of about 53% oil and 47% gas.
Transaction details
CNOOC expressed its commitment to “fully integrating Unocal’s strong management team and workforce into the combined company.”
It said the deal would not “adversely affect the US oil and gas market since Unocal’s US oil and gas production will continue to be sold in the US,” adding that Unocal’s US oil and gas production accounts for less than 1% of total US oil and gas consumption.
Along with its offer, CNOOC issued a list of “assurances,” including:
• To continue Unocal’s practice of selling and marketing all or substantially all of the oil and gas produced from the company’s US properties in US markets.
• To seek to retain substantially all Unocal employees, including those in the US.
• To persuade members of Unocal’s executive and operational management to join the management team of the combined company.
• To accept and agree to the terms of Unocal’s recent Federal Trade Commission settlement relating to its patent rights in reformulated gasoline.
• To divest or take other actions with respect to any of Unocal’s assets unrelated to exploration and production in North America to the extent such divestitures and actions “would not give rise to a material adverse effect on Unocal, including considering special management arrangements for Unocal’s US noncontrolling, minority pipeline interests and its storage assets.”
CNOOC said it will finance the cash offer through the following resources: $3 billion in cash; $3 billion in bridge loans provided by Goldman Sachs and JP Morgan; $6 billion in bridge loans provided by Industrial and Commercial Bank of China; a long-term, $4.5 billion subordinated loan from its majority shareholder, China National Offshore Oil Corp.; and a subordinated, $2.5 billion bridge loan from the parent.
Unocal response
In April, Unocal agreed to be acquired by Chevron in a merger offering Unocal stockholders an election, subject to proration, between $65/share in cash, 1.03 shares of Chevron common stock, and a combination of cash and Chevron commons stock for each Unocal share.
Unocal’s board recommended the transaction to Unocal stockholders, a recommendation that “remains in effect,” the company said June 22.
Unocal said it “intends to evaluate the CNOOC offer proposal in a manner consistent with the board’s fiduciary duties and its obligations under the Chevron agreement.” Unocal also said “there can be no assurance that the proposal would result in a definitive agreement with CNOOC.”
Chevron response
Chevron said it is strongly committed to its Apr. 4 merger agreement with Unocal, approved by both boards.
“A transaction with Chevron is highly likely to close, while the CNOOC proposal must undergo an extensive regulatory process in the US and elsewhere,” the company said.
Chevron and Unocal have received clearance to proceed from the FTC and expect a vote by Unocal stockholders in early August.
Analyst comments
Bernard J. Picchi, senior managing director of Foresight Research Solutions LLC, expects Chevron to prevail but to have to match CNOOC’s $67/share cash bid.
“One compromise would be for Chevron and CNOOC to jointly acquire Unocal, thus owning and developing some or all of its Asian assets together,” Picchi said. “We admit this is long shot, but it is not out of the question.”
CNOOC is unlikely to be discouraged by US regulatory, congressional, or White House scrutiny of its offer for Unocal, he said.
“In fact, the Chinese probably welcome an intense US government review...as a kind of clarifying exercise that will set firm policy regarding Chinese direct investment in the US,” Picchi added.
He said it would be difficult for US President George W. Bush’s free-trade administration to block CNOOC’s bid. Picchi sees no antitrust issues.
“US companies already have substantial direct investments in China. Further, we doubt that CNOOC’s bid will resonate poorly (if at all) with US public opinion, especially since CNOOC has promised no job cuts at Unocal vs. Chevron’s stated plan to cut jobs after the merger,” Picchi said.
He believes that Unocal’s board and shareholders and the bidders will determine the outcome.
Picchi noted that both CNOOC and Chevron “covet Unocal’s Asian and Caspian production assets.” He added, “As CNOOC starts with a more humble endowment of non-Chinese Asian assets than Chevron, it makes sense that they would bid more aggressively on these assets than Chevron.”
Meanwhile, Chevron wants Unocal for its development opportunities in Indonesia, Vietnam, Bangladesh, and Azerbaijan.
“One of the most important development projects in Chevron’s global portfolio is its Gorgon-Barrow Island LNG project on Australia’s Northwest Shelf,” Picchi said.
Chevron intends to market LNG to China so Chevron would avoid offending China, the most likely LNG buyer, he said. CNOOC will be heavily involved in China’s LNG trade, he said. ✦
