CNOOC Says It Won’t Raise Unocal Offer

Chinese oil firm CNOOC Ltd. said Wednesday that it had no plans to up the ante for Unocal Corp., even though its $18.5-billion offer was snubbed by the El Segundo oil company in favor of a sweetened bid by rival Chevron Corp. valued at about $17 billion.

Nonetheless, investors and analysts said Wednesday that they expected CNOOC to put more money on the table. Anything less, they said, would be tantamount to giving up.

“I see a significantly higher bid coming from CNOOC,” said David Merjan, a portfolio manager at Chicago-based investment firm William Blair & Co., which recently sold its CNOOC shares because of the Chinese company’s Unocal quest. “They will not walk away from this

Some analysts said China’s third-largest oil producer could opt to move on to other acquisition targets.

If CNOOC wants to win the bidding race for Unocal, it would need to increase its bid to at least $70 a share to offset the risk to Unocal shareholders that the deal would be significantly delayed or blocked by the U.S. government, Merjan and others said. The Chinese government controls China National Offshore Oil Corp., which holds a 71% stake in publicly traded CNOOC.

CNOOC last month offered to buy Unocal for $67 a share in cash, or about $18.5 billion. That price easily topped Unocal’s April 4 agreement to be acquired by Chevron in a stock-and-cash deal that initially was valued at about $62 a share, or about $16.9 billion, but fell as low as $55.27 in mid-May, tracking the stock price of the San Ramon, Calif., oil giant.

Although the value of Chevron’s offer recovered to about $60 a share by Tuesday, Chevron felt threatened enough to improve its offer before a Unocal board meeting on Tuesday to $63.01 a share, or $17.2 billion.

The revised proposal would increase the cash portion of the deal to 40% from 25%. In all, Chevron would pay about $7.5 billion in cash and would issue about 168 million new shares.

Although Chevron’s bid remains lower than the CNOOC offer, Unocal board members recommended that shareholders approve it at a special meeting Aug. 10. Chevron has already secured the necessary government approvals.

The bid from CNOOC, on the other hand, has been dogged by extensive criticism in Washington, where legislators from both parties have denounced Unocal’s possible buyout by the Chinese firm on economic and national security grounds.

On Wednesday, the Senate approved a provision from Sen. Charles E. Schumer (D-N.Y.) to require a State Department report before a foreign, government-owned company could acquire a U.S. company. The State Department would have to assess how a U.S. company in the same business would be treated if the roles were reversed.

The Unocal board was justified in choosing Chevron’s revised offer because “it combines compelling value, regulatory certainty and accelerated timing” for its shareholders, A.G. Edwards & Sons analyst Bruce Lanni said in a note to clients.

For now, CNOOC is sticking by its original bid. “We regret they haven’t embraced our offer yet, but we’re going to monitor the situation closely,” CNOOC spokesman Mark Palmer said. “The $67 all-cash offer is still on the table.”

Wall Street seemed unimpressed by the higher bid from Chevron, as Unocal shares fell 3 cents to $64.96 on Wednesday. Chevron shares rose 30 cents to $57.60, while CNOOC shares fell to $60, down 5 cents.

“Chevron raised their bid by about $3, and the stock essentially did nothing,” said Merjan, whose company recently owned more than 218,000 shares of CNOOC but sold because Merjan feared a bidding war over Unocal and disagreed with the Chinese company’s move to grow through acquisition. “In no way is this the winning blow. The market is assuming an offer somewhere in the low- to mid-$70s coming from CNOOC.”

Chevron shareholders, however, probably are relieved that the company didn’t raise its offer by too much, said Duane Grubert, an analyst at Fulcrum Global Partners. Since Chevron and Unocal signed their April agreement, Unocal has more than halved its debt and struck a deal to sell its Canadian assets for a higher-than-expected $1.8 billion in cash to Pogo Producing Co. of Texas, he noted.

“The Canadian divestiture on its own helps Chevron rationalize increasing their bid,” Grubert said. “In our view, Chevron’s still going to get a good deal.”

Gene Gillispie, an analyst at Howard Weil Inc., said Chevron’s new bid essentially restored the value of its original offer, which fell with Chevron’s stock price in the last two months. He said he was unsure whether there would be many more counteroffers.

Shareholders of Chevron and CNOOC “are concerned that this thing could get out of hand,” Gillespie said. “If CNOOC were to raise their bid, I think that Chevron would go away. There are limits to how much you want to beat up your own shareholders.”

On the other hand, Unocal’s board probably already considered both CNOOC’s actual bid and the reported willingness of CNOOC to up its bid to $69 a share and to set aside as much as $2.5 billion that Unocal could collect under certain circumstances if the deal died, Gillespie said.

“I have to believe that Unocal’s board had a pretty good idea of what CNOOC was willing to do in terms of a revised offer ... when they made this decision” to go with Chevron on Tuesday, he said. “And whatever it was, it was not good enough.”