Unocal Says It Favored CNOOC Bid
Unocal Corp. was ready to brave a political fight and accept a buyout offer from China’s CNOOC Ltd. last week, but instead endorsed rival suitor Chevron Corp. after CNOOC refused to sweeten its bid, Unocal said Monday.
The showdown over Unocal unfolded over several days in mid-July, the El Segundo-based oil company said in a regulatory filing, revealing that its board favored the $18.5-billion all-cash offer from CNOOC over its pending $16-billion-plus deal with Chevron -- and had a draft agreement at the ready. All this despite growing opposition in Washington, where lawmakers have threatened to try to block any attempt by CNOOC to buy Unocal.
CNOOC is 71% owned by government-controlled China National Offshore Oil Corp., and its ties to the Chinese government have sparked spirited debate over the merits of the deal and whether it presents an economic or national security threat to the United States.
Indeed, Monday’s filing -- an amended proxy statement issued in advance of the Aug. 10 vote by Unocal shareholders on Chevron’s offer -- sheds light on previously undisclosed details of CNOOC’s generous government-backed financing arrangements, which could draw even more scrutiny on Capitol Hill.
The filing also provides a detailed account from Unocal’s viewpoint of the brinkmanship involved in the takeover battle, which began June 22 when CNOOC unveiled its $67-a-share offer, trumping the $62 bid Chevron and Unocal had agreed to back in April.
Mindful of the political risk and delay involved in a deal with CNOOC, Unocal asked both companies to improve their bids, according to the filing.
On July 16, Unocal Chief Executive Charles Williamson urged CNOOC Chairman Fu Chengyu to “make his best offer,” telling him that “a sufficiently large increase” in his company’s bid would probably end the battle with San Ramon, Calif.-based Chevron.
But Fu declined to raise CNOOC’s bid without shifting some costs back to Unocal. And when Chevron sweetened its proposal July 19, the Unocal board stayed with Chevron, according to the filing.
At least one large Unocal shareholder warned Monday that the battle was not over, and that CNOOC might yet make another offer. What’s more, given the board’s willingness to face political opposition, Chevron could still lose the board’s support before the shareholder vote.
“There’s more to come,” said Jason Putman, a managing director at Victory Capital Management, holder of more than 7 million shares of Unocal stock.
Chevron’s revised cash-and-stock offer, which shifts in value along with the company’s stock price, contains a higher cash portion than its original offer. On Monday, it was worth $17.3 billion, or $63.67 a share.
Unocal’s stock, meanwhile, continued to trade above the price of Chevron’s offer -- an indication that investors still expect CNOOC to come back with a higher offer. On Monday, Unocal’s shares closed at $64.90, down 10 cents. Chevron shares rose 58 cents to $58.37.
Shareholders are going to be reluctant to side with Chevron if there is a chance of a higher offer from CNOOC, said Peter Schoenfeld, whose investment firm, P. Schoenfeld Asset Management, owns more than 1 million shares of Unocal stock.
“We’re going to vote against [Chevron] as long as Chevron’s stock stays where it is,” said Schoenfeld, who wrote a letter to Unocal last week reminding executives there of their “duty to maximize value for stockholders.” He added Monday, “We would like to see CNOOC come back now that they’ve seen this better bid.”
CNOOC did discuss increasing its bid from $67 a share to $69 a share, according to Unocal, but Fu said there would be two conditions. In return for the higher offer, he wanted Unocal to pay Chevron a $500-million breakup fee that CNOOC had agreed to pay as part of its original offer. And he asked Unocal to lobby Congress on CNOOC’s behalf even if the Chevron agreement was still on the table.
Williamson rejected the lobbying proposal and “expressed dissatisfaction” that Fu changed his position on the breakup fee.
Xiao Zongwei, CNOOC’s director of investor relations, declined Monday to say why Fu didn’t boost his offer for Unocal last week. But referring to the disclosures made in Unocal’s filing, Xiao said it was part of the negotiating tactics for companies “to invite bidders to raise their bid one by one.”
Ma Xiaoye, a former Chinese trade official and now head of the Academy for World Watch, an independent civic group based in Shanghai, said it was clear Fu was very interested in buying Unocal. “But this matter is highly politicized,” he said. “If I were Mr. Fu, I would stop there because of so much noise and political pressure.”
Indeed, that political pressure increased Monday as House-Senate negotiators working on an energy bill approved an amendment from Rep. Richard W. Pombo (R-Tracy) that would require any deal between Unocal and CNOOC to undergo an extended government review.
One element of the CNOOC offer that has been sharply criticized by lawmakers and by Chevron is the financing behind the all-cash bid.
Chevron has complained that the underlying financing of CNOOC’s bid amounts to a subsidy from the Chinese government equal to about $10 a share of the CNOOC bid for Unocal.
Steve Lipin, a spokesman for CNOOC in New York, rejected Chevron’s complaints.
“CNOOC is a financially independent company from the Chinese state, and it does not receive subsidies,” Lipin said. “The parent giving its subsidiary attractive financing ... there’s nothing nefarious, there’s nothing unique about it.”
Under terms of the CNOOC proposal, the company would finance the Unocal purchase with $3 billion of cash on hand and $16 billion in debt. CNOOC’s government-controlled parent would provide a 30-year, $2.5-billion interest-free loan as well as a 30-year, $4.5-billion loan at an interest rate of 3.5% a year.
The interest on the second loan would not be collected and “would never be payable” if CNOOC’s credit rating dropped below a certain threshold, according to a financing summary in Unocal’s Monday filing. In addition, the loans from CNOOC’s parent would not include specific performance covenants or any penalties for default, Unocal said.
The remaining $9 billion in financing would come from bridge loans provided by the government-owned Industrial and Commercial Bank of China and from Goldman Sachs & Co. and JP Morgan.
Times staff writer Don Lee in Seoul contributed to this report.
