CNOOC Ltd. finally made its long-expected move on Unocal, offering $18.5 billion in cash for the El Segundo, Calif., company.
CNOOC would give stockholders $67 a share, somewhat better than the deal Unocal accepted from Chevron Corp. back in April, when Chevron offered a combination of 25 percent cash and 75 percent stock valued at about $62 per share.
Chevron’s share price hasn’t changed much since then, and CNOOC said its new offer would sweeten the pot for Unocal holders by $1.5 billion compared with the Chevron buyout. CNOOC would also have to pay $500 million to San Ramon, Calif.-based Chevron as a break-up fee.
If the Chinese company succeeds in what many think is an uphill battle, CNOOC would win a major portfolio of energy assets in Asia, where the government-controlled company is building major LNG infrastructure to import the fuel into China. It would also be the biggest foreign acquisition by a Chinese company ever, dwarfing Lenovo Group’s $1.25 billion purchase of IBM’s PC unit, completed in May.
“CNOOC Ltd. believes the combined company would have a leading position in the Asian energy market and an expanded role in the development of China’s liquefied natural gas (LNG) market,” the company said in a statement to the Hong Kong Stock Exchange June 22.
The Chinese company would boost its reserves by nearly 80 percent to about 4 billion barrels of oil equivalent, and more than double its production. About 70 percent of Unocal’s proved reserves are in Asia and the Caspian region, CNOOC noted.
Workers would be kept
If CNOOC prevails, it might be good news for U.S. employees of Unocal, at least initially. That’s because the Chinese company has pledged to retain substantially all Unocal employees and to try to persuade Unocal’s top management to remain with the new entity. Chevron is expected to slash jobs in the integration of the two companies. In the longer term, if CNOOC won out, it might well sell off the U.S. assets.
CNOOC also promised it would continue selling substantially all of the oil and gas produced by Unocal’s U.S. properties in the U.S. market. That could blunt a move by some members of Congress to try to block the deal.
CNOOC also said it would go along with the settlement reached by Chevron and Unocal with the Federal Trade Commission to essentially stop trying to enforce Unocal’s patent on reformulated gasoline. And the company says it’s willing to divest any of Unocal’s non-E&P assets in North America if needed to win approval from U.S. regulators.
Chevron stands pat
Chevron didn’t raise its bid immediately in response to the rival offer, saying swiftly that “Chevron stands behind its April 4, 2005, merger agreement with Unocal, which has been approved by the boards of both companies.”
As for Unocal, that company said that it “intends to evaluate the CNOOC proposal in a manner consistent with the board’s fiduciary duties and its obligations under the Chevron agreement.” Unocal noted that as part of the Chevron merger agreement, the Unocal board recommended that transaction to Unocal stockholders, and “that recommendation remains in effect.”
Finding the money
An interesting facet of the CNOOC announcement was the way the company has put together financing for the huge payment to Unocal holders. It doesn’t hurt, of course, to have the financial muscle of the Chinese government’s controlling ownership.
According to CNOOC, the company can use its cash reserves of more than $3 million. It has commitments for $3 billion in bridge loans from Western financial powerhouses Goldman Sachs and JP Morgan, plus bridge loans from the Industrial and Commercial Bank of China for $6 billion. The bridge loans would be replaced by bonds and term loans.
China National Offshore Oil Corp., the state-owned 70.6 percent majority shareholder of CNOOC Ltd., would provide a $4.5 billion long-term loan, and a subordinated bridge loan of $2.5 billion, to be refinanced with equity within a couple of years.
CNOOC’s hard-charging chairman and CEO, Fu Chengyu, said the company expects the new business entity would retain a strong, investment-grade credit rating.
“For our shareholders, there is a strong business rationale for the combination, as CNOOC Limited and Unocal would form one of the leading international E&P companies and become one of the premier players in the Asian energy market,” he said. The deal would add gas reserves and “strengthen our regional presence by combining with Unocal’s complementary Asian asset base. I am confident that the merger will increase shareholder value.”
Reserves at $11.20/BOE
According to CNOOC, the offer represents $11.20 per barrel of oil equivalent for Unocal’s reserves.
All in all, the deal faces an uphill battle. It’s a big bite for the Chinese company, which is dwarfed by Chevron’s size and worldwide reach. And even though the cash offered to shareholders is about 9 percent more than Chevron’s cash-and-stock offer, the U.S. company’s bid has already gotten past most regulatory hurdles and is likely to close fairly quickly if stockholders accept it.
