Unocal's Board Decides to Continue Talking with Chinese

Jul 15, 2005 (Dow Jones Commodities News Select via Comtex)

Despite mounting opposition in Washington, the board of Unocal, the American oil company at the center of a takeover battle, instructed its management yesterday to continue negotiations with a government-backed Chinese oil company to seek a higher bid than its $18.5 billion offer, executives close to the company said.

While still endorsing a rival $16.8 billion bid by Chevron, Unocal's board, which met yesterday at the company's headquarters in El Segundo, Calif., decided it would consider an offer from the China National Offshore Oil Corporation, or CNOOC, if several conditions are met.

The executives had previously said Unocal's board was looking for a higher price and guaranteed compensations if the deal was blocked.

CNOOC has indicated that it might raise its offer, and in recent days has included new concessions in its proposal, including a commitment to shed certain assets to secure government approval, $2.5 billion in escrow to protect Unocal if CNOOC was to break any part of its deal and a separate $500 million breakup fee.

But the provisions might not be enough. For example, the breakup fee would be paid only if CNOOC withdrew its offer, and the escrow account provides funds only for potential liabilities against lawsuits if CNOOC reneges on its agreement.

Neither provision would take effect if the transaction was blocked by the United States government.

The fight over Unocal has drawn fierce reaction in Washington to China's growing energy ambitions and its desire to acquire an American oil company.

The opposition complicates CNOOC's position. While the Chinese company has described the deal as a commercial operation, critics have said the acquisition would threaten America's national security and its energy supplies.

So far, Unocal's board has proved deft in playing competing bids against each other to try to raise the price. CNOOC was the first to approach Unocal in December, with an offer of $13 billion for its Asian assets. That move prompted Chevron and another company, Eni of Italy, to step in and make competing offers, pushing up the price.

"The board is pitting one buyer against the other to get the best price possible," said Fadel Gheit, a longtime oil analyst at Oppenheimer & Company in New York, who owns both Unocal and Chevron shares. His firm is recommending both stocks. "That's their job. I think they will take their time doing so."

Regardless of what Unocal's board ultimately decides, the company's shareholders will vote on Chevron's proposal at a meeting on Aug. 10.

CNOOC has been trying to persuade the investors to turn down Chevron and back its higher offer, while Chevron has repeatedly said that the Chinese bid faces a lengthy review process involving several United States agencies.

Chevron pointed out that in recent weeks it has secured all the required regulatory approvals, from both the Federal Trade Commission and the Securities and Exchange Commission.

The Chinese company faces an additional hurdle. Its offer will be reviewed by a top government panel, the Treasury Department's Committee on Foreign Investments in the United States, which looks at foreign acquisitions that have national security implications.

Ultimately the decision to approve the Chinese offer will rest with President Bush, who has the authority to block foreign takeovers upon the recommendation of the panel, which is headed by the Treasury secretary.

Anti-China pressure, meanwhile, is growing steadily in Washington.

A prominent critic of the Chinese bid, Representative Richard W. Pombo, a Republican from California and the chairman of the Resources Committee, said yesterday that he planned to propose an amendment to the energy bill in Congress that would require the energy secretary to review CNOOC's bid. Mr. Pombo's district includes San Ramon, where Chevron has its headquarters.

On Wednesday, Representative Duncan Hunter, a California Republican and the chairman of the Armed Services Committee, said he might also introduce legislation to block CNOOC from buying Unocal, even if a deal was approved by shareholders and the government.

Chevron is offering $16.25 in cash and a fraction of 1.03 Chevron shares for each share of Unocal. With the cash portion amounting to a quarter of the offer and the stock portion to three-quarters, that values Unocal at $60.14 a share.

But since April 4, when the deal with Chevron was announced, Unocal's shares have gained 11 percent, closing yesterday at $66.29 a share, down 46 cents. Chevron closed at $56.82 a share, down 1.1 percent.

CNOOC is offering $67 a share, in an all-cash offer.

Analysts said the difference of $6 a share between Unocal's current price and the Chevron offer means Chevron might have to increase its bid before the shareholder meeting.

"The market is clearly telling Chevron it will not accept its offer," Mr. Gheit said. "The Chevron deal is shortchanging them." (C) 2005 FWN Select. All Rights Reserved