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Eric Ng

Wang Xiangwei

Firm in last-minute offer to compensate shareholders if takeover falls through

CNOOC will set aside US$2.5 billion to compensate Unocal shareholders should it sign a takeover agreement with the California-based oil firm's board but subsequently fail to complete it, according to sources close to the situation.

The last-minute sweetener is designed to ease shareholders' concerns that Hong Kong-listed CNOOC, faced with regulatory hurdles and political controversy, might simply walk away from its US$18.5 billion all-cash bid.

Unocal's 10-member board  is set to convene at midnight tonight  to decide whether to reverse its current endorsement of rival Chevron's US$16.6 billion cash-and-share offer in favour of CNOOC's.

Sources said that if Unocal's board backed its bid, CNOOC would set aside US$2.5 billion - or US$9.05 per share - to be held in escrow by its financial adviser JP Morgan. The sweetener would apply only if the deal passed regulatory hurdles.

Should CNOOC then fail to complete the deal, Unocal shareholders would have a contractual claim to the funds, which would be held by an American financial institution subject to US law and court directives.

The mainland firm, JP Morgan and its second financial advisers Goldman Sachs, all declined comment as did NM Rothschild, which is advising CNOOC's independent directors.

Meanwhile, the company was also bracing itself last night for more political fallout from US congressional hearings launched before the House of Representatives' Armed Services Committee.

Early testimony at the hearing was decidedly hostile to the deal.

'China more or less invented strategy some thousands of years ago,' former CIA director R. James Woolsey told the committee. 'For anyone who believes that this is purely a commercial undertaking unrelated to a national strategy of domination of energy markets and of the Western Pacific, I would suggest that that view is extraordinarily naive.'

Any deal between CNOOC and Unocal will also face a detailed security review by the cabinet-level Committee on Foreign Investments in the United States (CFIUS),  which reviews foreign  investments into American  industry for possible breaches of national security.

CNOOC made a voluntary filing to CFIUS on June 29 but the committee has yet to  announce a review of the proposal.  Last night on US television, Republican Joe Barton, chairman of the House Energy and Commerce committee, pledged to launch a second congressional hearing on the CNOOC bid  next week.

While noting that responsibility for the security review would normally  fall on CFIUS, which is essentially a White House-led body, Mr Barton said: 'We're going to look into how CFIUS operates.'

In anticipation of the backlash on Capitol Hill, CNOOC  placed advertisements in  Washington newspapers  yesterday arguing its case.

Timed to coincide with the launch of the congressional hearings, the  American-flavoured ads feature a baseball referee and ask: 'Would an umpire call a strike before the ball has been pitched?'

Meanwhile, CNOOC's board was expected to meet last night to build consensus among independent non-executive directors and to discuss its ability to head off a Chevron counter bid.

'Price is only one key element,' a person close to the deal said. 'Other issues include the sources of additional financing needed to support a potential higher bid, and what US assets [CNOOC] would  sell to satisfy US regulators.'

In March, CNOOC was forced to withdraw from launching a formal bid to acquire Unocal due to opposition from its independent non-executive directors.

As a result, Unocal's board voted on April 4 in favour of the  Chevron bid. The firm hopes to avoid repeating the mistake. 'When you are going into a takeover battle,  the last thing you want is a split board,'  said the source.



CNOOC in US$2.5b bid  to sweeten Unocal deal