Bloodied CNOOC remains undeterred
Bitter experience in Unocal takeover battle won't halt the mainland oil giant's overseas expansion drive
No one would blame CNOOC for throwing in the towel. Fighting on foreign turf against Chevron, a company five times its size and 100 years older, the last thing the Chinese firm needed or expected in its suit for Unocal was a lesson in protectionism from the US Congress.
Still, in takeover battles as in brawls, down is not always out. The question is whether it's worthwhile getting up again.
CNOOC is wary of a bidding war where it is stuck paying a premium, according to a source close to the company.
'This is a tactical thing. If CNOOC increases its bid to US$69, then Chevron may raise to $65; if CNOOC goes to $71 Chevron may bid $67,' the source said. 'This is a very likely scenario because Chevron can't lose face over this.'
At the same time, political obstacles make CNOOC's prospects look increasingly bleak. The US Congress tentatively scheduled a vote by Friday on an energy bill that could delay a CNOOC-Unocal tie-up by subjecting it to a protracted 120-day review.
'CNOOC has underestimated the political force in the US,' said DBS Vickers Securities analyst Gideon Lo Wai-yip. 'If CNOOC raises its bid now, it will attract more opposition. It's better to leave it to Unocal's shareholders to decide.'
When Unocal's shareholders vote on the Chevron offer on August 10, they will face the same issue confronting CNOOC now - how to price the political risk.
Sources say that chief executive Fu Chengyu has clearance from his board to go to US$69 per share, approximately US$19 billion.
The market is split. Based on Wednesday's share prices Chevron's offer was worth US$17.3 billion, compared with Unocal's market cap of US$17.7 billion, suggesting investors believe Chevron has room to raise its bid. But because Unocal continues to trade well below the value of CNOOC's offer, punters are to some extent pricing in the uncertainties facing the bid.
Unocal's board made a comparable assessment two weeks ago, when Chevron's cash-and-equity offer was US$16.3 billion. Despite the political climate then, the board was leaning towards CNOOC's US$18.5 billion bid, which represented a 13.5 per cent premium.
A recent filing with the US Securities and Exchange Commission shows that at a meeting on July 14 Unocal's board agreed that 'assuming neither Chevron nor CNOOC improved the financial terms of its proposed transaction, the board's inclination would be to withdraw its recommendation for the Chevron transaction.'
Five days later, Chevron raised its bid to US$17.1 billion, including more cash and fewer shares. While CNOOC's offer still stood at an 8 per cent premium, Chevron had closed the gap sufficiently to win the renewed support of the board.
While it is only a rough measure, to re-establish a 13.5 per cent premium CNOOC would need to raise its bid to US$19.4 billion.
'Given what CNOOC indicated earlier as to what it considers a fair valuation of Unocal, it can bid up to US$22 billion,' said Daiwa Securities analyst Rachel Tsang Wai-ming. 'There is no reason for CNOOC to chicken out of bidding higher.' But if CNOOC has decided to give up on Unocal, few believe it will diminish its future ambitions.
'Supposing CNOOC's bid is unsuccessful,' said Dong Xiucheng, a vice-dean of the School of Business Administration at the University of Petroleum in Beijing. 'I don't think it will impinge on its entrenched strategy of becoming a multinational oil company.'