Speculation was growing Friday that China Offshore Oil Co. Ltd. (CNOOC) was only waiting for Congress to recess before boosting its bid for Unocal and announcing a U.S. partner to take over its U.S. assets.
Neither CNOOC nor Unocal would comment on the rumors. However, several financial analysts were suggesting that a white horse, in the form of a U.S. partner, could be a route that CNOOC may take to win the El Segundo, CA-based producer.
"A U.S. buyer in hand, versus CNOOC's willingness to sell the U.S. assets" could give the Unocal board of directors "a little more comfort," said Peter Schoenfeld, CEO of P. Schoenfeld Asset Management LLC, which holds more than one million Unocal shares. Schoenfeld, who had criticized Chevron's bid, said, "I would hope the board would support" the new CNOOC deal.
Oppenheimer & Co. analyst Fadel Gheit suggested that Occidental Petroleum Corp., Apache Corp., Burlington Resources Inc. and Devon Energy Inc. all might be likely candidates to buy Unocal's U.S. assets. He put Occidental at the top of the list.
"All these companies have a huge amount of cash, but Oxy has established itself as an efficient U.S. producer, and they've made it clear they want to expand their U.S. operations," Gheit said. "They could easily pull off a $2 billion to $3 billion deal, no problem."
Unocal apparently was within a whisker of accepting a purchase agreement from CNOOC Ltd. in mid July based on documents filed with the Securities and Exchange Commission (SEC) last Monday -- Unocal's first disclosure of recent board meetings and communications on the matter.
The consensus on Unocal's board as of July 14 was that in light of the value difference between Chevron's $60.50/share offer and CNOOC's $67/share offer, the CNOOC offer clearly was preferable. The board also believed Unocal shareholders would reach the same conclusion.
However, Unocal Chairman Charles R. Williamson informed CNOOC Chairman Fu Chengyu after a board meeting on that day there still were some concerns about the risks inherent in a CNOOC transaction. He said the Unocal board "would be willing to accept those risks if CNOOC were to offer a price sufficient, in the board's view to compensate Unocal's shareholders for the additional risk."
A day later, CNOOC deposited $2.5 billion in an escrow account set up to cover any potential compensation to Unocal in the event of a legal dispute with CNOOC. And a day after that, on July 16, Fu came back with a sweetened but conditional $69/share offer.
"By July 17, Unocal's and CNOOC's advisors had substantially completed negotiation of the key documentation relating to the potential CNOOC transaction," Unocal told the SEC.
But the new CNOOC offer came with conditions that Unocal ended up being unable to accept, particularly given the risks involved in such a deal. Instead of CNOOC footing the $500 million bill for the termination of the agreement between Unocal and Chevron, the new offer by CNOOC required that Unocal cover that charge. Furthermore, CNOOC requested that Unocal lobby Congress to allow the transaction to go forward, something forbidden by the Chevron negotiations.
The sweetened Chevron offer made two days later apparently was just enough to sway the Unocal board in light of several key concerns about siding with the Chinese oil firm.
For one thing, Unocal's board became more aware of the likelihood of a substantial timing delay with a CNOOC merger. In contrast, Unocal and Chevron already had obtained all the requisite regulatory clearances for their merger.
In addition, Unocal's board determined that the increase in CNOOC's offer simply was not enough to cover all the risks associated with such a deal. In its SEC filing, Unocal listed five major categories of risks associated with the CNOOC transaction:
Unocal also said that prolonging the potential transaction process by selecting the CNOOC deal over Chevron's offer would "impose difficulties in retaining and motivating employees." In addition, Unocal saw tax advantages to siding with Chevron over CNOOC.
In the end, Chevron's cash-and-stock offer of about $63/share (up from about $60.50) was enough for Unocal's board to accept it and recommend shareholder approval. Even with the increase, Chevron's bid continues to be a discount to Unocal's current share price ($64.78 as of 1 p.m. Friday). It remains far below the $69/share conditional offer made by CNOOC.
Earlier last week, Unocal shareholder Peter Schoenfeld, released a letter demanding Unocal's board seek a higher offer and suggested shareholder damages could run "at least several billion dollars" if it did not.
Unocal shareholders will vote on the Chevron bid on Aug. 10. The SEC filing on Monday was the revised proxy statement related to that vote, with the details of the higher Chevron offer.
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