Chevron Corp. would have three days to propose a counteroffer for Unocal Corp. if the Unocal board withdraws its support for a $16.8 billion cash-and-stock merger, according to documents filed with the Securities and Exchange Commission (SEC). Unocal's board was mum Friday about whether it would withdraw its support for Chevron and back a competing $18.5 billion cash offer from the China National Offshore Oil Co. (CNOOC).
However, a stipulation under an existing merger agreement between Unocal and Chevron means that unless Chevron or CNOOC drop out of contention, Unocal's future may not be decided for at least three days following the board's announcement. Under the stipulation, Unocal must give Chevron "advance written notice of its decision to withdraw or modify its recommendation" as part of the counterbidding process, according to a joint proxy statement.
Under the agreement, if Unocal's board throws its support to CNOOC, the Chinese company would have to pay Chevron $500 million. However, if the Unocal board maintains its endorsement for Chevron, but Unocal's shareholders reject the deal in a vote on Aug. 10, Unocal would owe Chevron $250 million -- if a CNOOC deal fell through, according to the filing.
On Wednesday, Chevron filed a "Unocal integration plan" with the SEC. According to Chevron spokesman Don Campbell, Chevron has offered jobs to 71 Unocal employees, and 66 have accepted. Campbell said Wednesday that the company still believes that its bid is the best one for Unocal shareholders. Pending their approval, he said, a deal could be completed in a month.
In an Opinion column in the Wall Street Journal last Tuesday, Chevron CEO David O'Reilly finally broke his silence about the bidding process for Unocal, but he did not indicate whether the San Ramon, CA-based oil giant would up its offer.
O'Reilly wrote, "For Unocal shareholders, the most important issue is clear. It is a choice between a definitive merger agreement with Chevron, which can close in the next four weeks, versus an uncertain and highly contingent proposal from CNOOC, which cannot be executed unless and until Unocal shareholders reject the Chevron agreement, or Chevron opts out.
"Even if CNOOC were to ultimately enter into a firm agreement with Unocal, it would still face a complex and uncertain government review process, including congressional hearings and inquiries by four state attorneys general that will focus on antitrust, national security, pension, environmental and fair-trade issues," said O'Reilly. "Chevron, by contrast, has already cleared all the necessary regulatory hurdles."
If the stock market is any indication, a bidding war may be looming. Unocal shares jumped following the Chevron offer, but have held fairly steady for the past three weeks, at around $65/share -- well ahead of Chevron's offer of $60.68/share. CNOOC has offered about $67/share.
In a note to clients, Oppenheimer & Co. energy analyst Fadel Gheit said Chevron must raise its bid to gain shareholder approval. "The market is telling us that $60 is inadequate...So unless they raise the bid, they stand a chance of losing it." Gheit added that Chevron needs to increase its offer by at least $5 in cash, to "make it much more acceptable."
Gheit said, "I would vote my stock and encourage my clients to take the Chevron deal if they increased the bid by $5. That's $1.2 billion more, and although it looks big, it is miniscule. It is 50 cents on a Chevron share, which is nothing." Chevron would be easily able to increase its Unocal bid because it had about $14 billion of cash on hand at the end of 1Q2005 and will add at least $1 billion to that figure for the next few quarters, he added.
Meanwhile, CNOOC and Unocal have been negotiating since late June, and a source told the Financial Times that the two are "within a stone's throw" of agreeing to a draft merger agreement. CNOOC also is said to be considering raising its bid, according to the Times. One sticking point, according to the source, is a provision for an escrow account in excess of $2 billion for Unocal. Also, an additional $500 million would be paid as a breakup fee to Unocal if CNOOC were to pull out of the merger.
However, Unocal apparently still remains concerned about CNOOC's ability to close a merger in the United States, especially with criticism from members of Congress and national security experts. CNOOC on July 1 filed a required notice with the Committee on Foreign Investment in the United States (CFIUS), and is hoping that an investigation will immediately begin to cut the time to close a final transaction. But CFIUS does not plan to begin an investigation until Unocal and CNOOC come to an agreement, which puts the Chinese national oil company in a bit of a Catch-22.
While the three companies continue their jockeying, the House Armed Services Committee met Wednesday to discuss CNOOC and the implications on national security if it is able to buy Unocal.
"Some might think it odd for the committee to review the Chinese bid of Unocal," said Rep. Duncan Hunter, (R-CA), chairman of the committee. "After all, one might argue that foreign corporate acquisitions are outside the scope of the national security issues we usually deal with. Nothing could be further from the truth.
"The simple fact is that energy is a strategic commodity," said Hunter. "The infrastructure, drilling rights, and exploration capabilities Unocal uses to provide energy on the open market all represent strategic assets that affect U.S. national security."
Three weeks ago, the House, on a vote of 398 to 15, passed Resolution 344 to line up against CNOOC's bid. The resolution noted the strategic importance of energy, China's ongoing efforts to lock up global energy resources, and the impact of those efforts on U.S. gasoline prices. It further called upon President Bush to conduct a thorough review of the transaction. A similar resolution was proposed Friday in the Senate by Sen. Byron Dorgan, D-ND.
"There is not and would not be reciprocal treatment if a U.S. oil company or a U.S. company wanted to buy a Chinese company," said Dorgan. "It wouldn't happen."
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