CNOOC may make $20b cash bid for Unocal

CNOOC may make $20b cash bid for Unocal

Rob Stewart and Matthew Miller, Bloomberg, Hong Kong

CNOOC Ltd., China's largest offshore oil and gas producer, may bid about US$20 billion in cash for Unocal Corp., the eighth- biggest U.S. oil company, trumping an offer from Chevron Corp., people familiar with the plan said.

The Beijing-based company will offer about $71.50 a share, 10 percent higher than a bid made by San Ramon, California-based Chevron on April 2, the people said, asking not to be identified. It would be the world's second-largest cash offer for a company in at least six years, data compiled by Bloomberg show.

China needs overseas energy assets to help fuel its $1.65 trillion annual economy, the world's fastest-growing major market. Paying with borrowed funds would cost state-controlled CNOOC about $1.2 billion in yearly interest payments, the same as Unocal's net income in 2004.

"It's a relatively high price to pay," said Marc Faber, who oversees about $300 million as managing director of Hong Kong- based Marc Faber Ltd. "The Chinese are willing to pay top dollar for oil reserves and the purchase may not look so stupid in the long term." ` The company may use some of its $3 billion in cash and borrow the remainder from banks to finance the bid, the people said. CNOOC will seek approval for a bid from its eight-member board as soon as today, they said.

CNOOC's Chief Financial Officer Yang Hua declined to comment today.

In March, the company's independent directors delayed a vote on the issue and requested more information to address concerns an acquisition carried too much risk in terms of strategy and funding, they said.

Chevron is offering Unocal shareholders a combination of 0.7725 Chevron shares plus $16.25, or 1.03 Chevron shares or $65 in cash. Shares of Chevron last traded at $59.34 in the U.S. The acquisition would boost its daily output by about 16 percent.

CNOOC needs to move quickly on its bid for El Segundo, California-based Unocal because the U.S. Securities and Exchange Commission is poised to approve the disclosure documents on Chevron's bid. The Federal Trade Commission, the U.S. antitrust regulator, approved Chevron's takeover plan on June 10.

The Chinese company's bid would have to be approved by U.S. regulators amid concern about the control of Unocal's energy assets shifting to China. Two Republican congressmen, Richard Pombo and Duncan Hunter, on June 17 wrote to U.S. President George W. Bush seeking a review of any bid by CNOOC for Unocal on national-security concerns, the Asian Wall Street Journal reported yesterday.

"This is a politically sensitive issue here," said Michael Cuggino, who oversees $360 million at Pacific Heights Asset Management LLC in San Francisco, including Chevron stock. "We're talking about oil and this a time when there is a shortage of oil."

CNOOC indicated it would finance the acquisition through bank debt and available cash, and attached proposal letters from potential financing sources, according to a May 26 filing made by Chevron to the U.S. Securities and Exchange Commission.

"Something of that size would be difficult for the company to digest given its current balance sheet," said John Bailey, an analyst at Standard & Poor's in Hong Kong. "It depends on exactly what they do and how they fund it. We're not privy to it at this stage."

JPMorgan Chase & Co., Merrill Lynch & Co. and UBS AG managed an $850 million sale of bonds convertible into CNOOC shares in November, the largest such sale by a Chinese company to overseas investors.

CNOOC is attempting to buy Unocal as crude oil rose to a record of more than $59 a barrel in New York yesterday. Crude oil for July delivery rose 90 cents, or 1.5 percent, to $59.37 a barrel on the New York Mercantile Exchange, the highest closing price since trading began in 1983. China, Asia's second-biggest economy, is the world's second-largest user of oil after the U.S.

Goldman Sachs Group Inc. and JPMorgan are advising CNOOC on the transaction. The New York-based investment banks would share about $200 million in fees for a successful takeover of Unocal, the people said.

Goldman spokesman Edward Naylor and JPMorgan spokeswoman Megan Donald, both based in Hong Kong, declined to comment.

CNOOC's Chairman and Chief Executive Officer Fu Chengyu flew to El Segundo, California to meet with Unocal executives on Dec. 26 and indicated the Chinese company would make a bid for the U.S. oil producer, according to Chevron's regulatory filing.