Unocal: The Bidding War Begins
Category: Economy & Business... Oil & Gas...
Posted Thursday, June 23, 2005 at 08:21 AM [GMT-6]

As expected, the China National Offshore Oil Company (Cnooc) has raised the stakes for Unocal, submitting an all-cash offer of $18.5B in an effort to stymie Chevron's current $16.5B cash-plus-stock deal. Here are some excerpts from the report in today's Wall Street Journal:

Cnooc is offering $67 a share for Unocal, and would have to pay a $500 million breakup fee to Chevron while assuming Unocal's $1.6 billion in debt. Both Chevron and Cnooc are bracing for a protracted battle and have hired public-relations firms to press their respective agendas.

Wouldn't you love to make half a billion just for not doing a deal? That's the worst case scenario for Chevron, in the event that Unocal goes with Cnooc's bid. But, it also appears that $67/share may just be the starting point for the bidding. The real winners will be the Unocal shareholders.

Cnooc is quite sensitive to the potential "anti-foreign-takeover backlash":

But it also tried to head off concerns in Washington and elsewhere about Chinese ownership, saying it is willing to sell and market most or all of the oil and gas produced from Unocal's U.S. properties in U.S. markets and that it would seek to retain substantially all of Unocal's 6,500 employees.

Those of us who have been directly affected by corporate takeovers immediately recognize the phrase "seek to retain substantially all...employees," which is generally code for "most of them are history." However, Cnooc would presumably be more likely to retain employees than Chevron, given the lack of overlap with an existing employee base, especially in non-field personnel. Chevron has remained non-committal about its layoff plans, although it has already said that it would consolidate Unocal's headquarters into its own offices.

Cnooc's commitment to sell US-derived production to US markets seems to be window dressing, as selling that production to foreign markets is already logistically difficult, not to mention politically ill-advised.

Unocal remains coy about the new bid, and Chevron professes to be confident that its proposal is the best one.

Late yesterday, Unocal, of El Segundo, Calif., said it intends to evaluate the Cnooc proposal in light of its "fiduciary duties and its obligations under the Chevron agreement." A company statement noted that the board's recommendation that shareholders approve the acquisition by Chevron "remains in effect."

Chevron issued a statement saying its original agreement to buy Unocal "combines compelling value, regulatory certainty and accelerated timing, providing a superior transaction for Unocal stockholders." Chevron has been pushing hard to expedite a vote on its offer by Unocal shareholders, but one hasn't been scheduled yet. A senior Chevron official said this week he hoped to have the deal wrapped up by August, but that was before Cnooc's move.

My prediction? Unocal will end up selling to Chevron for around $70/share. I have nothing concrete to support that call, other than this seems to represent the fastest and cheapest way for Chevron to acquire new reserves. A $70/share bid equates to around $11/BOE (based on the published figure of 1.75B barrels of proved reserves), which still seems like a bargain given today's oil prices in the high $50s.

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Comments

Where do the Commie's get that kinda' cash?

Posted by: Wallace-Midland Texas at June 23, 2005 01:43 PM

Hmm...let's see...oh, yeah...take a look at that tax statement "they" send you each year. That might give you a clue. ;-)

Posted by: Eric at June 23, 2005 02:15 PM

Heh. I just realized that I thought you were commenting on the next post, about local governments grabbing private property. ;-)

I guess it's a sad commentary that the question seems to be equally relevant to both posts.

But, in reply to your actual question, in the proper context, even the Commies embrace capitalism now, when it's convenient (and lucrative).

Posted by: Eric at June 23, 2005 02:41 PM

Yeah, now that I think about it, I guess the Chicoms do make some nifty money selling cut rate underwear to Wal-Mart.

Posted by: Wallace-Midland Texas at June 23, 2005 03:30 PM

Regarding your "prediction"...me thinks me detects a prior life career choice within yon blogdom.

Posted by: Sherry at June 24, 2005 01:34 PM

Yeah, well, as they say, it takes one to know one!

So, when do you start your blog? ;-)

Posted by: Eric at June 24, 2005 01:39 PM
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