1.

Energy Utilities Mining

CNOOC bid for Unocal

CNOOC REBUFFS U.S. CONCERNS OVER UNOCAL BID
By Francesco Guerrera

Financial Times (UK)
June 23, 2005

Original source: Financial Times (UK) (subscribers only)

HONG KONG -- China National Offshore Oil Corporation on Thursday rebuffed politicians’ and investors’ concerns over its US$19.6bn bid for its U.S. rival Unocal -- the third-largest cash offer ever -- arguing it would not endanger its own balance sheet or U.S. national security.

As U.S. politicians attacked the decision by the state-controlled company to trump Chevron’s US$18bn bid for Unocal with a US$67-per-share offer, CNOOC’s top executives mounted a strong defense of what they called a “transformational” deal.

In an interview with the Financial Times, Fu Chengyu, chairman and chief executive, said the bid, launched after a late night board meeting on Wednesday, was a “good offer for Unocal . . . it is a good offer for America.”

In a surprising move designed to allay concerns of a Chinese takeover of strategic U.S. assets, CNOOC pledged not to export any oil and gas produced in the U.S. and to retain all Unocal employees.

CNOOC executives said they were confident the takeover, which would trigger a payment of a US$500m break-up fee to Chevron, would be cleared by the U.S. government and regulators.

However, former U.S. Senator Bob Kerrey, a well known former U.S. senator, predicted Congressional pressure would force the White House to block the bid. Speaking at the Beijing Foreign Correspondents Club, Mr. Kerrey, a well-known former Democratic presidential candidate in 1992, said: “It makes complete sense for this deal to happen economically for CNOOC. But I don’t think it’s going to happen."

Credit rating agencies said they might downgrade CNOOC as analysts warned the bid -- pitched at a premium of about 9 per cent to Chevron’s cash-and-shares offer -- could saddle the Chinese group with too much debt.

CNOOC will fund the bid with US$7bn in loans from its state-owned parent, a US$6bn loan from state lender Industrial and Commercial Bank of China, a US$3bn bridge loan from its advisers Goldman Sachs and JP Morgan and US$3bn from its cash reserves. The Chinese group will also assume US$1.1bn of Unocal debt.

However, Mr. Fu said the bid would increase earnings per share from the first year and its funding was designed to retain the strength of CNOOC’s balance sheet.

CNOOC’s Hong Kong-listed shares closed slightly higher at HK$4.225 on Thursday.

2.

Energy Utilities Mining

CNOOC Bid for Unocal

CNOOC HAS A POLITICAL GAME TO PLAY IN WASHINGTON
By Francesco Guerrera

Financial Times (UK)
June 23, 2005

Original source: Financial Times (UK) (subscribers only)

HONG KONG -- The battle between CNOOC and Chevron for Unocal will be fought as much in Capitol Hill’s corridors of powers as in Wall Street’s dealing rooms.

And while the state-controlled Chinese group is familiar with U.S. capital markets, having been listed in New York since 2001, Washington’s wheeling-and-dealing world is unfamiliar territory.

But to win the heart and minds of Unocal’s shareholders -- and convince an increasingly raucous group of politicians that oppose the takeover -- CNOOC will have to play the political game. With advisers including the Washington lobbyists Public Strategies, the law firm Akin Gump, and the public relations consultants Brunswick Group, CNOOC will not be short of advice.

Communication experts say the key planks of CNOOC’s strategy will be to play down any perceived threat posed by its bid to U.S. energy supply.

“For CNOOC, it is all about being non-threatening, to confront and demystify any preconceptions about the company,” said a PR executive not involved in the bid.

In this respect, CNOOC’s pledge to keep selling all of the oil and gas produced in the U.S. on the domestic market is aimed at allaying fears of a “Chinese takeover” of a vital resource.

At the same time, CNOOC will have to avoid suffering the same fate as Hutchison Whampoa, the Hong Kong conglomerate that in 2003 was forced to withdraw from a joint bid for the telecoms group Global Crossing after protests from politicians. Just like the Global Crossing deal, CNOOC’s bid will be scrutinized by the influential Committee on Foreign Investments in the U.S.

“They will have to deflect the political heat. The CFIUS process is about the law. If there is an issue, CNOOC will have to be seen to be dealing with the issue, not the rhetoric,” said an industry expert.

Yet CNOOC already appears to have scored a minor own-goal by code-naming the Unocal takeover attempt “Operation Treasure Ship,” after the fleet sailed by legendary Chinese admiral Zheng He.

Although some historians believe Zheng He discovered America before Columbus, once his voyages were over, China turned away from the outside world and underwent decades of cultural and technological stagnation.

3.

Energy Utilities Mining

Unocal

CNOOC OFFER MAY BE A FIRST SALVO
By Francesco Guerrera, Joe Leahy, and Enid Tsui

Financial Times (UK)
June 23, 2005

Original source: Financial Times (UK)

CNOOC's Treasure Ship, following in the wake of Chinese explorer Zheng He, who may have discovered America a century before Columbus, has entered hostile U.S. waters.

Contrary to most analysts and investors' predictions, the Chinese company is to push ahead with its bid to buy Unocal, code-named Operation Treasure Ship, though its has yet to settle on the level at which it will go up against the offer from its U.S. rival Chevron.

The bid, which came after months of wrangling between the management and its non-executive directors, is a milestone in China's long march from command to market economy.

The biggest-ever takeover offer by a Chinese group for a high-profile U.S. oil producer, the bid is a sign that China's companies are no longer content to operate in the domestic arena and be considered as attractive investments for foreign multinationals.

"It is a wake up call for the global financial community. China is no longer a hunting ground for foreign investors. It has become a source of takeover activity," said the Asia head of mergers and acquisitions at an international bank.

But for CNOOC's management, led by chairman and chief executive Fu Chengyu, the bid is only the beginning of a perilous journey. Analysts expect the Chinese groups to be plunged into a bidding war with Chevron, a much bigger rival with a long experience of corporate battles.

With Chevron expected to increase its cash-and-shares offer, the Chinese group will have to fight hard, and probably pay more than the current bid, to win the hearts and minds of Unocal's shareholders.

The financial battle is likely to be accompanied by attacks on CNOOC's ability to clinch the deal, after opposition from the independent directors forced it to withdraw its original bid at the last minute in April, days before the Chevron offer.

Political hostility in the U.S. will open another front for CNOOC and its advisers, Goldman Sachs and JP Morgan. Some members of Congress are up in arms at the perceived threat to national security posed by Unocal's sale to a Chinese state company. Two California congressmen are demanding a federal inquiry into any CNOOC bid, a process it would probably have to go through anyway. And politicians are also pointing to Chinese activity in Canada, where they have been attracted by the oil sands fields.

China's foreign ministry this week warned the U.S. against "political interference," but with the CNOOC bid set to be approved, and partly funded, by the highest government authorities, a U.S. political backlash is a given.

The powerful Committee on Foreign Investments in the US will almost certainly review the deal -- a move that is unlikely to derail the bid but could put further pressure on CNOOC.

The political attacks will be blunted, however, if CNOOC agrees to sell Unocal's U.S. operations, which account for about a third of its US$12bn assets, to a domestic buyer, even Chevron. It is understood that CNOOC has had exploratory talks with private equity groups but no deal has been reached yet.

With Unocal's share price having risen 57 per cent since the Financial Times first revealed CNOOC's interest in the California-based group in January -- and the need to pay a $500m break-up fee -- Mr Fu will have to guard against his own shareholders.

CNOOC's management is protected by Beijing's majority stake in the company, but protests by minority shareholders could cause unease and even force a rethink among Mr. Fu's political masters.

People close to the situation say his strategy has focused on portraying the deal as an inevitable step in China's quest to gain natural resources to keep its economy growing. Yet, that argument has been weakened by comments from Beijing officials and influential academics that this is a corporate, not a state, matter.

The nature of Unocal's Asian operations, which account for about 60 per cent of its assets, also suggest a takeover would do little to slacken China's thirst for energy.

While CNOOC could double its natural gas production by taking over Unocal, the bulk of the U.S. group's output in countries such as Thailand and Bangladesh is already earmarked for domestic power plants. In Indonesia, where Unocal has US$1.8bn-worth of assets, many of the fields have still to be explored and it is unclear how much could be exported to China.

For many analysts, CNOOC should have spent its billions more wisely and bought assets around the world, rather than one big company in a contested takeover. But having faced down the market scepticism, internal dissent, and official misgivings, the threat of sinking is unlikely to deflect Mr. Fu from his mission to become captain of a huge Treasure Ship.

4.

Energy Utilities Mining

Unocal

CHEVRON UNLIKELY TO LIFT BID IMMEDIATELY
By James Politi

Financial Times (UK)
June 23, 2005

Original source: Financial Times (UK)

NEW YORK -- Chevron's advisers were on Wednesday considering their options in light of CNOOC's decision to attempt to break up Chevron's $16.4bn takeover of Unocal.

Rather than immediately raising its bid in response to CNOOC's offer, the U.S. oil major was more likely to wait and see how investors, Unocal's board and U.S. regulators and politicians, reacted to the Chinese company's move.

Chevron's closest allies in the takeover battle could be in Washington, say many analysts. If the U.S. government and Congress raise enough objections to CNOOC owning Unocal's assets, most of which are in Asia, the regulatory approval of the Chinese company's offer could become unusually fraught.

In such an environment, Unocal's board, which includes Kevin Sharer, the chief executive of Amgen, the biotechnology giant, and Richard McCormick, the former chief executive of US West, the telecoms group, might easily be persuaded to continue supporting the deal with Chevron.

Even if that were to change, people close to Chevron say that the company could make use of a "force-the-vote" provision inscribed in the merger agreement. This clause allows Chevron, which is already far along in obtaining regulatory approval for its deal, to put the proposal to a shareholder vote even if Unocal's board switches its recommendation in favor of CNOOC.

At that point, investors would be forced to choose between a deal that was nominally lower, but lacking any completion risk, and a nominally higher bid with a greater risk of being blocked by the government.

In recent weeks, faced with the prospect of a CNOOC counterbid, Chevron had moved to accelerate the timetable for the completion of the deal. Originally slated for October, the merger is now expected to close in August.

"We're doing everything we can to move this quickly like we would in every single one of them," George Kirkland, Chevron's global head of exploration and production, said at a Reuters energy summit on Wednesday. "I think we could be closed in the August timeframe."

Yet, for all the signs pointing to Chevron still being the frontrunner, CNOOC's bid could emerge as the ultimate winner if shareholders believe that its offer is high enough to make up for the risk that it is not completed. This would mean that if Chevron were to force a vote, shareholders could turn it down.

Moreover, says one senior New York-based mergers and acquisitions lawyer, "force-the-vote" provisions have rarely been tested in practice.

"There is a question as to whether those provisions are enforceable," he says. "Is it consistent with your fiduciary duty to submit something to shareholders that you do not support?"