Why China's Unocal Bid Ran out of Gas


With the Aug. 2 decision by China National Offshore Oil Corp., better known as CNOOC, to drop its $67-a-share offer for Unocal (UCL), all the pieces have fallen into place for a peaceful acquisition of the independent oil and gas outfit by U.S. giant Chevron (CVX) -- albeit at a lower bid of $64 a share.

CNOOC's surrender announcement included a hint of bitterness and a slap at the U.S. political arena, where the threat of selling a U.S. concern to one 70%-owned by the Chinese government had ignited a firestorm of controversy. And it left analysts wondering where CNOOC might turn next in its global ambitions.

"NO GAME PLAN." Analysts agreed that Unocal had offered CNOOC an unusual target because of its strategic assets in Southeast Asia. More aware now of the harsh political reaction to any additional attempt to take over U.S. companies -- and lacking another stateside target boasting Unocal's Asian attractions -- CNOOC likely will sit on the sidelines for a while and "lick its wounds," says Oppenheimer analyst Fadel Gheit.

While Unocal and Chevron made final preparation for the Aug. 10 vote at which they are expected to seal their marriage, Gheit and other analysts were busy conducting an autopsy of CNOOC's first failed attempt at a major U.S. acquisition.

"They had no game plan," says Gheit. "I don't know if they had bad advice or did not listen or if the bureaucracy just couldn't move fast enough. CNOOC is at a disadvantage in a fast-paced market."

"UNIQUE" OPPORTUNITY. Although he calls CNOOC's war chest "a bottomless pit" of cash, Gheit believes the company "will be out of action for quite a while. They just blew it. I think they could have had Unocal. It's never been a matter of money but the art of the deal. You can't haggle over a $500 million breakup fee in an $18 billion deal," a reference to CNOOC's hint of increasing its bid while dropping a promise to pay Chevron a breakup fee.

Jeff Hayden of Houston's Pickering Energy Partners says Unocal was a "unique" opportunity for CNOOC. "No other U.S. company has a portfolio like Unocal," he adds.

But the Chinese giant's failure to recognize the complex challenges such a bid would face may have sealed its fate. "It's apparent they [were] too slow to react," says AG Edwards analyst Bruce Lanni. "They had a difficult time getting off the mat to put a bid together." Lanni had always supported Unocal's board in its decision to accept the Chevron offer, despite the extra cash a sale to CNOOC would bring.

RATING HIKED. Lanni's view echoed the Aug. 1 report from Institutional Shareholder Services, which emphasizes the uncertainties of success for a CNOOC deal, and the analysis by Unocal adviser Morgan Stanley, which discounts the value of CNOOC's bid because of the time required to win U.S. approval. Oppenheimer's Gheit dubbed the ISS report the "final nail in CNOOC's coffin."

Meanwhile, Bear Sterns analyst Adam Clarke reacted by raising his investment rating on CNOOC's

American Depositary Shares (CEO) and said the end of the Unocal adventure will give investors a chance to focus on CNOOC's "operational strengths, strong production growth, leverage into oil exploration activity, and strong balance sheet."

In a report, the Hong Kong-based Clarke called the damage to CNOOC's reputation "substantial" and said the maneuver demonstrated its "allegiance to its national service role."

"UNPRECEDENTED" POLITICAL OPPOSITION. Looking ahead, Clarke said he believes CNOOC's best opportunities will come from liquefied natural gas (LNG) deals with Australia. Some market rumors suggest that CNOOC's ambitions Down Under extend beyond product deals, including a possible acquisition of Australia's Woodside Petroleum.

Warning that a bid for Woodside could prove as problematic as the Unocal foray, Clarke notes that the two outfits could put some uncommercialized natural gas opportunities on the fast track by sharing a stake in those assets.

CNOOC was clearly brought up short by the unpleasant end to its Unocal adventure. In an Aug. 2 statement, the company said it would have raised its bid yet again "but for the political environment in the U.S." Calling U.S. political opposition "unprecedented," CNOOC termed it "regrettable and unjustified." The company stressed its "purely commercial objectives" and said its congressional critics made it difficult to accurately assess prospects for success.

A HIGHER PRICE? One of those critics reacted quickly to CNOOC's surrender, calling it "good news for the free market." House Resources Committee Chairman Richard Pombo (R.-Calif.) added that "CNOOC's Communist government ownership and promise of virtually interest-free loans are not consistent with these principles."

Unocal declined to comment on CNOOC's announcement, noting that it never had any agreement with the Chinese company. CNOOC made its offer in late June, only after Unocal had accepted an April bid by Chevron.

But CNOOC's talks with Unocal prompted Chevron to raise its initial offer to $64 a share. Unocal shareholders can only wonder if that figure might have ultimately climbed higher if CNOOC had been better able to navigate the tricky U.S. political waters. From Platt's Oilgram News

Platts, like BusinessWeek Online, is a unit of The McGraw-Hill Companies


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