Backlash ends Chinese bid for Unocal

NEW YORK/SINGAPORE - China's CNOOC Ltd has abandoned a bold US$18.5 billion offer to acquire Unocal Corp in the face of strident political opposition, clearing the way for the US oil producer to conclude a deal with larger US rival Chevron Corp.
The move ends a takeover battle that became a flashpoint for Sino-American trade relations and the global scramble to secure energy supplies, spawning Congressional hearings and drawing vehement indignation from US lawmakers.

Financially, CNOOC's cash offer in late June easily topped Chevron's sweetened US$17.4 billion bid for Unocal, whose shares on Tuesday began trading roughly in line with the Chevron bid.

But CNOOC's higher offer was overshadowed by a fierce backlash in Washington over a Beijing government-controlled company attempting to buy American oil assets as crude prices raced to record highs.

"The political reaction has scared off the board of Unocal, the shareholders and CNOOC itself," said Edmund Harriss, fund manager at Guinness Atkinson, which holds CNOOC shares.

"I don't think anybody really anticipated quite what a maelstrom they were entering into."

Calling the political response "regrettable and unjustified," CNOOC said in a statement it was reluctantly withdrawing its offer. It said it considered increasing the offer, and would have done so were it not for the political environment in the United States.

"This political environment has made it very difficult for us to accurately assess our chance of success, creating a level of uncertainty that presents an unacceptable risk to our ability to secure this transaction," the company said.

'IT WAS BIG, ALRIGHT'

Some members of the US Congress had sought to block a CNOOC deal almost from the start. Allowing Unocal to pass into Chinese hands would boost Beijing's leverage over Central and Southeast Asia, some said, while others complained China was subsidising the bid with interest-free and low-interest loans.

Last week a congressional conference committee added a provision to a broad energy bill that would have delayed the necessary government review of CNOOC's offer by months.

"No surprise -- it looks like Chevron has pulled off a pretty good political campaign and got a lot of support," said Jason Putman, an analyst at Victory Capital Management in Cleveland, Ohio, which owns Unocal shares.

In Washington, critics of the Chinese bid welcomed CNOOC's decision to bow out of the race.

"The big idea was that Beijing could buy its way into the American oil business. It was big, alright, but not well-considered, and it collapsed largely because Americans still know the difference between cash and freedom," said a spokesman for the House Energy and Commerce Committee Chairman Joe Barton. "They thought we could be bought."

END OF A LONG ROAD

Though CNOOC did not place a bid on the table until late June, it had set its sights on Unocal -- which boasts a prized portfolio of Asian assets stretching from Indonesia to Myanmar -- much earlier.

CNOOC was said to have been in talks to buy the El Segundo, California company as early as January, but failed to put in a bid during the auction process. Instead, Chevron won the race to buy Unocal for about US$16.4 billion in April, an offer it was forced to sweeten last month when faced with the counter-bid.

Though Unocal steadfastly backed Chevron through the battle, it made clear in public filings that it had been willing to accept the Chinese bid under certain conditions -- including a higher offer -- which CNOOC chose not to meet.

CNOOC shares, which had struggled over fears of a bidding war and the assumption of excessive debt, rose to a record high in Hong Kong trading on Tuesday before the company withdrew its bid, gaining 2.8 per cent to HKUS$5.50. Its shares closed up nearly 6 per cent on the New York Stock Exchange.

Unocal shares, which have risen nearly 50 per cent since the start of the year, ended up 16 cents at US$64.53, while Chevron shares rose nearly 2 per cent to US$59.56 a share on the NYSE.

Unocal shareholders are due to vote on the Chevron offer on Aug. 10. If they approve it, the deal could close on that day.

Unocal would not comment on the CNOOC pullout except to say it believes a Chevron deal provides the best value for shareholders. Chevron did not address the CNOOC move either but said it looked forward to closing the deal on Aug. 10.

- REUTERS