China in $28bn move on Unocal

HONG KONG - China's largest overseas oil and gas producer, CNOOC, may bid about US$20 billion ($28 billion) in cash for Unocal Corp, the eighth biggest US oil company, trumping an offer from Chevron.

The Beijing company will offer about US$71.50 a share, 10 per cent higher than a bid made by California company Chevron on April 2, people familiar with the plan said.

It would be the world's second-largest cash offer for a company in at least six years.

China needs overseas energy assets to help fuel its US$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 last year.

"It's a relatively high price to pay," said Marc Faber, who oversees about US$300 million as managing director of Hong Kong-based Marc Faber. "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 US$3 billion in cash and borrow the remainder from banks to finance the bid, the sources said.

CNOOC will seek approval for a bid from its eight-member board as soon as today, they said.

In March, the company's independent directors delayed a vote on the issue and requested more information to address concerns that an acquisition carried too much risk in terms of strategy and funding, they said. Chevron is offering about US$62 a share in cash and stock for Unocal, based in California.

The acquisition would boost its daily output by about 16 per cent.

CNOOC needs to move quickly on its bid for Unocal because the US Securities and Exchange Commission is poised to approve the disclosure documents on Chevron's bid.

The Federal Trade Commission, the US antitrust regulator, approved Chevron's takeover plan on June 10.

The Chinese company's bid would have to be approved by US 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 US 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 US$360 million at Pacific Heights Asset Management in San Francisco, including Chevron stock.

"We're talking about oil and this at 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, said a May 26 filing made by Chevron to the US Securities and Exchange Commission.

CNOOC is attempting to buy Unocal as crude oil rose to a record of more than US$59 a barrel in New York. Crude oil for July delivery rose 90c, or 1.5 per cent, to US$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 US.

Goldman Sachs Group and JPMorgan are advising CNOOC on the transaction. The investment banks would share about US$200 million in fees for a successful takeover of Unocal, the sources said.

Goldman spokesman Edward Naylor and JPMorgan spokeswoman Megan Donald declined to comment.

- BLOOMBERG