CNOOC seen needing to raise bid to win Unocal

SINGAPORE - Chinese oil producer CNOOC Ltd may need to raise its bid for Unocal Corp to more than US$19 billion ($28.04 billion) to win the race for the US oil and gas producer, investors and analysts have said.

CNOOC has board authorisation to step up its bid to US$69 a share, from US$67 now, but analysts say a knock-out price is needed to prise Unocal's board away its preferred buyer, Chevron Corp, even though CNOOC's offer is already higher than Chevron's.

Without a big jump in CNOOC's bid, Unocal shareholders -- many of which are now short-term arbitrage funds -- are likely to back the sweetened stock and cash offer of US$63 per share from Chevron, the second-largest US oil company.

"The arbitrageurs have been buying the stock, and they are sitting on huge positions. All they care about is closing it and they have made a couple of bucks already," said a senior investment banker who is not directly involved in the bidding process for Unocal.

Arbitrage funds specialising in mergers and acquisitions, corporate restructuring and bankruptcies, have snapped up Unocal shares since CNOOC announced its counter-bid in late June, according to people familiar with the situation.

Some also built short positions in Chevron or CNOOC, so that they might gain if shares in one of the would-be buyers were to fall.

Unocal shares have jumped 20 per cent in the past 2 months on expectations of a bidding war. The shares ended down 6 cents at US$64.90 on Thursday, above Chevron's increased offer, signaling the market expects more drama in the takeover battle.

Chevron's sweetened offer narrowed the gap between the US firm's offer and CNOOC's bid to US$4 a share from US$7.

CNOOC has said it will stick with its cash offer of US$67 per share, dousing speculation of an immediate increase in its bid. The company is bent on closing the Unocal deal and unlikely to look for alternative targets now, despite speculation it may go after Australia's Woodside Petroleum Ltd. or Marathon Oil Corp of the United States, said people familiar with CNOOC's strategy.

For now, Chevron appears the favourite to take home Unocal, analysts say. It has room to up its bid again towards US$66 a share without looking like it overpaid for the company, said Fulcrum Global Partners analyst Duane Grubert.

Usually, in a bidding contest, share prices of the takeover target will stay firmly above the higher bid price.

But due to the regulatory uncertainty surrounding the Chinese bid, Unocal shares are still trading below the CNOOC offer -- reflecting the likely lengthy approval process, or so-called "time value of the money".

- REUTERS