Politics complicate Unocal takeover tussle

The outcome of a corporate takeover is not always a case of the highest bidder wins.

In the takeover battle for US oil and gas producer Unocal Corp, political risks have raised the stakes for arbitrage fund managers hoping to make a fast buck.

Chevron Corp is offering US$17 billion ($25.16 billion) to take over US oil and gas producer Unocal. It sweetened its stock and cash bid to counter rival suitor CNOOC Ltd.

But CNOOC's US$18.5 billion offer is still the higher bid on the table, though it faces stiff political opposition in Washington and uncertainty over the completion of a deal.

Beijing could also order CNOOC to abandon its bid to avoid complicating Sino-US ties, fund managers say.

"None of us can read the Chinese government. It is very difficult to understand what is meaningful to the government at this point," said a fund manager at a US-based arbitrage fund holding Unocal shares.

"This is the first time that I have gone through something like this," said the fund manager, who declined to be identified.

The stakes are high for arbitrage funds, short-term investors who specialise in mergers and acquisitions, corporate restructuring and bankruptcies.

By some estimates, up to 30 per cent of Unocal's shares are in the hands of arbitrageurs partly because of the US$18.5 billion counter-bid from China's largest offshore producer.

Arbitrageurs typically hold about 15 per cent of the shares of takeover targets.

The arbitrageurs try to maximise returns by buying shares of takeover targets while building short positions in the shares of the buyers. But so far they have made less money than expected from the Unocal takeover battle, some experts estimate.

CNOOC's unsolicited bid for Unocal has drawn ferocious opposition from US politicians, who say a sale of the California-based oil company with premium assets in Asia to a Beijing-controlled outfit would harm US energy security.

Due to regulatory risks surrounding the CNOOC takeover, Unocal shares have been trading at below CNOOC's cash bid of US$67 per share but above Chevron's stock-and-cash bid, now at US$63.45.

The wider spread between the CNOOC offer and Unocal share price, which last traded at US$64.85, indicates the market believes a Chevron-Unocal deal is more likely. How Unocal's shares perform in the next few days will hinge on whether CNOOC raises its cash offer or withdraws it, experts say.

A source close to the process said today that CNOOC had not decided its next move and would hold more talks next week.

"It will get a sense of that over the next few days. Clearly the management is very cautious," the source said, when asked about the most likely outcome.

"CNOOC is dealing with something beyond the normal commercial considerations. It is in unpredictable terrain."

Time is running out as Unocal shareholders will vote on the Chevron deal, which Unocal's board backs, on August 10.

CNOOC is worried the US Congress will take more steps to delay its bid. A longer delay means CNOOC must pay a higher premium to compensate Unocal shareholders.

The US Congress voted last week to approve a delay of up to 141 days in a review of the offer. The vote shocked CNOOC, which expected a maximum 90-day review process, sources said.

If CNOOC withdraws its bid, Unocal's share price is expected to fall directly to the level of Chevron's stock and cash offer.

Arbitrageurs have been scrambling to gather information to predict CNOOC's new move.

US arbitrage fund PSAM chief executive Peter Schoenfeld said he believed CNOOC could still win if it raised its offer and the US government was unlikely to reject the deal.

"On the pure financial aspect and regulatory aspect, the chance of them getting turned down is very small," he said, echoing the view of several funds holding Unocal shares.

- REUTERS