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Major advisory firm backs Chevron-Unocal deal

A major investment advisory firm on Monday recommended that Unocal Corp. accept Chevron Corp.'s $17.5 billion takeover bid instead of entangling themselves in the political turmoil that deals with the bid from CNOOC Ltd.
/ Source: The Associated Press

A major investment advisory firm on Monday recommended that Unocal Corp.'s shareholders accept Chevron Corp.'s $17.5 billion takeover bid instead of entangling themselves in the political turmoil facing a slightly higher offer from China's government-owned CNOOC Ltd.

The endorsement of Institutional Shareholder Services, or ISS, provides San Ramon-based Chevron and El Segundo-based Unocal with a little more firepower as they meet with investors this week to rally support for their proposed marriage. Unocal's board has already voted in favor of the Chevron offer.

Many of the nation's largest institutional investors, including public pension funds and mutual funds, rely on ISS's opinions to help them decide on how to vote on difficult decisions that come up for shareholder votes. Another large shareholder advisory service, Glass, Lewis & Co, expects to distribute its analysis of Chevron's bid later this week.

A shareholder vote on the Chevron bid is scheduled for an Aug. 10 meeting in Los Angeles.

Unocal Chairman Charles Williamson said he was "extremely pleased" to win ISS's support. A CNOOC spokesman in New York didn't immediately return calls Monday.

ISS's blessing of the Chevron's stock-and-cash offer — valued at $63.71 per share Monday — represents another blow to CNOOC and its all-cash bid of $67 per share, or $18.4 billion.

CNOOC — part of the China National Offshore Oil Corp. — has been trying to fend off strident political opposition since it first tried to trump Chevron with its offer six weeks ago. Lawmakers are concerned that the sale of a U.S. oil company to a company backed by China's communist government could imperil national security.

The political backlash is the main reason that ISS sided with Unocal's board in deciding CNOOC's current bid isn't worth the uncertainty looming over it.

ISS estimated it will take six to nine months for CNOOC's bid to navigate through all the political and regulatory hurdles in the United States and China, with no guarantee that the deal would ever be completed. If Unocal's shareholders give their approval, Chevron could close its deal before the end of next week.

The true value of CNOOC's bid is $65.38 per share, assuming the offer remains in limbo for the next six months, ISS concluded. The calculation is based on an "opportunity cost" of $1.62 per share that Unocal shareholders would absorb for rejecting Chevron's "bird-in-hand" bid to pursue a potentially larger payoff next year.

If the political wrangling lasts even longer than expected, ISS warned that the CNOOC bid could unravel completely, "with Unocal shareholders left holding the (empty) bag."

To compensate Unocal shareholders for the added risks, ISS suggested CNOOC will have to pay at least 10 percent more than Chevron's bid. Using that benchmark, CNOOC would have to raise its bid to around $70 per share — a price that some industry analysts also agree would probably be too tempting for Unocal to pass up.

CNOOC already has board approval to raise its bid as high as $69 per share, but hasn't made a move since Chevron raised its initial bid from $62 per share two weeks ago. The Chinese company's silence caused ISS to question whether CNOOC is still serious about buying Unocal.

In another development, Unocal and Chevron resolved a potential legal headache by settling a shareholder class-action lawsuit that objected to the deal. The settlement, reached last week, still requires the approval of a California state court.