China’s government-controlled CNOOC Ltd. withdrew its $18.4 billion bid for Unocal Corp. on Tuesday, ending a politically charged takeover battle that highlighted the United States’ growing apprehension about the economic rise of the world’s most populous country.
CNOOC’s retreat clears the way for Chevron Corp., the second-largest U.S. oil company, to complete its acquisition of Unocal next week, even though its cash-and-stock offer is currently worth $700 million less.
Chevron had several factors working in its favor — regulatory clearance, the support of Unocal’s board and the backing of U.S. lawmakers, who questioned whether economic and national security interests would be threatened if a company with significant ties to China’s Communist government were to buy a major U.S. oil company.
Those misgivings virtually ensured CNOOC’s bid would have to undergo a rigorous — and possibly tempestuous — review that would have prevented Unocal from being sold for at least another six to nine months, with no guarantee that the deal would ever be completed.
In a strongly worded statement, Hong Kong-based CNOOC said it might have raised its bid even higher, if not for the political backlash.
“The unprecedented political opposition...was regrettable and unjustified,” CNOOC said. “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.”
Chevron spokesman Don Campbell declined to comment on CNOOC’s remarks, saying the company is focused on assuring a smooth transition after its Unocal acquisition is complete.
The marriage is expected to be consummated Aug. 10 when Unocal shareholders are scheduled to formally vote on the offer. CNOOC’s withdrawal from the bidding is anticipated to turn the vote into a formality.
Unocal spokesman Barry Lane said the company’s board remains convinced that it accepted the superior offer.
Oppenheimer & Co. Fadel Gheit agreed with Unocal’s rationale, given the uncertainties surrounding CNOOC’s bid. But he doubted a bid from another foreign oil company would have met such stiff opposition.
“If (Netherlands-based) Royal Dutch Shell had come up with an offer $2 per share higher, then Chevron wouldn’t be getting Unocal,” Gheit said. “Let’s face it: We are treating the Chinese completely different from most other countries.”
University of Maryland business professor Peter Morici believes different standards must be applied to China because the country hasn’t lifted its own restrictions on foreign investments and, until recently, refused to lift currency controls that has enabled it to build a huge stockpile of U.S. dollars.
“China is not playing by the same rules as everyone else,” said Morici, who specializes in international economics. “China serves its own interests and no one else’s. They are not into mutual benefits.”
Gheit predicted China eventually will retaliate against Chevron for mining its political connections in Washington D.C. to fuel the opposition against CNOOC’s bid. “China is probably already thinking, ’We don’t know how and we don’t know when, but we will get (Chevron) for this,”’ he said. “This will go down in the history books in China.”
Chevron already is working with CNOOC on oil projects near China and Australia. Campbell declined to discuss how that relationship might change because of the tensions that flared in the Unocal tug-of-war.
“This deal is good for Chevron — it’s something they needed to do — but if I were Chevron, I would be calling up China right now, saying, ’Come, let us reason together,”’ said William Ferer, director of research for W.H. Reaves & Co., an institutional money manager.
Tuesday’s resolution pleased investors.
With CNOOC’s bid gone, Unocal’s shares are likely to fluctuate with the value of Chevron’s bid, which was worth $64.41 per share, or $17.7 billion, after Tuesday’s developments.
Although Unocal’s shares have slipped from their recent 52-week high of $66.79, stockholders are still reaping a big gain from the El Segundo-based company’s decision to sell itself. The company’s market value has climbed by about $6 billion, or nearly 50 percent, during the past seven months.
San Ramon-based Chevron initially agreed to buy Unocal in early April for $62 per share. Unocal — prized for its oil and natural gas supplies in Asia and the Gulf of Mexico — also had been negotiating with CNOOC and another unidentified bidder believed to be Italy-based Eni SpA.
After Chevron had already received all the required regulatory approvals to buy Unocal, CNOOC tried to break up the marriage six weeks ago with an all-cash offer of $67 per share.
CNOOC’s move triggered a political furor that reflected the United States’ concerns about the China’s increasing financial muscle and its bustling economy’s growing thirst for oil.
Many lawmakers also fretted Unocal’s oil drilling might have military applications that could some day be used against the United States.
Most industry experts doubted those concerns were well founded, but Morici thinks Congress raised legitimate issues. “I don’t know why we should give our oil technology or any other kind of technology to an authoritarian country like China,” he said.
Although he didn’t oppose CNOOC’s bid, Sen. Charles Schumer, D-New York, also criticized China’s treatment of workers and its resistance to foreign investment in its own country.
“The furor over China treating American companies and workers unfairly up and down the line is real,” Schumer said in a statement. “If China were open to American companies buying Chinese companies, I think CNOOC would have had a much easier time of it.”
Hoping to allay the fears about its bid, CNOOC had agreed to sell Unocal’s U.S. assets and promised to retain all of Unocal’s workers — something that Chevron is unlikely to do. Even as it dropped its bid, CNOOC reiterated Tuesday that its interest in Unocal was “purely commercial.”
CNOOC’s ownership structure also raised hackles in Congress. The company is part of the China National Offshore Oil Corp., which is 70 percent owned by China’s government — an arrangement that helped secure favorable financing terms unavailable to Chevron.
Raising concerns about the financing became a pivotal issue because it made it more difficult for CNOOC to raise its bid without fueling the perception that its offer was being bankrolled by a deep-pocketed government, Gheit said. “They didn’t want to put even more fuel on that fire, so it became a tremendously uphill battle for them.”
Despite the prickly politics, Unocal’s board appeared poised to accept CNOOC’s offer until Chevron agreed to sweeten its offer two weeks ago.
CNOOC’s board had authorized a bid increase to $69 per share, but the company’s chairman, Fu Chengyu, declined unless Unocal agreed to pay the $500 million fee that would have been owed to Chevron if its bid lost out. Unocal refused, and reaffirmed its commitment to Chevron.