By Stephen D. Simpson, CFA
June 23, 2005
It's a staple scene of many romance movies -- a second suitor comes running into the chapel or airport at the very last moment, hoping to snatch away his/her lover before she/he runs off with a rival forever.
Giant oil companies might lack silver screen stars' good looks, but China's CNOOC (NYSE: CEO) is going to give it a try anyway.
On Wednesday evening, CNOOC finally made its move -- offering $18.5 billion in cash for Unocal (NYSE: UCL). This deal trumps Chevron's (NYSE: CVX) prior offer in size; CNOOC is offering about $1.5 billion more, entirely in cash, whereas Chevron's offer was 75% stock, 25% cash. Of course, should this deal happen, CNOOC would also be on the hook for a $500 million cash break-up fee owed to Chevron.
I didn't think CNOOC management could pull off the financing for an all-cash deal, but they made it happen. In addition to $3 billion or so in cash on hand, the deal would be funded by a $6 billion bridge loan from the Industrialand Commercial Bank of China, a $4.5 billion loan and a $2.5 billion subordinate bridge loan from its parent company, and $3 billion in bridge loans from JP Morgan (NYSE: JPM) and Goldman Sachs (NYSE: GS).
I underestimated those latter aspects. I had figured that CNOOC could call upon its parent company to play the role of sugar daddy, but I didn't think they'd get quite so much. What's more, I misjudged Morgan's and Goldman's drive to get a deal done.
Even though we now have a nice and credible package for Unocal, it might not be enough. As Chevron pointed out in response to the bid, the prior deal already has the approval of both boards and various regulatory bodies. For their part, Unocal acknowledged the bid but affirmed their allegiance to the Chevron deal -- at least for now.
What's more, political fallout could complicate the completion of a CNOOC-Unocal deal. Though CNOOC management believes that politics shouldn't, and won't, enter in to it, Reps. Richard Pombo and Duncan Hunter of California have already written to President Bush on the matter. Given that many U.S. politicians are already annoyed at China over other matters, it wouldn't surprise me if they move to block this deal.
Even if CNOOC pledged to keep U.S.-based energy in the U.S. (or sold the U.S. assets outright), this deal would still represent a large foreign acquisition of American-controlled energy assets. Given the sometimes prickly relations between the U.S. and China, it might be hard for many people to believe that this deal would serve the United States' best interests in the long term.
While I'm not going to count CNOOC out just yet, I would say that its chances of winning aren't good. That said, CNOOC is making the most compelling argument it can -- cold, hard cash on the barrel, and plenty of it.
Though I'd probably prefer the CNOOC deal if I were a Unocal shareholder, the history of M&A shows that the best financial deal for shareholders doesn't always carry the day. Whatever the conclusion, expect this deal to get even more interesting before a final winner emerges.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (which means he's neither long nor short the shares).
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