Politicians may be all worked up about the security implications of a Chinese oil company's efforts to buy an American one, but analysts...
LOS ANGELES — Politicians may be all worked up about the security implications of a Chinese oil company’s efforts to buy an American one, but analysts say Unocal’s board is focused on dollars and cents as it decides whether to accept Hong Kong-based CNOOC’s $18.5 billion offer.
“The major job for the directors is to pursue a deal that is the best deal for the Unocal stockholders,” said Michael Bazdarich, an economist at the University of California, Los Angeles. “That’s got to be their job No. 1. They’re not there to do foreign policy for the United States or trade policy.”
Unocal’s board could make a decision on the bid as early as today and CNOOC may even sweeten its offer, according to the Financial Times.
A spokesman for El Segundo, Calif.-based Unocal declined to discuss details of board meetings, saying the company doesn’t make the agenda public.
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The 10-member board already is on record recommending shareholders approve an earlier, $16.6 billion takeover bid by San Ramon, Calif.-based Chevron. Shareholders are to vote on that bid Aug. 10.
CNOOC has offered $67 a share in cash, while Chevron has offered shareholders $65 a share in cash, 1.03 shares of Chevron stock or a combination of cash and stock. But the total purchase would be made with 75 percent stock and 25 percent cash.
“As we speak, that means the value of the offer on the table is $60.65 per share,” said Fadel Gheit, senior energy analyst for Oppenheimer in New York. “It’s $6.10 below what Unocal closed at and a discount of 9.1 percent.”
Shares of Unocal have been priced above $65 since June 23. The stock closed yesterday at $66.75, up 84 cents, on the New York Stock Exchange. It added another 25 cents in late trading.
“The Chevron offer is a bit less than the share price right now, given that it’s gone up,” said James Barth, senior fellow at the Milken Institute in Santa Monica, Calif.
Judging by the stock price alone, that would seem to give CNOOC’s cash offer the edge on the basis of economic value to Unocal shareholders.
But the Chinese firm’s bid comes with almost certain regulatory hurdles, while the Chevron offer has cleared them.
“It could be closed the day after shareholders vote, assuming the shareholders approve it,” said Gene Gillespie, an oil and gas analyst for Howard, Weil, Labouisse, Friedrichs in New Orleans.
As Unocal’s board contemplates the CNOOC offer, it must consider the risk of a long government review and the possibility regulators could decide to block the merger.
“There’s time risk and there’s closing risk,” Gillespie said. “There’s an elongated review process and it doesn’t close until sometime next year, and there’s a risk that it will never close.”
A long regulatory limbo could also hurt the stock price.
“The uncertainty itself generates a cost and of course means the Chevron offer is worth somewhat more, because it’s an offer on the table and a vote can be taken fairly soon,” Barth said. “There’s more uncertainty on what could happen with the competing offer.”
Adds Barth: “If [Unocal board members] focus on political factors, and it turns out shareholders lose value in their investment, they could go after the board of directors.”
If Unocal decides to accept the CNOOC offer, a full review by the Committee on Foreign Investments in the United States is all but certain, according to William Reinsch, president of the National Foreign Trade Council and a former high-ranking official in the Commerce Department in the Clinton administration.
Reinsch said he does not believe the interagency panel will be influenced much by the alarms being sounded by members of Congress.
“Where they are most sensitive to the politics of the situation is on the question of referring the case for a full 45-day investigation following the initial 30-day review,” he said. “But the truth is, that’s not a very high threshold.”
In addition to assessing the potential economic and security threats if CNOOC takes over Unocal, Reinsch said the panel should consider the long-term impact if the U.S. were to reject the deal based on fears of China’s intentions.
In other words, rejecting the deal on national security grounds — and thereby casting China’s intentions in a negative light — might hinder the U.S. economic and policy goals abroad.
“You want to take into account the counterfactual situation,” he said.
Former CIA director James Woolsey yesterday warned the House Armed Services Committee that CNOOC’s proposed takeover of Unocal, the ninth-largest U.S. oil and gas firm, posed a threat to U.S. security.
“We are dealing with a takeover attempt by the most powerful communist dictatorship in the world, an organ of its state for all practical purposes attempting to take over an American corporation,” Woolsey told the panel.
Seeking to defuse the growing chorus of opposition, CNOOC has pledged to cooperate with U.S. officials and began running ads in Washington publications with the message that it deserves a fair review.
Economist Bazdarich said he thinks the CNOOC offer will win out in the end.
“I think, anybody who is against this … they’re not informed and looking at the whole set of realities,” Bazdarich said. “If this were a defense contractor that would be one thing, but this is an oil company. There’s nothing strategic unless some demagogue makes it an issue.”