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China unocal deal curbed by chevron { July 20 2005 }

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Unocal backs sweetened $17 bln Chevron bid

By Jessica Hall and Charlie Zhu
Wednesday, July 20, 2005; 10:15 AM

PHILADELPHIA/SINGAPORE (Reuters) - U.S. oil producer Unocal Corp. endorsed a sweetened $17 billion takeover offer from Chevron Corp., preferring it to a higher bid from China's state-run CNOOC Ltd. <0883.HK>.

Chevron , the second-largest U.S. oil company, raised its stock and cash bid to $63.01 per share from roughly $60, turning up the heat in an international battle for energy assets as strong demand and tight supply hold crude oil prices near record levels.

The improved offer for Unocal, which has assets stretching from Myanmar to the Gulf of Mexico, sets the stage for CNOOC to raise its $67 a share cash bid further.

"We're likely to see CNOOC increase its bid, which it has been signaling for a while," said Duane Grubert, an analyst with Fulcrum Global Partners.

A CNOOC spokesman said the company remained "comfortable" with its $18.5 billion bid and believed its offer had a "distinct advantage." A person familiar with the matter said CNOOC had anticipated a higher Chevron bid and was reviewing options on how to react.

But Chevron still remains the favorite to win Unocal, whose board has favored Chevron's bid partly due to concern U.S. regulators might reject the CNOOC deal based on national security grounds or the deal may be stuck in long review process. It recommended shareholders accept the sweetened offer at a shareholders' meeting already scheduled for Aug. 10.

"We're still making the bet that Chevron will prevail," Grubert said. "The politics against the Chinese bid are so severe."

CNOOC will try to convince shareholders that its deal would be approved by the U.S. government, the source familiar with the matter said.

"Price is only one issue on shareholders' minds. The other issue is to make people understand the 'certainty issue'," said the source, who spoke on condition of anonymity. "CNOOC is absolutely committed to the transaction and determined to win."

CNOOC has made some concessions in an attempt to woo Unocal. It agreed to set aside $2.5 billion in a U.S. escrow account that could be tapped by Unocal shareholders if CNOOC walked away from a deal. CNOOC also put $500 million in escrow to pay a break-up fee attached to the Chevron-Unocal deal.


Peter Schoenfeld, chief executive officer of New York-based investment firm PSAM LLC, which holds more than 1 million Unocal shares, said CNOOC's bid remained superior provided it could be approved by the U.S. government within 90 days.

But "realistically, the Unocal Board will likely still require an improvement above $67 by CNOOC to switch allegiance," he said. He believes Unocal could be worth $74 per share based on recent transactions.

Yang Liu, a fund manager at Atlantis Investment, which does not hold CNOOC shares, said CNOOC should not rush to raise its bid. "CNOOC should cool down a bit. They should wait for Unocal shareholders to vote on the Chevron deal," Liu said.

Chevron, which has a stock market value of about $120 billion, raised the cash component of its offer to 40 percent from 25 percent, offering a total $7.5 billion in cash plus 168 million new shares, equivalent to about 7.5 percent of its enlarged share capital according to Reuters data.

Unocal's timely sale of Canadian assets to Pogo Producing Co. for a higher-than-expected $1.8 billion has helped Chevron comfortably raise its bid without straining itself financially, Grubert said.

Unocal shareholders will get $27.60 in cash and 0.618 of a Chevron share for each Unocal share. Shareholders will have a choice of taking shares or cash. But if election for all cash or all shares exceeds the 60:40 split, they will get shares and cash on a pro-rata basis.

Chevron said the higher offer remained accretive to earnings per share in 2006.

Unocal shares rose 22 cents to $65.21 in morning New York Stock Exchange trading, a 3.4 percent premium over Chevron's offer price, but down 2.4 percent from a record high $66.78 a week ago.

Chevron's bid values Unocal at 11 times analysts' forecasts for Unocal's 2005 earnings, according to Reuters data. Chevron shares trade at a 2005 price/earnings ratio of 9.4 times.


CNOOC's shares initially rose 2.2 percent to HK$4.75 in Hong Kong trading on Wednesday, but pared gains to close at HK$4.675 after the news, up just 0.5 percent.

CNOOC shareholders are concerned a rise in the Chinese bid could undermine the interests of CNOOC's minority shareholders. At least one fund has sold its stake as a result.

"We expect CNOOC is now pondering whether it will raise the bid or not. It's a matter of whether it will justify shareholders' value," said fund manager Stella Mak at East Asia Asset Management Co., which holds CNOOC shares.

CNOOC's overture had sparked concern among U.S. politicians that a sale of Unocal to a Beijing-controlled company would harm U.S. national energy security. Beijing owns 70 percent of CNOOC. Its deal is backed by low- and zero-interest state loans.

(Additional reporting by Deepa Babington in New York and Wendy Lim in Hong Kong)

2005 Reuters

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