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Cnooc Drops Unocal Bid, Clearing Way for Chevron --- Chinese Oil Company Cites U.S. Congress's Opposition In Ending Takeover Battle

By Matt Pottinger in Beijing, Kate Linebaugh in Hong Kong and Russell Gold in Dallas
1,798 words
3 August 2005
The Asian Wall Street Journal
A1
English
(c) 2005 Dow Jones & Company, Inc. To see the edition in which this article appeared, click here http://awsj.com.hk/factiva-ns

Cnooc Ltd. of China abandoned its effort to acquire American oil producer Unocal Corp., ending a long-running takeover battle that has created new tests for U.S.-China ties amid increasing economic friction.

The Chinese company's withdrawal means rival bidder Chevron Corp. will almost certainly win control of Unocal on Aug. 10, when Unocal shareholders plan to vote on Chevron's offer of $17.7 billion in cash and stock.

In reaching for the midtier U.S. oil company, Cnooc, considered to be one of China's most modern and Western-minded companies, fell victim to a blast of anti-China sentiment in Washington. Tensions between the two nations have grown recently as Beijing has complained of U.S. efforts to limit imports of Chinese textiles, steel and televisions. Officials in Washington have fired back about pirated goods from China entering the global market and about Beijing's currency policies, which have helped keep Chinese exports inexpensive.

Congressional opposition in the U.S. was the major factor behind Cnooc's decision to quit, the company said in a statement yesterday. Cnooc's $18.4 billion offer for Unocal was already $800 million higher than Chevron's, and company executives concluded that Congress would either kill the deal outright or place so many hurdles in its path that the cost of completing it would rise too high.

Cnooc would have sweetened its bid "but for the political environment in the U.S.," the Cnooc statement said. "We are reluctantly abandoning our higher offer to the clear disadvantage of Unocal shareholders and employees."

An adviser to Cnooc was even blunter. "There are people in the U.S. who are fundamentally against and afraid of China," he said. "Beijing has always been suspicious that the U.S. has dual standards. This is the perfect example. It's a disgrace."

But Cnooc made important missteps that also contributed to the failure of its bid, people close to the company concede. Chairman and Chief Executive Fu Chengyu neglected to get his own board behind the bid until late in the game, missing an early chance to clinch a deal. Cnooc's bid was nonetheless the largest and most sophisticated takeover attempt by a Chinese company to date, involving White House-connected lobbyists and an army of Wall Street advisers and media strategists.

For Cnooc, the American-educated Mr. Fu and the phalanx of advisers to have stumbled suggests just how steep a learning curve Chinese companies still face in their endeavor to invest overseas. The failed bid also is a significant setback for Mr. Fu's ambition to expand Cnooc in one fell swoop, rather than through the piecemeal overseas investments the company has made in the past. The company's options for picking up sizable oil-and-gas assets in Asia are limited, with many of Asia's best prizes locked up by oil companies in countries that harbor the same desire for long-term energy security as China.

For the U.S., the saga has raised the possibility of a host of unintended consequences. There was no immediate official response from Beijing, but analysts and businessmen worry that Chinese officials might retaliate against U.S. businesses. Another possibility is that Chinese energy companies, mandated to provide for China's massive and growing energy needs, will increase their dealings with what Washington considers "rogue states" if Chinese companies can't buy Western-controlled energy assets.

The reaction to Cnooc's bid by the U.S. Congress, which took the highly unusual step of setting up legislative roadblocks against a deal that at that point Cnooc hadn't even signed, also has prompted international political and business leaders to warn against what they view as a disturbing tilt by America toward protectionism.

"The world is watching," Singapore Prime Minister Lee Hsien Loong said last month of America's handling of the Cnooc bid and other trade frictions with China. "If the U.S. yields to short-term political pressures and turns protectionist, the damage to U.S. interests in Asia and your standing world-wide will be long-lasting."

Jason Kindopp, a China analyst for the Eurasia Group, said he expects the Chinese government to retaliate by favoring European over U.S. companies for big-ticket purchases such as airplanes or power-generation turbines. Beyond economic issues, he says there is "a greater risk of security tensions running rampant."

In its quest for Unocal, one of Cnooc's earliest mistakes might have been its most costly. In March, Cnooc had an edge over Chevron and Italy's ENI SpA, which was also interested in buying Unocal. The Chinese company's head, Mr. Fu, had been talking to Unocal Chairman and Chief Executive Charles Williamson since December, longer than the two other bidders, and Unocal was receptive to Cnooc's offer to retain nearly all Unocal staff. Unocal called for final bids to be submitted on March 30.

But a day before that deadline, Mr. Fu informed Unocal that Cnooc couldn't submit a proposal in time, opening the way for Chevron to strike a deal a few days later to buy Unocal for $16.7 billion in cash and stock. As it turned out, Mr. Fu was meeting resistance from his own board, according to people close to Cnooc. These people say that the board hadn't been briefed on the planned acquisition until shortly before the Unocal deadline. At least one Cnooc independent director, Goldman Sachs economist Kenneth Courtis, wanted more time to study the plan, according to Cnooc advisers.

Mr. Fu eventually received his board's backing and made a renewed bid for Unocal in June, offering nearly $2 billion more than Chevron. But by then the challenge facing Cnooc was considerably more daunting: It would have to break up a tentative oil deal between two American oil companies.

To defend its deal, Chevron sprung to action with a lobbying effort that helped uncork months, even years, of pent-up congressional frustration with China over everything from theft of American intellectual property to China's expanding military budget. Republicans and Democrats, sometimes with the assistance of Chevron, wrote open letters to U.S. President George W. Bush criticizing Cnooc's bid as unfair, because it was backed by low-interest loans from Chinese state-owned institutions. Two Republican lawmakers, including the chairman of the House Energy and Commerce Committee, wrote to Mr. Bush stating that the Chinese "are great economic and political rivals, not friendly competitors." Ultimately, legislation aimed at hindering the bid was passed.

Cnooc tried to fight back, placing advertisements in newspapers in Washington, but the effort lacked traction. But the congressional backlash did have an effect on Unocal investors, who began to look more unfavorably on Cnooc's bid, which now appeared to face long delays. People who know Mr. Fu said he was surprised by the intensity of the reaction in Congress.

He wasn't the only one. Business leaders ranging from Exxon Mobil Corp. Chief Executive Lee Raymond to HSBC Holdings PLC Chairman John Bond have warned recently against the threat of protectionism represented by efforts to block acquisitions on political grounds.

In China, the moves by the U.S. Congress have added to widely held suspicions that Washington is choking off China's access to sources of energy. Chinese oil companies China National Petroleum Corp. and China Petrochemical Corp. have made deals in Iran and Sudan against the wishes of Washington, which considers them both rogue states. But Cnooc's failure to secure energy reserves through a different route, buying them on the open market in the form of Unocal, has bolstered the view that China has little choice but to search for energy in countries the U.S. shuns.

Zhou Tianyong, deputy head of research at China's Central Party School, said that behind every failed attempt by Chinese companies to win big oil contracts abroad "is the shadow of American companies and the American government."

The Cnooc saga has fueled more general skepticism in China about U.S. motives. "Free trade for the U.S. isn't really free and fair, it's just what's best for the U.S.," said Xing Houyuan, a senior researcher at the Chinese Academy of International Trade and Economic Cooperation, a think tank related to China's Ministry of Commerce. Ms. Xing, speaking after Cnooc had signaled its withdrawal, added: "This isn't going to have any positive impact for the U.S."

Indeed, U.S. businessmen in China privately voice worries that Chinese officials may retaliate by choosing to award contracts or investment opportunities to non-American companies, a tactic China has used in the past.

"I can't imagine that big U.S. companies with interests in China will not be watching this with some concern," said Robert Kapp, a business consultant based in Washington state and former president of the U.S.-China Business Council, as word of Cnooc's decision spread. "I still don't think it's clear that we have reached some kind of tipping point after which it is impossible to return the ship of U.S.-China relations to an upright position. But the trends of the past six months aren't particularly positive."

Energy analysts in Beijing are already speculating that Chevron, the lobbying of which helped ignite the anti-Cnooc response in Congress, can forget about trying to expand in China.

For Chevron, clinching the deal while helping stir up Chinese anger could generate problems. Once the deal closes, the company will become the largest Western energy company in the Asian-Pacific region in terms of reserves of oil and natural gas. But Chevron will need China as a customer, particularly for a large gas project off the Australian coast known as Gorgon, where Cnooc has tentatively agreed to pay $22 billion for a 12.5% ownership stake and a 25-year supply of gas. Negotiations, however, are still continuing. "The owners of Gorgon need the Chinese more than the Chinese need Gorgon," said Houston energy investment banker Matthew Simmons.

Among bankers and lawyers counting on big fees from advising Chinese companies on international acquisitions, few expect China's appetite to be dimmed.

"It's a minor hiccup and nothing more," Nick Seddon, managing director at the DLA Piper Rudnick Gray Cary law firm in Hong Kong, said yesterday. "It was a very big deal. It was always going to be a hard one."

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Jason Dean in Beijing contributed to this article.

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