Unocal Reveals Portrait of Negotiations

By Ben White
Washington Post Staff Writer
Tuesday, July 26, 2005

NEW YORK, July 25 -- On July 16, Chinese oil company Cnooc Ltd.'s politically explosive bid for Unocal Corp. hung in the balance.

A day before, Unocal chief executive Charles R. Williamson had informed his counterpart at Cnooc, Fu Chengyu, that if Cnooc bumped its bid up from $67 per share it could probably knock out rival bidder Chevron Corp. and seal a deal.

But in a phone conversation the next day, Fu balked.

He told Williamson that Cnooc would consider raising its bid only if Unocal dropped a demand that Cnooc pay a $500 million breakup fee to Chevron, which already had a signed merger agreement with Unocal. Fu also demanded that in return for a larger offer, Unocal start trying to convince members of Congress that a Cnooc deal would not threaten U.S. national security.

These vivid details come from an updated proxy statement Unocal sent to shareholders and filed with the Securities and Exchange Commission on Monday. Unocal filed the proxy to update shareholders on the terms of Chevron's latest offer. But the filing also provides a rare behind-the-scenes look into a high-profile takeover fight that has captivated Wall Street and stoked political fears in Washington about the ambitions of a rising China.

According to the proxy statement, Williamson "expressed dissatisfaction" to Fu that the Chinese executive would seek to negotiate the breakup fee, which Williamson considered a settled issue. And he told Fu that Unocal could not start lobbying right away because to do so would violate the company's agreement with Chevron.

Williamson held a conference call with Unocal directors on July 17 and told them about his conversation with Fu, the filing stated. Despite the Cnooc chief executive's refusal to raise his bid, the board told Williamson it was still leaning toward Cnooc. The directors instructed Williamson to tell Chevron chief executive David J. O'Reilly that if Chevron wanted to keep the support of Unocal's board, the company would have to increase its offer by July 19, the day of the next scheduled Unocal board meeting.

Williamson made the call and gave O'Reilly the deadline. On July 19, O'Reilly called Williamson and raised Chevron's bid from about $60.50 per share to $63.01, including a larger cash portion. That night, Unocal's board approved the revised offer, and it issued a news release the next morning urging shareholders to approve it in an Aug. 10 vote.

That is where the fight for Unocal stands -- but it is by no means over.

Cnooc has not dropped out and may yet raise its bid. The company refused to comment on its plans or on Unocal's new proxy statement on Monday. Several Unocal shareholders said they viewed the proxy as evidence that Unocal's board is open to Cnooc and would be responsive to a higher offer.

Several shareholders said they believed Cnooc would wait to raise its offer until it learns the fate of legislative attempts to slow down or derail its bid. "We can only hope that Cnooc is not suffering from Washington fatigue," said Peter Schoenfeld, who has been supportive of Cnooc's bid and whose hedge fund firm controls about 650,000 Unocal shares.

The Unocal filing also details previously undisclosed provisions of Cnooc's proposed financing. In addition to questions about energy security, some members of Congress have said Cnooc benefits from below-market financing courtesy of Beijing. Cnooc has said its government-controlled parent company will provide $7 billion in financing, including a $2.5 billion, 30-year, interest-free loan and a $4.5 billion, 30-year loan at 3.5 percent interest. The Unocal filing on Monday said the interest on the $4.5 billion loan could be waived if Cnooc's credit rating falls below a certain level.

The filing also describes why Unocal directors believe Chevron's latest bid -- valued at about $17.3 billion -- is superior to Cnooc's $18.5 billion offer. It says Unocal's board would be willing to accept the higher risk associated with Cnooc's bid if the Chinese company offered a "sufficient" price. But it says Cnooc has so far failed to offer that price. Based on Unocal's apparent willingness to accept Cnooc's $67-per-share offer even before Chevron raised its bid, shareholders say they believe Unocal is demanding that Cnooc pay a 10 percent premium over whatever Chevron offers. That would mean Cnooc would need to bid slightly over $70 per share to secure Unocal's support.

Among other risks to a Cnooc deal, the filing cites proposed congressional legislation to block the deal or to create delays that could add "six to nine months" to the approval process. Barring any legislation, final authority to approve or block a Cnooc bid would rest with the Bush administration.

The proxy also includes a draft copy of a tentative agreement between Unocal and Cnooc. The agreement includes the creation by Cnooc of a $2.5 billion U.S. escrow account. According to the agreement, Unocal could try to claim the funds if Cnooc violated a merger agreement. But the proxy describes the escrow provisions as "complex and untested." It also notes that rejection of a Cnooc deal in Washington would not amount to a breach of contract and would not entitle Unocal to recover the $2.5 billion.

The proxy statement says Chevron's proposal includes 60 percent Chevron stock, offering Unocal shareholders the opportunity to continue to invest in the combined entity. Cnooc's offer is all cash. The statement suggests that Chevron's stock has probably been held down by the prospect of a bidding war for Unocal and could rise significantly once a deal is completed. Chevron stock rose 58 cents, or 1 percent, on Monday to close at $58.37. That makes Chevron's offer worth $63.67 per Unocal share.

© 2005 The Washington Post Company