The board of Unocal Corp. accepted a sweetened takeover offer from Chevron Corp. early Wednesday, dealing a setback to the politically sensitive, unsolicited bid for Unocal from Chinese oil company Cnooc Ltd.
In a bid anticipated by Unocal shareholders, Chevron offered $63.01 per share, or about $17 billion. Chevron initially offered about $16.5 billion.
Chevron raised its bid to head off an anticipated increase by Cnooc to $69 per share, a source close to the deal said.
"Our increased offer has been driven by competitive circumstances, but even at this higher price it remains a compelling transaction for Chevron stockholders and is accretive to both cash flow and earnings per share in 2006," Chevron chief executive David J. O'Reilly said in a prepared statement. "We are pleased to have the continued support of the Unocal board of directors and look forward to closing the transaction in just three weeks."
Unocal shareholders are scheduled to vote on Chevron's bid on Aug. 10.
In addition to raising the price, Chevron increased the cash portion of its bid from 25 percent to 40 percent. Chevron's new bid is still lower than Cnooc's all-cash $18.5 billion offer. But Cnooc has run into opposition from members of Congress who say selling a U.S. oil company to a Chinese firm could threaten national security. Cnooc is 70 percent controlled by the Chinese government.
Cnooc did not immediately raise its offer after the Chevron bid. "Cnooc's $67-per-share all cash offer has not been changed and remains in effect," the company said in a statement. "We have fully negotiated a merger agreement and other transaction documents reflecting this proposal with Unocal which we believe to be acceptable to them. We regret that they have not yet embraced our offer."
Unocal shares, which have risen in recent weeks in anticipation of a bidding war, closed at $64.96 on Wednesday, down 0.03 percent, indicating that shareholders do not view the current bids as final. Chevron shares closed at $57.60, up 0.3 percent, suggesting that Chevron shareholders approve of the increased bid.
Several Unocal shareholders said they appreciated Chevron's new offer but do not consider it high enough to knock Cnooc out of the running. They said they expect Cnooc to raise its offer.
"We think this is a modest improvement from what [Chevron] had before," said hedge fund manager Peter Schoenfeld of P. Schoenfeld Asset Management. Schoenfeld, whose firm controls about 650,000 Unocal shares, said his analysis suggests that Unocal is worth $74 per share.
Cnooc's board has authorized management to bid at least $69 per share, people close to the company say. Cnooc has already offered to put $2.5 billion in an escrow account while a deal with Unocal is examined in Washington. The account is intended to assure Unocal's board that Cnooc has significant assets in a U.S. account that could be claimed if litigation arises between the two companies. Sources say that Cnooc wants assurances that Unocal will lobby for the deal in Washington if it accepts Cnooc's offer. Questions remain about how much lobbying Unocal could do given its agreement with Chevron.
Industry analysts say there may be more bidding before a deal is complete.
"Obviously Chevron gained the momentum by increasing its bid, but in my view they did not go up enough to discourage Cnooc from seriously pursuing its bid," said energy analyst Fadel Gheit of Oppenheimer & Co.
Gheit said Chevron has an additional advantage because 40 percent of its offer is in Chevron stock, which could rise significantly if the uncertainty of a rival Cnooc bid is removed.
"Chevron thinks its stock is undervalued right now," Gheit said. "That's why they think they can afford to bid low and clinch it. Cnooc has only one way to go, and that's pure cash. In order to entice shareholders, I think they have to get their bid close to $70."