The battle pitting Chinese and U.S. energy companies against each other for control of Unocal is one of those events that show how different the Chinese and U.S. financial systems really are. The Chinese bidder, Cnooc Ltd., has come late to the game, trying to break up a deal already approved by both the Unocal and Chevron boards that's just two weeks from potential completion.
Chevron, understandably, has raised all sorts of doubts about Cnooc's bid, which is higher than Chevron's but tied up in uncertainties and red tape. But when you get beyond this particular deal, you realize that what's going on here is not just a takeover battle, it's a culture clash as well.
Even though Cnooc has shares that trade on the New York Stock Exchange, it's not acting remotely like a U.S. company. Rather, it seems to be acting as an extension of its government-owned parent. Fueling this perception is that documents filed yesterday by Unocal with the Securities and Exchange Commission show that what Cnooc had described as loans from its parent look more like grants or stock purchases.
The documents show that the bidder's parent, China National Offshore Oil Corp., is far more heavily involved than Cnooc Ltd. had disclosed. Big Cnooc, as I call it, owns 70 percent of Baby, with the rest owned by public shareholders.
Big Cnooc (pronounced SEE-nook) would lend Baby $7 billion of the $19 billion it would use to top Chevron's bid. Previous analyses of those loans -- including the one I made two weeks ago -- way understated the subsidy from Big Cnooc, because Baby had selectively disclosed some of the loan terms, but not others.
Baby publicly described $4.5 billion of borrowing from its parent as a 30-year loan carrying a 3.5 percent interest rate. But if you read Unocal's new filing, you discover that Baby told Unocal (but not the investing public) that it won't have to pay interest on that borrowing if its credit rating falls below investment grade.
Usually, borrowers pay more if their credit deteriorates. Here, the worse that Baby's credit rating gets, the more favorable the loan terms become.
The other $2.5 billion parental loan, which Baby had described as a two-year interest-free loan, actually may last as long as 30 years under certain circumstances. It would still be interest-free.
Should Baby's credit rating fall below investment grade and these loans run their full terms, the interest subsidy totals more than $5 billion, or $18 per Unocal share. My previous estimate was $2.6 billion, or about $9.50 a share.
In a background document that it provided me, Baby says the subsidy is only $700 million. That's because Baby assumes it will retain its investment-grade rating and repay its parent quickly with proceeds from selling stock -- some of which the parent would apparently buy. Considering that the difference between Baby's $67-a-share cash offer and Chevron's stock-and-cash offer was about $1 billion as of Monday, you can see why these subsidies matter.
There's nothing illegal about Baby getting help from its parent, of course. And it's hard to feel sorry for Chevron, No. 6 in the Fortune 500, which like any U.S. company its size has benefited over the years from a variety of goodies dispensed by the federal government.
But it's also hard to differentiate between Baby, the nominal bidder for Unocal, and its government-owned parent. Both companies are run by the same man, Fu Chengyu. Had Big Cnooc bid for Unocal, things would have been straightforward. Instead, it's using Baby, a nominally capitalistic, publicly traded, for-profit company.
Cnooc, as you can imagine, thinks my analysis is all wrong. "You're falling for the mythology," a U.S. spokesman for Baby Cnooc said when I asked him to discuss the subsidies. Even though Big Cnooc is owned by the Chinese government, he said, "it's financially independent from the Chinese state" and thus Baby's cheap borrowing "is not any sort of state subsidy."
News of the true nature of the loan subsidies is sure to complicate Baby's pursuit of Unocal, which became a longer shot than ever last week when Chevron sweetened its bid to $63.67 a share (at yesterday's closing price of Chevron stock) from about $60.
Baby Cnooc is offering $67 a share in cash, but that offer is subject to regulatory delays and huge political risks. Washington pols, egged on by Chevron, have been attacking what they call the "Chinese offer" on economic and supposed national security grounds.
Unocal shareholders are scheduled to meet on Aug. 10 to vote on the Chevron offer. If a majority approve of the bid, the game's over. But if Baby puts a bid north of $70 a share on the table late this week (or early next week, after Congress has gone home), things could get very interesting. One thing that the U.S. and Chinese systems have in common is that shareholders care only about how much they get for their stock. They don't particularly care where the money comes from.
Newsweek's Sarah Schafer contributed from Beijing. Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.