Influential proxy voting advisory firm Institutional Shareholder Services Inc. on Monday endorsed Chevron Corp.'s bid to acquire Unocal Corp., dealing another blow to Chinese oil company Cnooc Ltd.'s unsolicited rival bid for the California-based oil and natural gas producer.
Rockville-based ISS said Unocal shareholders should vote in favor of Chevron's current $17 billion offer because Cnooc's $18.5 billion bid risks being rejected by policymakers.
"The Cnooc bid is highly uncertain due to U.S. and Hong Kong regulatory issues and U.S. political opposition in some quarters," ISS said in a note to its 1,300 institutional clients, a group that includes large mutual and pension funds.
Unocal's board has endorsed Chevron's bid and a shareholder vote on the offer is scheduled for Aug. 10. Cnooc, which is 70 percent owned by the Chinese government, is deciding whether to raise its current $67 per share offer for Unocal.
Such an increase is growing less likely, sources close to Cnooc said Monday. The sources, who declined to be identified by name because no final decision has been made, said Cnooc directors and executives did not anticipate how intense the negative reaction to their bid would be in Washington, where members of Congress have criticized the deal on the grounds that it would threaten U.S. national security. The sources said the unexpectedly hostile reaction made it less likely that Cnooc would increase its offer. A decision from Cnooc is expected this week.
In its report, ISS said Unocal directors made the correct decision on July 20 when they agreed to continue supporting Chevron's takeover offer after Chevron increased its bid from $16.5 billion to $17 billion and added a larger cash component.
When possible regulatory delays are taken into account, ISS said, Cnooc's current offer is worth just $1.38 per share more than Chevron's. ISS said it was reasonable for Unocal directors to conclude that this amount is too low to compensate for the risk of Cnooc's offer.
ISS also said it was "unclear whether Cnooc's bid is still even on the table." Since Chevron increased its offer, Cnooc "has been much quieter than would be expected from a party seriously interested in breaking up and trumping an agreed-upon transaction," the advisory firm said.
Cnooc declined to comment on the ISS report.
Chevron Vice Chairman Peter J. Robertson issued a statement saying the endorsement "underscores our belief that a combination of these two companies makes strategic sense and that our merger terms offer Unocal shareholders a compelling value that could be theirs within a matter of seven business days."
On Monday, two more members of Congress criticized Cnooc's bid.
Rep. John D. Dingell of Michigan, ranking Democrat on the House Energy and Commerce Committee, attacked what he called below-market financing for Cnooc provided by the Chinese government.
"If China can finance [the Unocal] acquisition on such favorable terms, there is no reason to believe it could not, would not, or has not already subsidized acquisitions in other sectors to acquire other companies in key industries and unfairly compete against American firms and workers," Dingell wrote in a letter to Commerce Secretary Carlos M. Gutierrez.
Sen. Evan Bayh (D-Ind.) issued a statement responding to news reports that Cnooc might wait until Congress adjourned for August before increasing its bid. He said the move would challenge Congress's right to regulate foreign commerce.
"You can be sure that I will not be alone amongst my colleagues, in the Senate and in the House, who will be paying attention to what happens in the coming days, and if need be, will be prepared to act when Congress returns in September," Bayh said.
Cnooc declined to comment on the remarks by Dingell and Bayh.