CNOOC's 'punch drunk' offer

published 9 June 2006

China National Offshore Oil Corporation (CNOOC) yesterday tried to allay American politician and investor fears after the Chinese group bid $19.6bn for US rival Unocal. This is the third-largest cash offer in history, and is $1.5bn more than Chevron's offer made some two months ago. But CNOOC is picking up much criticism for its bid.

So what's the problem? Well, CNOOC's bid looks "punch-drunk", says Lex in the FT. The Chinese group's bid puts a $11.50 price tag on each proven barrel of oil equivalent nearly $1 more than Chevron offered to pay. This will "blow a big hole" in CNOOC's robust balance sheet...where it will go from a net cash position to gearing of nearly 70%. Yet CNOOC's own balance sheet is only part of the problem.

Both the US government and Unocal investors are worried about CNOOC's offer. The US government will not be happy about strategic assets such as oil falling into the hands of a foreign state. Remember of course that the Chinese government owns some 70% of CNOOC, says John Paul Rathbone on Breakingviews.com. And even though ExxonMobil has called on the Bush administration to not block the deal which could backfire for US firms looking to buy overseas many lobbyists don't agree.

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Then there's the Unocal board, which is currently backing the Chevron deal. This is despite CNOOC's "friendly" approach, where the Chinese group has promised to keep most of Unocal's management, and won't cut jobs. American firms are certainly not constrained to opting for the highest bid. Yet whatever Unocal finally decides, don't expect the Chinese to leave the table quietly.