Chinese Co’s rating to downgrade after Unocal merger |
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Thu, 23 Jun 2005 13:05
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LOS ANGELES: China’s third largest offshore oil and gas producing company CNOOC yesterday bid $18.5 billion for US-based Unocal Corp. The bid tops a rival offer of $16.6 billion by Chevron which was approved by the Unocal board and regulatory authorities.
The Chinese company said its bid is a friendly one and not meant to challenge Chevron. In a statement to the media, CNOOC chairman Fu Chengyu said his company was “seeking a consensual deal with Unocal” in order to secure energy for China.
China is the world second largest buyer of oil after the US. In fact, soaring demand from China is said to be partly the reason why oil prices surged 55 percent last year. Its domestic output of oil and gas faces a huge shortage which can only be filled by overseas acquisitions of oil companies. The country is today the fastest growing major market. China’s $1.65 trillion economy has averaged over 9 percent growth over the last two decades. Unocal which has half of its oil and gas resources in Asia would be a strategic buy for CNOOC and the country as well.
If the deal comes through, it would be the biggest-ever acquisition for a Chinese company. It would be nine times bigger than the acquisition of IBM’s PC division (a $1.25 billion deal) by China’s Lenovo Group; the deal was completed last month.
CNOOC’s oil and gas output would more than double, if the deal is approved. Reserves would also increase by a substantial 80 percent (the equivalent of four billion barrels of oil).
It is expected that the US government would not readily approve the proposed merger. Congressmen were likely raise an issue about a foreign company holding strategic assets in the US.
CNOOC chief Fu stressed that there will be no harm to the strategic interests of the US government. Analysts agree that the deal, if approved, would only give China an advantage over Unocal’s oil reserves in Indonesia and Azerbaijan, which are less vulnerable to instability compared to those in the Middle East. He said the US government should be reassured that Unocal's U.S. oil and gas output would continue to be sold here even after the acquisition.
He said CNOOC’s offer of one hundred percent cash “offers complete value certainty to Unocal shareholders, as opposed to Chevron's cash/stock offer.”
"We are quite confident. We believe the U.S. government will approve the deal."
Unocal’s shareholders will have to be convinced that CNOOC’s bigger offer compensates for any risk of the government objecting to the acquisition.
California-based Chevron yesterday said their bid was superior as it combined value and regulatory approval.
The bid by CNOOC is in line with the Chinese government’s effort to reduce oil import costs which surged 86 percent to $4.66bn last month. The nation’s three biggest oil companies were asked to acquire overseas assets in order to augment the nation’s oil resources.
Meanwhile, the CNOOC bid for Unocal has made Moody’s Investor Services review its issuer rating for a possible downgrade. The Chinese oil and gas company, listed on the Hong Kong stock exchange is currently rated an A2. The rating issuer said CNOOC does not have any previous experience of an acquisition so it is certain to face difficulties integrating the two organisations.
They expressed doubts whether CNOOC would be able to efficiently manage the group’s combined operations and also retain Unocal’s operating expertise. Additionally, the offer of $18.5 billion in cash and assuming a net debt of $1.1 billion would force CNOOC to borrow heavily to fund the acquisition.
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