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Wednesday, July 20, 2005

Chevron Gets the Nod!Unocal Rejects Chinese Take-Over

Chevron Gets the Nod!Unocal Rejects Chinese Take-OverChevron Gets the Nod!Unocal Rejects Chinese Take-Over

Decision squashes a higher-valued bid from China's state-owned CNOOC

EL SEGUNDO - 07/21/05 - California-based oil giant Unocal has rebuffed an $18.5 billion takeover offer from China's state-owned CNOOC with the provisional approval of an "improved" $17.1-billion-dollar acquisition offer from US-based Chevron.

Unocal, the ninth-largest US oil company, and Chevron jointly announced the proposed merger, which will be submitted August 10 to a vote by Unocal shareholders.

"The Unocal Board of Directors recommends that Unocal stockholders vote in favor of adopting the Chevron merger agreement, as amended," the companies said this morning in their joint statement.

Unocal had already agreed a merger with Chevron in April when it received the rival CNOOC bid.

According to press reports, Chevron's "improved" offer reportedly consists of 40% cash and 60% stock, with the company paying about $7.5 billion in cash and issuing about 168 million shares.

The deal also would also give Unocal shareholders three options for each share held - to receive 0.69 dollars in cash; 1.03 shares of Chevron common stock; or a combination of $27.60 in cash and 0.618 of a share of Chevron common stock.

The CNOOC bid had set off a politically-charged controversy in the US with some lawmakers and a number of private-sector groups raising concerns about a major US firm being acquired, in effect, by the Chinese government.

The US has a mechanism to investigate international efforts to purchase American companies and can block those that as seen as a threat to national security.

Earlier this week, the Bush Administration told the Washington File that it would have been "premature to hold a formal review" of a Chinese oil company's bid for the California-based oil company Unocal.

"There is a process that our government uses to analyze such purchases or intent to purchase. And it's best that I allow that process to move forward without comment," President Bush said at a recent White House press conference covered by the Washington File.

According to media reports, CNOOC's Chief Executive Fu Chengyu had permission from the company's board to raise the bid to $19 billion, but it's know unclear whether CNOOC will up the ante.

Last week he offered to set aside $2.5 billion to cover Unocal against any shareholder lawsuits should a sale to CNOOC fail and depress Unocal's stock price.

CNOOC is one of three state-owned oil companies created by the Chinese government to acquire offshore oil reserves.

Established in 1982 as a joint venture partner with non-Chinese companies exploring such resources, CNOOC is 70%-owned by the Chinese government.

Although CNOOC is only valued at $22 billion, the company was able to make its offer of $18.5 billion for Unocal because of financial support from the Chinese government.

China's State Council, had approved the effort to purchase Unocal with the Governor of China's State Central Bank helping assemble the financial purchase package.

CNOOC's parent company, which is entirely owned by the Chinese government, had provided CNOOC with $7 billion toward the Unocal purchase.

Approval of any CNOOC deal with China would have required a review by the Committee on Foreign Investments in the US (CFIUS), a multi-agency panel chaired by the Secretary of the Treasury, to determine whether a US company's acquisition by another country could pose a national security threat.

"CFIUS is there to review foreign investments in the United States. If the conditions triggering that process are met, then certainly we will proceed," said Treasury Secretary John Snow.

On July 1, CNOOC had asked Washington to begin the necessary review process in order to boost Unocal shareholders' confidence in its bid, but Snow has said CFIUS would have reviewed the deal only if the CNOOC's bid had been accepted by Unocal.

A CFIUS review would have taken up to 90 days once it began.

CFIUS - established by Executive Order 11858 in 1975 - originally limited its activities to monitoring and evaluating the impact of foreign investment in the US, but its responsibilities have expanded over time.

The Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988 expanded CFIUS's mandate to include not only the investigation but also the suspension or prohibition of mergers or acquisitions that "threaten to impair" US national security.

The CFIUS process begins with a 30-day review period. If the committee approves a particular transaction during that time, it will not perform any further investigation, and if CFIUS does not approve the transaction after this initial review period, it will commence a 45-day investigation.

At the conclusion of the investigation, the committee must provide the president with a recommendation, and the president will then have 15 days to approve or prohibit the transaction.

Parties to a transaction may withdraw their submission at any time before a final decision.

The committee reviewed 320 transactions from 1997 through 2001 and conducted formal investigation of just four, according to a September 2002 report by Congress's Government Accounting Office.

Three of the deals that proceeded to the investigative phase eventually were cancelled.

In 2003, Global Crossing Ltd. was forced to abandon a planned sale of its telecommunications network to Hutchison-Whampoa Ltd., a Hong Kong-based group.

The US Defense Department and others on the CFIUS refused to approve the transaction on national security grounds.

However, there is also precedent for CFIUS approval of Chinese acquisition of a US defense company.

In 1995, CFIUS approved a takeover of Magnequench Inc., an Indianapolis, Indiana-headquartered company that supplies sophisticated magnets used in a variety of precision-guided munitions, by Beijing San Huan New Material High-Tech Inc., the China National Non-Ferrous Metals Import & Export Corp., and an investment group led by the Sextant Group Inc.

In 2003, the company's Chinese owners shut down Magnequench's production plant in Anderson, Indiana, and consolidated its production of magnetic powders at a facility in Tianjin, China.

Shortly afterwards, the company opened a magnet production facility in Juarez, Mexico.

Several members of the US House of Representatives' Armed Services Committee specifically cited the Magnequench deal asserting that an acquisition of Unocal by CNOOC would give Beijing access to a strategically vital asset.

The US lawmakers' move drew an outcry from the Chinese government, which condemned the lawmakers' initiative as political interference in what it insisted was a strictly business deal.

Unocal employs about 6,000 people worldwide, mainly in North America and Asia. Most of its oil and gas assets are in Asia, notably in Thailand and Indonesia.

Last year, the company posted a net profit of $1.2 billion on sales of $8 billion last year with suitor Chevron reported a net profit of $13.3 billion on sales of $155.3 billion.

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