Wednesday, July 20, 2005

$2 Billion Here, $2 Billion There...

…pretty soon you’re talking about real money.

Ron Brownstein reports on Chevron carping that below-market rates on Chinese loans to CNOOC gives the Chinese a $2.6 billion advantage in its bid for Unocal, more than erasing the difference between Chevron’s $16.5 billion bid and CNOOC’s $18.5 billion bid.

I assume the $2.5 billion figure came out of the usual B-school legerdemain: assume a 2% interest rate advantage on $5 billion, choose a cost of capital to discount the cash flows back to a present value of…well, if that doesn’t give us the right number, let’s try 2.5%...

Brownstein reports the low-interest loan as fact buttressed by Chevron spin, but then confusingly reports a statement from a CNOOC advisor—who ought to know—that no such loans are involved.

I doubt Unocal stockholders will be impressed by the implication that Chevron and CNOOC’s offers are both at the theoretical maximum, even though CNOOC’s higher all-cash offer is contaminated with low interest funny money a.k.a. US greenbacks instead of good old rock solid Chevron stock.

For their part, the Chinese might argue that they’re entitled to a little help in their efforts to create a necessary premium in their offer to Unocal stockholders, when Chevron is hitting them with national security reviews, the American flag, and the kitchen sink.

However, CNOOC’s strategy is to claim the moral high ground by being “more capitalist than thou”. If they want their deal approved as an expression of the purest free-market, globalized commerce, they’d better publicly kiss off the concessionary financing, whether it exists or not.

China has been facing this problem in recent years. The picture of the Chinese government piling up mountains of foreign exchange reserves and at the same time running their economy on below-market loans is ludicrous.

They need to wean themselves from the low-interest financing available both from their own and foreign governments and world financial organizations, and fight the tendency to allocate capital based on murky strategic or policy exigencies instead of clear P/L considerations.

In other $2 billion news, the CNOOC side leaked its intention to put another $2.5 billion in an escrow account for Unocal shareholders.

The money doesn’t have a lot of significance—it’s only payable in the unlikely event that CNOOC wins the bidding war and decides to walk away from the deal anyway.

On the other hand, if the U.S. government nixes the deal, CNOOC gets to collect its money from the account and go home.

The escrow idea seems to be little more than public relations push-back.

That is to say, even though the Unocal deal looks like it’s going to turn into a protracted, expensive political nightmare that may very well make a purchase by CNOOC impossible, CNOOC is determined to stick it out and vindicate the support of those people who stand in their corner.

Which is to say in less kindly terms, the chances of CNOOC getting caught up in a stupid bidding war that does nothing more than exhaust the interest and patience of the world financial markets while enriching a phalanx of greedy lawyers, accountants, and media consultants immeasurably has increased significantly.