2005-07-03

CNOOC/Unocal: the business perspective of the Rothschild proposal


A lot has been said about this deal, in the press and in blogs. These discussions focus on the political implications in the US. Not many commented on the matter from the business perspective.

Here (right click to download because pdf loads very slowly, thanks to MovieGuy for the link) is the CNOOC proposal which outlines its (claimed) business rationale. I will try to comment on some of its claims on "strategic fit" here (quoted are the claims in the presentation)

  • "double production and increase reserve" -- no doubt there is scale effect in this industry, but with CNOOC pledging to forgo a lot of the logical cost-cutting, plus the cost/uncertainty for the PMI (post-merger integration), it is unclear if the net will be positive. How did they quantify the overall value creation?
  • "world class international portfolio/leadership in Asia" -- I do not know how to translate the abstract "world class"/"leadership" concept into shareholder value, the consultants in Rothschild seem to be addressing the ego of Mr Fu instead
  • "Complementary gas/LNG position" -- yes, I am convinced there is synergy here. However, it bothers me that this more important point was listed as the last point in the presentation.
  • "EPS accretive" -- not sure how 'accretive' is such a big deal or what 'accretive' really means. Analysis at CNOOC/Unocal's Combines PE (slide 8) demonstrated clearly the bid was overpriced unless oil price continue to rise significantly. In fact, CNOOC share price declined after the announcement, the best measure of shareholder value.
  • "investment grade credit rating expected to be maintained" -- it sounds to me from the tone that what is "expected" is synonymous to "best case scenario", i.e. there is sizable probability that it will not be maintained

On the other hand, the better reasons for the acquisition were pushed to the sideline as "additional opportunities" (slide 12), therefore not receiving the right attention and I am not sure if they have been quantified and presented to CNOOC board, especially the point about "Unocal's deepwater drilling capabilities and other expertise".

Overall, my gut feeling is that there are opportunities for synergy and capability improvement for CNOOC. The price may be a bit too high, but no one can predict the future value of these assets (there should be an analysis on the valuation vs oil price scenarios). It is a medium size deal in this industry which would serve as an experiment for Chinese corporations, expect to see more in the future. If I am a CNOOC shareholder I would certainly not be disappointed if the deal does not go through. I hope Rothschild does back it up with some quantification which were not released in the presentation. Otherwise, I would seriously advise any corporation against hiring them as consultant.

For either US or China as a country, it makes most sense to view this deal as the business decision of two individual corporations. The integration after acquisition could equally likely to be successful or failed. It is an attempt by the Chinese to play by the rules in US, listening to investment banks and hiring lobby groups. The success of the bidding will encourage Chinese companies to play by these rules. If it is blocked without good reason by the right wings in US, the consequence might turn to something they are more unwilling to see. Lastly, if CNOOC fails at integrating the acquired assets and operations, it would be an expensive lesson for CNOOC shareholders, although for the Chinese busness in general this lesson needs to be learned sooner or later.

Not to be ignored is that this deal throws a new perspective into the pressure for RMB revaluation (that the reval will boost the purchasing power of Chinese corporations and that China's cash reserve will be looking for other investment alternative, e.g. by lending to corporation for acquisition, hence achieving higher yield for the banks now that there is enough reserve for reserve purpose).

5 comments:

ranc said...

I share your doubt about the deal and wouldn't be disappointed either if it fails to pass.

On the other hand, "bouble production", "world class international portfolio" etc may be categorized as "strategies", while things like "complementary gas/LNG positions" may be what you call "tactics". So the CNOOC presentation is not totally nonsense.

BTW, there is nothing about game theory that says it can only be used for "tactics", rather than grand "strategies". Whatever you do, "strategy" or "tactic", you have to think about your rival's response to it, and your response to their response, and their response to your response...

Sun Bin said...
This comment has been removed by a blog administrator.
Sun Bin said...

thanks for your comment.

hh, i was focusing on the 'value' in this deal. i.e. whether it is strategic or tactic (and the distinction isn't that clear), one should be able to translate the event into some number like the cashflow stream of the company, hence the shareholder's return (stock price gain and dividend received).

ranc said...

sure. What I mean by "strategy" is that things like "world class international portfolio" may not increase the "value" of CNOOC in the short run, but probably in the long run. But I'm no business person so I would not attempt to analyze the details of the CNOOC deal like you do.

You've got a nice blog.

Sun Bin said...

thanks :)