Seven years ago, the state-owned China National Offshore Oil Corp. (CNOOC) withdrew its $18.5 billion bid to take over American oil company Unocal Corp. If successful, the deal would have been and would still be China’s largest overseas acquisition ever; instead, the intense U.S. political opposition that forced CNOOC to retreat has cast a shadow over Chinese outbound mergers and acquisitions ever since.
But now CNOOC is giving it another shot with its $15.1 billion offer to acquire Canadian oil company Nexen Inc. This deal too would be the largest overseas acquisition by a Chinese company ever. Will things be different this time?
Though Nexen is based in Canada, it has major drilling operations in U.S. waters off the Gulf of Mexico, so the deal is still subject to review by the Committee on Foreign Investment in the United States (CFIUS), which can recommend that the president block a foreign acquisition on national security grounds. The Canadian government has a similar national security review process that CNOOC must pass.
Some of the same U.S. politicians who voiced opposition to the Unocal deal have already lined up against the Nexen one, including U.S. Senators Charles Schumer and James Inhofe and Congressman Edward Markey. In Canada, political figures have been more circumspect, but a number of newspaper columnists have urged Prime Minister Stephen Harper to block the deal. The basic issue is strategic control over vital resources but economic reciprocity also comes up a lot in opposition arguments: the Chinese government currently bars foreign investment in many domestic industries and, were the shoe on the other foot, would never allow a similar deal itself.
“I urge you not to miss this opportunity—the largest foreign acquisition ever by a Chinese company—to hold China to the commitments it has made to provide a level playing field for U.S. companies seeking to access Chinese markets,” Schumer wrote in a recent letter urging U.S. Treasury Secretary Timothy Geithner, who chairs CFIUS, to recommend that the president block the deal unless China agrees to open up more of its economy to U.S. competition.
Thomas Britt, a Hong Kong partner with Debevoise & Plimpton, says there is still enormous sensitivity among U.S. leaders about Chinese acquisitions in strategic sectors. “The passage of time since Unocal has not diminished those concerns,” he says, adding that lawyers advising on CFIUS issues need to be careful in managing client expectations.
But a lot has also changed since 2005.
“The environment right now is much better for a deal like this,” says Jeffrey Blount, the Asia managing partner at Fulbright & Jaworski. “There have been a lot more similar deals since Unocal, so it is much easier to do this type of deal than, say, five-plus years ago.”
Indeed, Chinese investments in the Canadian, Australian, and American energy sectors have become fairly common in recent years. Last fall CFIUS cleared CNOOC to make a $2.2 billion investment to acquire one-third of Oklahoma’s Chesapeake Energy Corp. Canada has hosted numerous deals. Last year CNOOC paid around $2 billion for a 35 percent stake in OPTI Canada Ltd., Nexen’s bankrupt partner in an oil sands joint venture. Another Chinese state-owned giant, China Petroleum & Chemical Corp. Ltd., better known as Sinopec, paid $2.1 billion for Canadian gas producer Daylight Energy Ltd. In 2009,Sinopec acquired Calgary-based exploration company Addax Corp. for $7.3 billion.
Jon Christianson, a Beijing-based corporate partner at Skadden, Arps, Slate, Meagher & Flom, says the stakes are lower now because of the volume of deals. “I don’t put much weight on this particular deal because the outbound market is much deeper now,” he says.
Thomas Man, a partner in the Beijing office of Orrick, Herrington, & Sutcliffe, says the Chinese companies have grown much more sophisticated. “Seven years ago, mega- deals for Chinese companies were a novelty, especially when it comes to dealing with foreign regulatory processes,” he says. “CNOOC had underestimated the international regulatory processes and the issue of national security, and how it tied in with global politics.”
Blount says such political concerns are dissipating next to economic ones. “Deals need to stand on their own merits in terms of market rationalization and job creation,” he says.
Chinese companies are often willing to pay more for energy assets because they are interested in gaining technical expertise in unconventional drilling methods like those used in Canada’s oil sands. CNOOC is offering to pay a 61 percent premium for Nexen’s shares. It is also offering to list its shares on the Toronto Stock Exchange and have a head office in Calgary to operate the North and Central America businesses.
CNOOC has added some protective measures to its offer, though. The agreement also states that Nexen cannot actively look for higher bids but can consider bids that other companies voluntarily make. CNOOC has also secured full support from Nexen’s board, and if directors of Nexen withdraw their recommendation for the deal, the company must pay the Beijing-based company a $425 million breakup fee. CNOOC is also entitled to the same amount should Nexen’s board withdraw its support for the deal.
A host of firms led by Davis Polk & Wardwell are advising CNOOC on the Nexen deal. Davis Polk New York partners George Bason Jr. and Leonard Kreynin, as well as Beijing partner Howard Zhang and Hong Kong partner Kirtee Kapoor, are leading work on the deals side, while Washington, D.C., partner John Reynolds III is advising on the CFIUS review. Davis Polk was also lead adviser to CNOOC on its Unocal attempt.
Involved in the deal or not, most international firms have targeted outbound Chinese M&A as a major growth area over the next few years, so there’s little doubt that lawyers in the region are hopeful that CNOOC will be successful in winning approval for its deal.
“That would obviously suggest greater opportunities for more legal work on large U.S. M&A deals originating from China,” notes Britt.
Blount agrees. “Everyone would take away [from approval] that this is a growth area right now,” he says. “It would be a positive sign and would empower people to put out even more deals.”