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China oil major invades US

CNOOC, China's state-controlled international oil company, launched the first contested bid by a Chinese company when it announced an all-cash offer for Unocal, a US oil and gas company with assets in Asia. CNOOC's offer values Unocal equity at $18.5 billion and outbids the recommended $17 billion shares-and-cash deal from US oil major Chevron. The Chinese company's move is expected by the market to lead to a protracted bidding war.

Even before its offer was officially launched, the potential bid proved controversial when the non-executive directors of CNOOC refused to sanction management's takeover plans without independent advice on the merits of the transaction.

CNOOC management is pitching the Unocal offer as part of a vital strategy to increase and diversify China's future sources of oil and gas. Critics have warned that CNOOC risks being dragged into a protracted fight for an asset that could quickly become overvalued.

In an early warning shot, credit ratings agency Fitch placed CNOOC's BBB+ rating on negative watch, citing concerns about the huge levels of debt that the oil company will assume should the deal prove to be successful.

The proposed deal entails CNOOC taking on $9 billion of senior debt and $7 billion of subordinated debt, resulting in ebitda/interest coverage halving from current levels according to Fitch.

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