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Dealmaker of the Week: George "Gar" Bason, Jr. of Davis Polk & Wardwell

DEALMAKER

George “Gar” Bason, Jr., 58, global cohead of Davis Polk Wardwell‘s MA practice.

THE CLIENT

China National Offshore Oil Corporation (CNOOC), the state-owned energy giant based in Beijing.

THE DEAL

CNOOC said Monday that it will pay $15.1 billion to acquire Canadian oil and gas company Nexen Inc., while also assuming $4.3 billion in Nexen debt.

THE DETAILS

The deal’s terms call for CNOOC to pay $27.50 in cash for each Nexen common share—a figure that reflects a 61 percent premium over Nexen’s July 20 closing price. The deal is expected to close in the fourth quarter, pending regulatory approvals.

The agreement includes multiple breakup-fee provisions. Under one scenario, CNOOC would pay Nexen $425 million if Chinese regulators do not approve the deal. On the flip side, CNOOC is to receive the same amount should Nexen’s board withdraw its support for the deal.

THE BIG PICTURE

By acquiring Nexen, CNOOC aims to to gain a foothold in Western Canada’s lucrative oil sands market. The Canadian company also has assets in such oil- and gas-producing areas as the Gulf of Mexico and the North Sea.

As The Am Law Daily noted earlier this week, the deal is another sign of Asian investors’ increased appetite for North American energy assets. For CNOOC specifically—which has completed a variety of deals in recent years to acquire more modest oil and gas assets from such companies as Oklahoma City’s Chesapeake—the Nexen acquisition represents a major investment. And it dwarfs the company’s $2.1 billion purchase last year of OPTI Canada, an oil sands producer and a partner of Nexen. (In 2005, CNOOC made a failed $18.5 billion bid for El Segundo, California-based Unocal Oil Company, which was eventually purchased by Chevron.)

The Wall Street Journal pointed out that the agreement between CNOOC and Nexen could cause tension between China and Canada. While the latter has happily watched Chinese buyers snap up Canada’s vast natural resources, the Canadian government could balk at the idea of a Chinese company actually owning those resources on such a large scale, according to the Journal. The deal—which would be the fifth-largest foreign takeover in Canadian history—is sure to face harsh regulatory scrutiny under the Investment Canada Act, which requires foreign investors to prove a transaction’s net benefit to the country.

At the same, the Journal notes, the deal could get a favorable reaction given that Nexen is not one of Canada’s largest oil companies and that its assets are not confined to Canada. The two companies’ announcement of the transaction includes a lengthy section promoting the deal’s benefits to Canada—including CNOOC promising to retain Nexen’s current management and employees, and to base all North American and Canadian CNOOC operations in Calgary.

THE BACKSTORY

Though this deal is the first on which Bason himself has worked with CNOOC, he says that Davis Polk’s relationship with the Chinese company goes back several years. The firm advised CNOOC on its attempted purchase of Unocal, in 2005, as well as its $2 billion debt issue on the Hong Kong Stock Exchange, in April.

ON CLOSING

The negotiations called for New York-based Bason to help orchestrate an agreement between a Beijing-based company and a target that is headquartered in Calgary and listed on the New York Stock Exchange. Bason’s team, which included Davis Polk attorneys in New York, Beijing, Hong Kong, and Washington, D.C.‚ worked closely with CNOOC’s Canadian counsel: a Stikeman Elliott team led by MA partner William Braithwaite.

Bason says his team and the Stikeman Elliott lawyers “worked perfectly together,” in part because Stikeman, unlike Davis Polk, does not have an office in Beijing or Hong Kong. “[Braithwaite] and I worked on the negotiations and the arrangement agreement and the terms of the deal with the other side,” Bason says.

The Davis Polk team also handled a variety of issues that arose in connection with CNOOC’s HKSE listing, including ensuring that a majority of the company’s shareholders backed the deal, thus eliminating shareholder approval in Hong Kong as an obstacle to closing.

As for the multiple break-up fee scenarios contained in the agreement created an extra complication, Bason says. Such provisions are turning up more and more as major transactions face increased antitrust scrutiny in the U.S. and abroad. That aspect of this deal is notable because it only applies to Chinese regulatory approval, and does not include other countries—specifically Canada. That was likely an important negotiationg point for Bason’s team, as it allows CNOOC to avoid suffering financially should Canada’s notoriously strict regulatory approvals process for inbound foreign investments go against the deal.

The number of moving pieces within the deal, and its geographic scope, made for a very intense process, Bason says. “The problem with transactions in Asia is it’s always the nighttime for somebody,” he says. “And as you get closer and closer to a transaction being signed, that proves to be just a massively important logistical element because think of how much interaction has to occur when you’re negotiating a transaction.”

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