Petro China: Pouring Oil On The Flames
Can the anti-China crowd put a crimp in Beijing's access to Western capital markets? In recent weeks, some of the same labor and human-rights groups battling China's entry into the World Trade Organization have mounted a furious campaign to block an initial public offering by PetroChina Co., a newly formed subsidiary of China's mammoth state-owned oil company. Already, the AFL-CIO has persuaded investors and public pension funds that control more than $1 trillion in assets to put out statements saying they won't invest in the deal.
Opponents have also prodded politicians on Capitol Hill to badger the Securities & Exchange Commission to delay or kill the IPO. The underwriter, Goldman, Sachs & Co., started the offering's roadshow in Asia and Europe on Mar. 13 and planned to begin the U.S. leg Mar. 22 after SEC approval of the prospectus. But already, the target amount to be raised has plunged from $7 billion last fall to about $3 billion today, resulting in part from the opposition, says Prudential Securities political risk analyst James Lucier. "I've been handicapping investment risk in Washington for 20 years, and I've never seen a deal with this level of political risk," he says. Goldman declined to comment.
SETBACK. If critics succeed, they could set back China's efforts to tap Western capital to help restructure its inefficient state-owned industries. PetroChina is the first in a series of IPOs planned for China's chemical, steel, and other sectors, all of which could face a similar firestorm. The campaign also could help critics marshal opposition to China's entry into the WTO. More broadly, it marks the first effort by activists to scuttle an IPO for human-rights reasons. "PetroChina is an inappropriate investment for Western capital markets, and bringing China into the WTO would entrench its ability to do similar deals," says Bill Patterson, head of the AFL-CIO's Office of Investment.
To prepare for the IPO the state-owned China National Petroleum Corp. last year spun off its best assets into PetroChina. The new company controls more than two-thirds of China's oil and gas production and took 480,000 of CNPC's 1.5 million workers. The IPO will sell off 15% of PetroChina, with CNPC retaining the rest. The proceeds will help to support the million workers left on CNPC's bloated payroll.
Opponents have blasted the IPO with a host of financial and human-rights arguments (table). In early March, Patterson put out a report aimed at convincing investors that the deal is too risky. It points out that because Beijing owns 100% of CNPC, which will retain 85% of PetroChina after the IPO, government officials will effectively control PetroChina's board and major corporate transactions. The report quotes PetroChina's prospectus, saying the unit "will be controlled by CNPC, whose interests may differ from those of our other shareholders. As a result, we may face significant constraints on our ability to implement our business strategy or to maximize our profitability."
TIBET ACTIVISTS. The AFL-CIO spelled out all these objections in a mid-March conference call for several dozen large-investment-fund managers. So far, major funds shunning the IPO include Vanguard, CalPERS, TIAA-CREF (the $250 billion teachers' pension fund), and the public employee pension funds of New York City, New York State, and California. "The larger question is how safe an investment is in countries that do not have freedom or democracy," says California State Treasurer Philip Angelides, who sits on the board of the $172 billion CalPERS.
Other groups oppose the IPO for more openly political reasons. Religious and conservative groups complain about CNPC's joint-venture investment in a $2.3 billion oil project in the Sudan, a country condemned by the U.S. for allowing slavery and supporting alleged terrorists. And human-rights activists and environmentalists say that CNPC may use IPO bucks on environmentally damaging oil projects in Tibet. "We're concerned because the potential for rights abuses there is enormous," says John Ackerly, head of the International Campaign for Tibet in Washington.
Even if critics scare off U.S. investors, Goldman can probably complete the public offering in Asia and Europe, where there is less opposition. But if opponents make the issue hot enough, it will provide one more flash point in the already troubled U.S.-China relations.