|Repsol YPF Case Study Solution|
- Repsol, a Spanish company, is looking to acquire oil assets in
- Currently owns 15% of YPF, an Argentinian company. Would like
to acquire the rest of YPF.
- Need to propose the cross-border M&A tender offer to YPF
shareholders and repel potential competitors.
- Offer financing options include cash, shares of Repsol stock, or
mix of cash and stock. Need to evaluate the options.
Structuring Repsol’s Acquisition of YPF(A)
1. How significant are the expected synergies and restructuring effects? Please prepare an estimate of the value of these.
2. Please assess the price that Cortina proposes to offer to YPF shareholders. At $44.78 per share, would Repsol underpay,
overpay, or just a fair price?
3. Please assess the current pricing of Repsol shares in the market. Is Repsol undervalues, overvalues, or just fairly values in
the global equity markets at this time? Is new a good time to issue Repsol shares?
4. Compare the relative advantages and disadvantages of offering to the shareholders of YPF either (a) cash or (b) shares of
Repsol. If you were a shareholder in YPF, which form of consideration would be more attractive (assuming that the amount of
consideration would be constant at $44.78 per share)?
5. Whether or not you recommend a cash-based offer for YPF, please compare the relative advantages and disadvantages of
the (a) all-debt-finances cash offer, (b) all-equity-finances cash offer, and (c) blended financing of debt, preferred stock, and equity.
How significant are variations in default risk in the assessment of the financing alternatives (see case Exhibit 10)?
6. What course of action would you recommend that Alfonso Cortina adopt regarding form of payment and financing for the
tender offer for YPF? On what “key bets” does your recommendation depend?
Repsol Corporate Profile
Repsol YPF is an integrated Spanish oil and gas company with
operations in 29 countries, the bulk of its assets located in Spain and
Argentina. The product of a 1999 takeover of Argentine energy firm YPF
by the Spanish conglomerate Repsol S.A. within the controversial
privatizations by president Carlos Menem, it is now one of the world's
ten largest oil enterprises, employing over 30,000 people worldwide.
In May 2006 Repsol announced it was planning to float between 15%
and 20% of YPF's shares in Argentina's stock market.
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STRUCTURING REPSOL’S ACQUISITION OF YPF S.A Case Solution
The CEO of Repsol S.A. Company was in the final stages of designing the terms of the unsolicited tender offer for acquiring YPF, the largest Argentinean Company. The value, which would be paid per share for acquiring 85% stake of YPF has been set at $ 44.78 per share. Now the next steps were to decide the form of the payment and the financing of the offer. The analysis for the three financing alternatives, which are debt, equity and the blend of debt and equity, needs to be performed along with their advantages and disadvantages.
If the company goes ahead with the cash form of payment, then the cash payment will have to be financed by an issuance of the debt and equity because the company did not have enough cash reserves to meet the total payment of $ 13.438 billion. In the case analysis, the linkage between the acquisition price, financing alternatives and the form of payment needs to be analyzed and the role of synergies would be considered in designing the financing for the deal. Finally, recommendations would be made to the management of Repsol Company based on the tradeoffs and the financial analysis performed.
We begin with the estimation of the value of the synergies, which would be created by this deal. These are described in the section below.
Expected Synergies & Restructuring Effects
There is an ideal strategic match for Repsol and its shareholders regarding this acquisition deal. Repsol generates its majority revenues from gasoline stations and refining activities. Moreover, it has to buy its crude oil from the other companies in the market. On the other hand, there are substantial reserves owned by YPF because the production and the exploration of the oil are the main activities of the company.
After the companies are combined, then the reserves of the combined firm will be quadrupled, the firm would vault among the top 10 international firms and they would have a more balanced business. The volatility of the crude oil prices would also decline and the earnings volatility would reduce because of a more balanced source of the profits, which is from the downstream, and the upstream sources.
A balance would be achieved between the downstream and the upstream operations and the activities of the combined firm could be expanded into other countries such as Latin America. Apart from this, capital expenditure savings and operational synergies would also be generated and the financial strength would be enhanced with the huge business scale. Moreover, a number of non-core assets would also be sold off which do not generate value for its businesses in the different geographic areas such as in Latin America, Spain and North Africa.
Estimate of Value for Synergies
The estimate of the value of the synergies is shown in exhibit 1 in the appendix. The total cash flow effects of the Repsol-YPF synergy are also shown in exhibit 2 in the appendix. The dollar value of these synergies and the cash flow effects of the synergies, which are expected to be generated from 1999 to 2003 show that positive cash flows would be generated by the combined firm, which would enhance the value of the firm.
Assessment of price offered to YPF Shareholders
The price, which has been offered to the shareholders of YPF, is $ 44.78 per share. We have performed the DCF valuation of YPF company in the excel spreadsheet as a standalone company. After calculating the value of YPF, we have calculated the PV of the synergies with the combined WACC assuming all debt financing.
The combined value of synergies and YPF shows a value of $ 44.95 per share as shown in exhibit 3 in the appendix. This is almost same to the price offered by Cortina to the shareholders of YPF. Therefore, the price of $ 44.78 per share is a fair price because there is strategic fit for the company and many synergies would be generated post acquisition due to the balance in the upstream and the downstream business activities.
Assessment of Current Pricing of Repsol Shares in Market
If we look at the historical share price chart in exhibit 11 in the case, then the current share price of Repsol in the market is around $ 17 per share. Moreover, using the information in exhibit 3, the actual value of Repsol is $7010/900 = $ 7.78 per share. I have also performed the DCF valuation for Repsol using the all debt WACC of 8.75 % as shown in exhibit 8 in the case. The intrinsic value of Repsol is $ 21.27 per share as shown in exhibit 4 in the appendix. Therefore, Repsol is currently undervalued in the global equity markets because is market price is less than its intrinsic value. However, now is not the right time for the management of the company to issue shares in the market...................................
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