If Spain’s Repsol SA is going to do the impossible-snag control of Argentina’s darling blue chip, YPF SA-some people say it had better do so before Argentina’s presidential elections in October.
Whenever it happens, if it happens, the implications are grand. Latin America will lose one of its star companies and Argentina will have to swallow some pride. The opposition party, the center-left Alliance, fumed in a statement that any takeover or merger would transform one of the country’s premier blue chips into “an appendix of a multinational group.”
The final outcome may in fact come down to a prizefight, with the current Peronist government and Repsol in one corner, and the Buenos Aires stock exchange and opposition politicians in the other corner. Even though Repsol now denies a fight is looming, earlier reports indicated it was interested in pursuing just such a showdown.
One can, however, easily envision such a match following the Spanish oil company’s $2 billion acquisition of 14.99% of YPF in a government auction. To acquire the rest of the government’s share, 5.3% outstanding, Repsol would have to either make a tender offer for the entire company which is currently valued at $13 billion, as the by-laws indicate, or it would have to change the by-laws. Although there are conflicting interests involved in the latter option, it is a much more affordable and logical route than raising $13 billion in cash.
The topic was raised at LatinFinance’s January Predictor conference in New York. There, opinions were split as to what Repsol might do in the future-either drag out the process through the presidential elections, trying to appease everyone’s interests in a cooperative manner, or go in for a quick one-two punch and be done with it before the polls open. Either way, “we’re going to lose YPF, but that’s life in the game,” said Vinod Sehgal, head of Latin American research at SG Cowen.
Neither company is commenting on its long-range plans. On January 21, Reuters reported that Repsol had confirmed speculation that it would integrate both companies. But on February 3, after Repsol Chairman Alfonso Cortina met with YPF’s board, the Argentine company issued a statement saying Cortina had not made an offer for the company, nor had he manifested any interest in incrementing his own company’s stock position.
Yet the international financial community still awaits with baited breath, although what Repsol wants seems clear to many on Wall Street. As one oil analyst told LatinFinance when the deal was first announced, “I can’t imagine why any company would make a passive investment for 15% at $2 billion.”
At the same meeting, YPF’s board asked Cortina to consider the option of amalgamating duplicate operations between the two companies into associations, to which Cortina replied that Repsol would consider it and report back.
Pointless Sale?
Some observers criticize the government for initiating the sale, not only because the funds aren’t crucial at this time, but because market conditions have been so volatile.
Others reason that since the current government has already met its debt obligations, it is selling off remaining state assets to cushion its coffers against any crash that Brazil-or any other emerging market-might experience. More cynical critics, meanwhile, are saying that President Carlos Menem would like to have this sale under his cap for the history books.
Emilio J. Alvarez-Farre, a partner in the Miami office of White&Case, which acted as legal counsel to the government, admitted the Ministry of Economy was disappointed that Repsol was the only company to make a bid.
Even then, Repsol bid $38 per share, acquiring the bloc for a price 30% higher than pre-announcement price levels.
Local analysts were expecting a bid closer to $34 per share. The government had invited more than a dozen oil companies to bid, hoping to garner a premium price, but given the bottoming-out of oil prices around the world and the specific conditions surrounding the YPF sale, most companies backed out.
According to Emilio Ocampo, managing director in Latin American corporate finance at Salomon Smith Barney, the government probably would have been able to attract other bidders had the price been lower. “The number of bidders is a function of the minimum price,” he said.
Acting as advisers to the government, Salomon Smith Barney had prepared a study that proved Repsol had the strongest strategic rationale for acquiring YPF, says Ocampo. “The size and business mix of Repsol made YPF a perfect match for them,” he said.
What would the impact be if Repsol were to take over YPF? Argentina’s Merval would lose one of its star listings, for one. YPF’s total capitalization is $3.5 billion, according to a spokesman at the bolsa. Even if Repsol takes over just 51%, “the impact would be grave,” he said.
A Gambling Strategy
Repsol’s move, some observers contend, is understandable from the point of view of the global oil market. Low prices have fueled the need for mergers, hence marriages like British Petroleum and Amoco. And, as in other industries such as finance and utilities, Spanish companies looking to compete on the global stage naturally turn toward Latin America first. Finally, YPF itself is an extremely well run company that analysts everywhere predict will be able to turn a profit even in lean times and is in position to profit handsomely from Brazil’s future energy needs in terms of natural gas.
One thing is certain: things will change in Argentina. No oil company in today’s environment would spend $2 billion to sit back and not stir up any dust. But just how Repsol will change YPF is still anyone’s guess.