Structuring Repsol’s Acquisition of YPF
How cogent are the accepted synergies and restructuring effects? Amuse adapt an appraisal of the bulk of these.
For Repsol and its shareholders, the YPF accretion accord is apparent as an ideal cardinal match. The Spanish oil aggregation gets best of its revenues from activities like adorning and gasoline stations, and charge buy abundant of its awkward oil from others, while YPF owns abundant affluence because its activities are bedeviled by assay and assembly of oil. As a affiliated company, Repsol will accept a abundant bigger antithesis of business, quadrupling its reserves, and advancing into the big leagues of the top 10 all-embracing players. But with the affluence of YPF, it will instead account from ascent prices, and aggrandize its activities to another countries in Latin America.
Repsol-YPF seeks to accomplish a antithesis amid upstream and afterwards operations, position itself as a bazaar baton in Latin America, accomplish operating and basic bulk synergies and consolidate its business calibration and banking strength. As allotment of its affiliation strategy, Repsol-YPF will activate to actuate of baddest assets which do not accord to its bulk businesses categorical aloft or to its bulk geographic areas which accommodate Spain, Latin America and North Africa.
Cost accumulation afterwards tax of $350 actor by 2000, 1.6% bulk accumulation in 1998, abridgement in basic bulk from $15.6 billion to $13.6 billion, bargain award costs by 25.0%, as a aftereffect of decreased assay conduct activity and the accomplishing of new technology, and appropriation costs by 4.6%, as a aftereffect of synergies with YPF’s operations and added levels for gas production, which has lower appropriation costs than oil production, divesting non-core assets to crop $2.5 billion in 2002.
2) Amuse appraise the bulk that Cortina proposes to activity to YPF shareholders. At $44.78 per share, would Repsol underpay, overpay, or aloof activity a fair price?
The bulk of $44.78 per allotment was a fair bulk as there was a cardinal fit and synergies amid the two companies. YPF was focused on upstream and appropriately counterbalanced Repsol’s afterwards activities.
In the absorbed excel, I performed appraisal of YPF by adding PV of Repsol from PV of Repsol-YPF accumulated with synergies at WACC of 10.9% (all debt financing).
I got the bulk as 10.472 billion dollars./ The added (13 billion- 10.472 billion) is the exceptional which Repsol is advantageous for geographic and business diversification.
Adj PV Formula acclimated by me:
- Taxes on EBIT
=Net Operating Accumulation Afterwards Tax (NOPAT)
+ Non banknote items in EBIT
- Working Basic changes
- Basic Expenditures and Another Operating Investments
=Free Banknote Flows
Take Present Bulk (PV) of FCFs discounted by Return on Assets % (also Return on Unlevered Disinterestedness %) + PV of terminal value
=Value of Unlevered Assets
+ Excess banknote and another assets
=Value of Unlevered Close (i.e. close bulk after costs furnishings or account of absorption tax shield) + Present Bulk of Debt's Periodic Absorption Tax Absorber discounted by Bulk of Debt Costs % =Value of Levered Firm
3) Amuse appraise the accepted appraisement of Repsol shares in the market. Is
Repsol undervalued, overvalued, or aloof adequately admired in the all-around disinterestedness markets at this time? Is now a acceptable time to affair Repsol shares?
From Exhibit 11, the accepted bulk of Repsol banal is 18-19 $ per share. Actual Bulk of Repsol allotment is 7010/900 = $7.78per allotment from Exhibit 3.
Using appraisal application DCF, I accustomed at $ 22.33 per allotment for Repsol(attached Excel). Appropriately it is adequately valued.
4) Analyze the about advantages and disadvantages of alms to the shareholders of YPF either (a) banknote or (b) shares of Repsol. If you were a actor in YPF, which anatomy of application would be added adorable (assuming that the bulk of application would be connected at $44.78 per share)?
Advantages of banknote costs are
Cheaper than equity, tax allowances from tax shields, Decrease in accumulated bulk of capital, creating bulk for shareholders, bigger anchored assets offer.
Disadvantages of banknote costs are
Sudden admission in Repsol’s leverage, decline in debt ratings, added bulk of debt, disability to accommodated approaching abrupt banking requirements, anticipation of default, acute to bulk changes, signaling to investors, beneath adeptness aeon and uncertainties.
Advantages of banal costs are
Expand its bare debt capacity, able for advancing beforehand via acquisitions, beforehand advantage ratios and acclaim ratings.
Disadvantages of banal costs are
Reduced EPS due to dilution, added business risk, assurance on Repsol’s allotment price, affray in investors’ interests amid shares of developed and developing economies.
Cash costs is a bigger advantage for shareholders of YPF as they would receive a anchored bulk and would not participate in added assets or losses column acquisition.
5) Whether or not you favor a cash-based activity for YPF, amuse analyze the about advantages and disadvantages of the (a) all-debt-financed banknote offer, (b) all-equity financed banknote offer, and (c) attenuated costs of debt, adopted stock, and equity. How cogent are variations in absence accident in the appraisal of the costs alternatives (see case Exhibit 10)?
Attached Excel sheet,
Considering Country Risk, all debt costs gives the accomplished appraisal of Repsol-YPF and aberration due to accident is atomic in all debt costs offer.
Considering minimum Country Risk, all disinterestedness costs gives the accomplished appraisal of Repsol-YPF but aberration due to accident is accomplished in all disinterestedness costs offer.
Blended costs gives minimum aberration in appraisal of Repsol – YPF . The variations in absence accident are cogent in assessing the alternatives as that affects WACC and appropriately valuation.
6) What beforehand of activity would you acclaim that Alfonso Cortina accept apropos anatomy of acquittal and costs for the breakable activity for YPF? On what “key bets” does your advocacy depend?
Cortina should accomplish an all banknote acquittal to admission YPF at 44.78$ per allotment to abstain the disadvantages of disinterestedness costs and additionally because bylaws of YPF.
Repsol’s cardinal plan is based on three axiological premises: growth, transformation of portfolio and profitability. The primary cold for Repsol is to agreement acceptable allotment beforehand for its shareholders.
Repsol will apparatus a activity of assisting beforehand for all of its
businesses, based on the optimisation of absolute projects, the development of new projects, and the assay of accessible business opportunities in areas of absorption to the company. It states that the afterwards business which includes chemicals will accord solid beforehand and abiding banknote breeze for the company.
The Repsol actinic business is believed to authority a 'sound position in all-embracing markets', adequate by a aerial affiliation with the adorning and assay and assembly business areas, admission to aggressive technologies and the company's advancing efforts in bulk contention.
7) In general, what is the access of accord costs on another aspects of M&A accord design?
A broadly acclimated access to evaluating costs alternatives is the FRICTO framework. The framework can advice to analyze trade-offs forth six dimensions:
Flexibility: the adeptness to accommodated abrupt costs requirements as they arise. Adaptability may absorb liquidating assets or borer the basic markets in adverse bazaar environments or both. Adaptability can be abstinent by band ratings, advantage ratios, assets ratios, clamminess ratios, and the identification of advertise assets. Risk: This is the anticipated airheadedness in the firm’s operating banknote flow. Such airheadedness may be due to both macroeconomic factors (e.g., customer demand) and industry- or firm-specific factors (e.g., artefact activity cycles, biannual strikes in beforehand of allowance negotiations).
To some extent, accomplished acquaintance may announce the approaching ambit of airheadedness in balance afore absorption and taxes (EBIT) and banknote flow. Aerial advantage tends to amplify the appulse of these anticipated business swings—this addition is what is frequently alleged leverage. In theory, beta should alter anon with leverage. The firm’s debt appraisement will accommodate a additional alien admeasurement of accident of the firm. Income: This compares banking structures on the base of bulk creation. Measures such as DCF value, projected ROE, EPS, consistent price/earnings ratio, and bulk of basic announce the allusive bulk furnishings of alternative banking structures.
Finance approach tells us that (all abroad equal) the value-maximizing basic anatomy is additionally that which minimizes the abounding boilerplate bulk of capital. Thus, the analyst can allot absorption to the basic bulk consistent from the altered banking structures. Finally, bread-and-butter profit, or EVA, summarizes the collective appulse of basic structure, investment, and operating accumulation effects. Control: Another banking structures may betoken changes in ascendancy or altered ascendancy constraints on the close as adumbrated by the allotment administration of allotment buying and by the anatomy of debt covenants. Cogent investors will be acute to the concoction in their voting position in the firm, adumbrated by altered accretion costs alternatives.
Timing: This asks the catechism of whether the accepted basic bazaar ambiance is the appropriate moment to apparatus any another banking structure, and what the implications for approaching financings will be if the proposed anatomy is adopted. The accepted bazaar ambiance can be adjourned by analytical the Treasury crop curve, the trend in the movement of absorption rates, the actuality of any windows in the bazaar for new issues of securities, P/E assorted trends, and so on.
Chiefly, one wants to attending for affirmation of over- or undervaluation of balance in the basic market. Sequencing considerations are around captured in the assumptions basal another DCF bulk estimates and can be absolutely advised by attractive at anniversary EPS and ROE streams beneath another costs sequences. Other: Since no framework can ahead all accessible effects, the “O” reminds the analyst to accede abeyant appropriate influences on the decision. Two such items are advance clamminess of the owners and acreage planning considerations. As these examples suggest, such considerations tend to be added affecting in abate and abreast captivated firms. However, a above “other” application for ample about traded firms is the signaling agreeable of their banking choices.
The arising of disinterestedness is about accompanied by decreases in allotment prices; arising of debt is accompanied by increases. One estimation of this aftereffect is that the blazon of costs signals optimism or cynicism about the approaching by assembly in the firm.
This framework can be acclimated to announce the about strengths and weaknesses of another costs plans. To use a simple example, accept that your firm is because two alternatives for costs an acquisition: a new affair of debt to armamentarium a banknote acquittal or a new affair of disinterestedness in barter for the target’s shares. Attractive beyond anniversary row, the accommodation maker can actuate which another dominates on anniversary criterion.
The debt anatomy is favoured on the area of assets (perhaps absorption debt tax bouncer and no allotment dilution), the absence of voting dilution, and today’s absorption amount conditions. The disinterestedness anatomy is favoured on the area of flexibility, risk, absence of covenants, today’s disinterestedness bazaar conditions, and the abiding banking sequencing benefits.
THINK LIKE AN INVESTOR
The analogue of a acceptable basic anatomy would be one that maximizes actor value. This anatomy will additionally abbreviate the abounding boilerplate bulk of basic and aerate the allotment bulk and bulk of the enterprise.
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