CFS WRITE UP ON CASE 6
BY SUSHMA T
Session 6 – Structuring Repsol’s Acquisition of YPF
1) How significant are the expected synergies and restructuring effects? Please prepare an estimate of the value of these.
For Repsol and its shareholders, the YPF acquisition deal is seen as an ideal strategic match. The Spanish oil company gets most of its revenues from activities like refining and gasoline stations, and must buy much of its crude oil from others, while YPF owns substantial reserves because its activities are dominated by exploration and production of oil. As a united company, Repsol will have a much better balance of business, quadrupling its reserves, and vaulting into the big leagues of the top 10 international players. But with the reserves of YPF, it will instead benefit from rising prices, and expand its activities to other countries in Latin America. Repsol-YPF seeks to achieve a balance between upstream and downstream operations, position itself as a market leader in Latin America, achieve operating and capital expenditure synergies and consolidate its business scale and financial strength. As part of its integration strategy, Repsol-YPF will begin to dispose of select assets which do not correspond to its core businesses outlined above or to its core geographic areas which include Spain, Latin America and North Africa.
Cost savings after tax of $350 million by 2000, 1.6% cost savings in 1998, reduction in capital expenditure from $15.6 billion to $13.6 billion, reduced finding costs by 25.0%, as a result of decreased test drilling activity and the implementation of new technology, and lifting costs by 4.6%, as a result of synergies with YPF’s operations and increased levels for gas production, which has lower lifting costs than oil production, divesting non-core assets to yield $2.5 billion in 2002.
2) Please assess the price that Cortina proposes to offer to YPF shareholders. At $44.78 per share, would Repsol underpay, overpay, or just offer a fair price?
The price of $44.78 per share was a fair price as there was a strategic fit and synergies between the two companies. YPF was focused on upstream and thus balanced Repsol’s downstream activities.
In the attached excel, I performed valuation of YPF by subtracting PV of Repsol from PV of Repsol-YPF combined with synergies at WACC of 10.9% (all debt financing).
I got the value as 10.472 billion dollars./ The additional (13 billion- 10.472 billion) is the premium which Repsol is paying for geographic and business diversification.
Adj PV Formula used by me:
- Taxes on EBIT
=Net Operating Profit After Tax (NOPAT)
+ Non cash items in EBIT
- Working Capital changes
- Capital Expenditures and Other Operating Investments
=Free Cash Flows
Take Present Value (PV) of FCFs discounted by Return on Assets % (also Return on Unlevered Equity %) + PV of terminal value
=Value of Unlevered Assets
+ Excess cash and other assets
=Value of Unlevered Firm (i.e. firm value without financing effects or benefit of interest tax shield) + Present Value of Debt's Periodic Interest Tax Shield discounted by Cost of Debt Financing % =Value of Levered Firm
3) Please assess the current pricing of Repsol shares in the market. Is Repsol undervalued, overvalued, or just fairly valued in the global equity markets at this time? Is now a good time to issue Repsol shares?
From Exhibit 11, the current price of Repsol stock is 18-19 $ per share. Actual Value of Repsol share is 7010/900 = $7.78per share from Exhibit 3.
Using valuation using DCF, I arrived at $ 22.33 per share for Repsol(attached Excel). Hence it is fairly valued.
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...
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