Corporate Finance: An In-Depth Analysis of Repsol-YPF Merger

This report analyzes the merger between Repsol and YPF, two major players in the oil industry. It begins by examining the strategic positions of both companies before the acquisition, including Repsol's dominance in Spain and YPF's nationalized status in Argentina. The report explores the strategic options available to both companies before the merger, the purpose behind the merger (including low crude oil prices and market trends), and the valuation of YPF as an independent company, including the calculation of Weighted Average Cost of Capital (WACC) and discounted cash flow (DCF) analysis. The report further discusses the potential of YPF after being absorbed by Repsol, the reasonable price Repsol should offer, the basis of payment, key factors affecting the acquisition's success, and potential threats to the deal. The analysis highlights the economic globalization transforming the oil industry and the need for growth, diversification, and risk reduction. The report concludes with an overview of the merger's implications and outcomes.

Running head: CORPORATE FINANCE
Corporate finance
Name of the Student
Name of the University
Author Note

2
CORPORATE FINANCE
Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
An analysis of the strategic position of the two companies before the acquisition:....................3
The strategic options of the companies before the merger:.........................................................4
The purpose for the merger:........................................................................................................5
Worth YPF as an independent company:....................................................................................6
The potential of YPF after being absorbed by Repsol.................................................................7
The reasonable price that Repsol should offer to acquire YPF...................................................8
The Basis of payment for the acquisition....................................................................................8
The key factors that might affect the level of success of the proposed acquisition.....................9
The threats of the proposed deal................................................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

3
CORPORATE FINANCE
Introduction
The discussion deals with the analysis of the merger taken place between two companies
Repsol and YPF. The merger took place in the march 1999 (Coloma 2016) The CEO of Repsol
took over the Argentinean oil company YPF by taking over 100% of its stock. On January of that
year at a public auction, the Repsol had bought 14.99% of YPF at a price of US$2 billion.
According to the transaction, the Repsol had an option buy the rest of the YPF within the next
three years. The investment of Repsol was more of a financial investment than taking of control
of the business. In order to get the full control Repsol had to take over the rest 85% of the shares
(Costamagna et al. 2015). However, there were a number of obstacles that the company had to
face. The main obstacle was the Article of Association, which states that any bid that envisaged
the control taking of more that 15% of the company’s stock, should be open to the entire
companies share and the requirement should be made in cash. This substantially increased the
level of debt and the company risk. The aim of the Repsol thus, as to swap the shares of YPF in
order to do that the Article of association had to be changed. There was a need for approval from
the YPF shareholders and need of cash to make the takeover (Fernandez 2015). In the following
three years, the changes were made and both of the companies were merged successfully. The
following discussion contains the analysis of the acquisition along with the prospects of the deal.
Discussion
An analysis of the strategic position of the two companies before the acquisition:
The company of Repsol was the largest oil company in Spain before the merge with the
company in 1999 had acquired 60% of the country’s oil refining capacity and 50% of the petrol

4
CORPORATE FINANCE
stations (Vandenberghe and Casteele 2017). By the end of 1998 with a workforce of 23762
employees, Repsol has also dominated Spanish petrochemical industry and had 45% stake in the
country’s main gas wholesale and retail operations (Barcelona 2017). The Repsol in almost forty
years became the Spain’s largest company in terms of turnover and profits. After spending
thousand millions of pesetas, the company had created a sound brand image. In 1989, after
floating to the stock exchange with market capitalization of €721 million, Repsol negotiated
important agreements with the foreign petrol companies and Spanish banks. The number of
shares with the US and Japanese banks doubled at that time (Muñiz, Alvídrez and Téllez 2015).
On the other hand, the YPF (Direccion Nacional De Yacimientos Petroliferos Fiscales)
was formed in the year 1922 when the petrol industry by the argentine government was
nationalized (Velez-Ocampo, Gonzalez-Perez. and Herrera-Cano 2017). By the end of the
nineteenth thirties, the company became dominant and contributed 68% of the company’s total
oil production. The dominance increased with time and the market share rose to 84% and the
company became a gas producer (Olivares 2015).
After years of confining its business in Spain, the Repsol in 1996 started to invest outside
the nation. Their focus was lain America, where the government was facing the major financial
problems with the institutions like World Bank, IMF, IDB (Dunlap et al. 2016). The company
also expanded in North America, Europe.
The strategic options of the companies before the merger:
Before the merger of the Respol and YPF, the Respol business was structured into four
main segments that are refining and marketing, petrochemicals, gas and electricity and E&P. In
1997, the company was first merged with Latin America and obtained a set off new objectives

5
CORPORATE FINANCE
investing 10.4 billion Euros (de Matías Batalla 2015) Over the last few years, the company had
been encountering many upstream, downstream. The Respol suffered from lack of reserves, and
the crude oil price fell off sharply. While profit was increased by 18%, the sector in the Europe
fell by 36% on average. Other than the strategies, other the dominance in Spain, The Company
tried to increase the business by generating electricity and monetizing the gas reserves. This
expansion in both Europe and Latin America showed high rates of growth with new set of
business opportunities. The new electricity generating technology using the combined power
station helped in minimizing risk and was attractive economically. Although in 1999, the
investment plan changed drastically with the purchase of YPF. The value of the investment was
almost 50% more than what the company had planned for five years which was around €14.5
billion (Graham Harvey and Puri 2015). The Repsols strength was refining and marketing and
YPF involves in exploration and production, therefore both complement each other hand the
collaboration would increase the self-sufficiency of the business.
The purpose for the merger:
The economic globalization transformed the structure of the oil industry this also created
a large number of corporations, which were not only looking for economies of scale and cost
reduction but also significant investments for new business opportunities(Dunlap et al. 2016).
There was a tremendous need for growth, diversification and reduction of risk. In order to tackle
the situation many companies of the oil industries were being merged. The collaborated
companies were called oil giants who had the competitive advantage in the industry (Graham,
Harvey and Puri 2015). The idea of the merger of the Repsol and YPF would enable the
company to face the competition of the middle ranking oil companies in terms of market
capitalization; this would also allow the both to attain more growth than its competitors.

6
CORPORATE FINANCE
The main reasons for the combining of the two companies can be jotted down as follows:
 The price of the crude oil was low, therefore there was a need for the companies
to combine to increase their volume to enhance cost saving (Parola Ellis and
Golden 2015).
 Change in the trend in the market and increase in competition forced them to
merge.
 Progress in the technology and the extraction techniques had reduced the cost for
exploration; this educed the barriers for the competitors to enter the market.
Repsol has YPF combined to tackle the situation.
 There was a need for considerable economies of scale in industry.
 The need to maintain a potential growth rate and maintain a scale that would
make the company exists for a long time.
 The rise in the new opportunities for vertical integration for oil companies and
anticipation for growth required considerable investment in infrastructure. The
combination was needed to help in this.
Worth YPF as an independent company:
Before the merger of the two companies, there was a valuation of the firm’s equity. This
was done to determine the price that the YPF shareholders had to offer. According to the Alfonso
Cortina, an internal team was engaged in order to value the YPF to assess the price
recommended (Capone 2015).
From the given information, the value of the YPF can be found out:
According to the data, the current price in dollars of the YPF share before acquisition was $41.85

7
CORPORATE FINANCE
The total no of shares (in millions) were: 353shares
Therefore, the independent value of the company in million=353*41.85=$14773.05
The various other finding of the valuation are noted down as follows:
 The price of the crude oil in 1999 with a discount of 3.5% was $16.
 The operation margin of the YPF in 1999 based on historic cost structure showed a
growth 1.5 % each year in the last 4 years in exploration and production. This reflects
that the company had a great efficiency.
 Compared to the last year that 1998 the YPF showed a growth of 5% in the income
refining and marketing sector (Parola, Ellis and Golden 2015).
 Operating margin of 16% in the year 1999 in refining and marketing was 16% with an
estimated growth of 2% per year.
Calculation of Weighted Average cost of capital
The discounting rate that is used for calculating the discounted cash flow is the WACC.
The weighted average cost of capital has two component cost of equity and cost of debt. This
components are discussed below.
The cost of equity or the expected return is calculated using the Capital Assets pricing
model. In the current case the CAPM model have been adjusted to reflect the risk involved in the
international investing. The use of the country risk premium provides a significant impact on the
valuation of the company. In the current case the country risk premium of 6.21% is used for
calculating the expected return using CAPM. The formula used for calculating the expected
return on equity is:

8
CORPORATE FINANCE
Return on Equity= Risk Free Rate+ Beta (Expected Market return- Risk free Rate+ country
Risk Premium)
The valuation of business is conducted for long term investment so the arithmetic mean
of the bond rate is used as risk free rate of return. In the current case the arithmetic mean of the
bond rate from the period 1962 to 1998 that is 7.10% is selected as the risk free rate of return.
Therefore the market return of 13.13% of the same period is used in the calculation of the
expected rate of return.
In calculating the expected rate of return beta is critical as it is useful in the formula for
accounting the risk. The company can use levered beta or unlevered beta for the calculation. The
beta measures the sensitivity of the security with respect to the movement in the market. In
levered beta the debt of the company is taken into consideration. On the other hand in the
unlevered beta the sensitivity of the share is measured only with respect to the movement of the
market. Therefore it can be said that the use of the unlevered beta is more appropriate as it
correctly measurers the volatility of the security with respect to the overall market. In this case
the company is an integrated petroleum chemical so the unlevered beta of 0.73 is used as per the
Exhibit 8.
Statement showing calculation of Expected return (CAPM)
Particulars Amount
Risk Free rate 7.10%
Market return 13.13%
Beta Unlevered 0.73
Country Risk premium 6.21%
Expected rate of return/ cost of Equity 16.04%

9
CORPORATE FINANCE
The cost of debt is 6.4% as mentioned in the exhibit 8. The calculation of the weighted
Average cost of capital is provided below:
Calculation of Weighted Average cost of capital
Particulars Amount
Weightage
(1)
Cost
(2) (1X2)
Debt 2578 26.34% 6.40% 1.69%
Equity 7209 73.66% 16.04% 11.81%
WACC 9787 100.00%
13.50
%
Valuation using DCF Model
Statement Showing calculation of Discounted free Cash flow
Amounts in Million dollar
Particulars 1999 2000 2001 2002 2003 2004
Net Income 687 789 917 1073 1250 1451
Add:
Depreciation 1114 1170 1228 1167 1167 1167
Cash Inflow 1801 1959 2145 2240 2417 2618
Less:
Capital Expenditure 1317 1284 1252 1221 1190 1161
Net cash Flow 484 675 893 1019 1227 1457
Discounting factor 0.88 0.78 0.68 0.60 0.53 0.47
Discounted free Cash flow
426.4
4
524.0
0
610.8
0
614.0
9
651.5
1
681.6
3
The table above provides the detailed calculation of the discounted cash flow of the
company for the forecasted period of 1999 to 2004. In the calculation in order to find the net free
cash flow the depreciation is added back with the net income as it is a non-cash expenses. The
capital expenditure is deducted from the net income.

10
CORPORATE FINANCE
The next step for valuing the company after determining the discounted free cash flow is
the calculation of the terminal value. The terminal value of the business is calculated using the
Gordon Growth model. The formula is provided below:
Terminal Value= (Final project year cash flow X (1+long term cash flow growth
rate))/( discount rate –long term cash flow growth rate)
The calculation of the Terminal Value is provided below:
Statement showing calculation of terminal value
Particulars
Amount (in Mil
$)
Cash Flow in 2004 1457
Long term Growth rate 5%
Discounting rate 13.50%
Terminal Value 18004.196
The independent valuation of YPF is calculated by adding the present value of cash flow
with the terminal value. The calculation is provided below:
Statement Showing Valuation of YPF as independent company
Particulars
Amount (in Mil
$)
Present value of forecasted Cash flow 3508.47
Terminal Value 18004.196
Valuation of YPF 21512.67
Therefore based on the above calculation and discussion it can be seen that the
independent valuation of the YPF is $21512.67.

11
CORPORATE FINANCE
The potential of YPF after being absorbed by Repsol
The Repsol’s acquisition of YPF since acquisition in 1999 has demonstrated a full
success in financial and operational management. The rate of sales has increased annually by
24% as a result the net profit increased by 16% per year (Fernandez 2015). The base year is
taken as 1999 and the current year is taken as 2011 in the current analysis. However, the rate of
profit isn’t equivalent to the rate of sales. This is due to the increase of the cost of sales as more
crude oil was purchased from producers at higher prices than the local oil refiners and producers
(Henson. and Sandberg 2017). The consolidation has also enhanced the import of manufacturing
premium gasoil and standard car oil. This import was done to meet the higher demand for the
products in the local market and comply with the applicable regulatory requirements of the
area(Holburn and Vanden Bergh 2014). The YPFs new financial controller states that the there
were several risks in the financial system of the company as the YPF offered 100% of its profit
to the shareholders. The Repsol invested US$12 billion and a got a return of US$2 billion.
Therefore, the YPF had a great potential in terms of profit and the acquisition was a great success
for both the companies.
In order to calculate the potential value of YPF after is acquired by Repsol the discounted
cash flow model for valuation is used. In this case it should noted that after YPF is absorbed by
Repsol then combined valuation of the company should be made. In this model the expected rate
of return of the shareholders are assumed to be the same. The cost of debt combined is 7.4% as
provided in the exhibit 8. In order to calculate the WACC the debt and equity of both the
company is combined for the year 1998 to determine the weightage. The calculation of WACC is
provided below:

12
CORPORATE FINANCE
Calculation of Weighted Average cost of capital
Particulars
Amoun
t
Weightage
(1)
Cost
(2) (1X2)
Debt 6157 31.14% 6.40% 1.99%
Equity 13612 68.86% 16.04% 11.04%
WACC 19769 100.00%
13.03
%
In order calculate the discounted cash flow the estimated operating income provided in
Exhibit 10 is used. The combined operating income provided in the exhibit is assumed to be the
cash flow from operation. Based on this figure the discounted cash flow is calculated that is
provided below:
Statement Showing calculation of Discounted free Cash flow
Amounts in Million dollar
Particulars 1999 2000 2001 2002 2003 2004
Exploration and
Production Income 1026 1249 1438 1646 1875 2077
Add:
Refining and Marketing 18164 19299 20670 22139 23436 24812
Cash Inflow 19190 20548 22108 23785 25311 26889
Discounting factor 0.88 0.78 0.69 0.61 0.54 0.48
Discounted free Cash
flow 16977.14
16082.3
2
15307.9
9 14570.06 13716.94
12891.7
6
The table above shows the combined discounted cash flow based on the projections
provided. The calculation below indicate the terminal value of the company.
Statement showing calculation of terminal value
Particulars
Amount (in Mil
$)
Cash Flow in 2004 26889
Long term Growth rate 5%
Discounting rate 13.03%

13
CORPORATE FINANCE
Terminal Value 351409.533
Statement Showing Valuation after acquisition
Particulars
Amount (in Mil
$)
Present value of forecasted Cash flow 89546.22
Terminal Value 351409.533
Valuation 440955.75
The table above indicates the valuation of the business after the acquisition.
The reasonable price that Repsol should offer to acquire YPF
The Repsol for this operation had to imply a considerable disbursement of cash. This was
the largest bid in the Spanish stock market history. In order to back this, Repsol had to bring
together 13400 million dollars in cash (Fernandez 2015). However, the cash-offer has a number
of advantages part share part offer as it would attract the YPF current shareholders. Moreover, it
can also increase the level of debt of the Repsol. If the cash offer meets with the full
acquiescence of YPF shareholders, the increase would rise up to 4 times in this case. During the
financing of the merge, the Repsols executive committee thought that financial structure would
not be sustainable for a long time. Thus, there was a need for recapitalization. The
recapitalization includes increase of the capital for $ to 6 billion more. Additionally a plan for
disinvestment was also proposed that could benefit up to 2to2.5 billion dollars in the following 3
years (Holburn and Vanden Bergh 2014). The plan was made in such a way that would minimize
the element of risk. According to the Repsol CEO Alfonso, during this whole process he was
worried about the effects of the financial plan on the present capital structure. Therefore, he

14
CORPORATE FINANCE
made it essential to evaluate the level of debt of the company at the start of the purchase itself
( Henson and Sandberg 2017). The Repsol management after the estimation came up with the
information that the period debt would reduce by 1000 million dollars per year and if the bonds
were converted along with it, the debt plus equity ratio would be around 35%. Therefore, the
decision was crucial, the uncertainty whether the company would be able to finance the
operations without difficulty was cleared.
The calculations provided in the earlier section of the report indicates the value of the
company. The calculation shows that the after acquisition the combined value of the company
will increase as a result it will be an appropriate decision to acquire YPF at the reasonable price
of $21512.67 million.
The Basis of payment for the acquisition
There are three options available for making payment to the shareholder of the YPF. The
three options for making payments are offering cash, stock or avail a mix method of payment
(Brueller, Carmeli and Markman 2016).
The payment to the shareholder by cash will be preferred by the shareholder of the.
However, it can be seen that this will increase if the entire amount of the acquisition is made
through cash this will rapidly increase the level of debt of the company. The result could be 4
times greater the debt equity than the industry average. This will increase the cost of debt of the
company as the credit rating of the organization will decline. Therefore based on the discussion it
can be seen that making entire payment of acquisition through cash is not an appropriate step.
There was continuous negotiations depending on the modification of the Article of
Association that clearly states that the financing of the merger should only be done though cash.

15
CORPORATE FINANCE
After the initial step of buying only 15% of the YPF stake in cash, the Argentinean government
appeared to give a direct backing to the plan (Fernandez 2015). Although the backing of the
government was necessary there had to be an approval of the YPFs board so that the deal can be
paid by shares and not by cash only. However, the approval was delayed and the situation for
Repsol did not seem to be in favor of (Sako 2016). Therefore it can be seen that the entire
payment for acquisition cannot be made through cash.
The approach that should be followed is that 15% stake is acquired by shares. The rest
portion of should be acquired through cash. The alternative strategy made by Alfonso for
generating enough cash is the possibility of making public offer for capital. This would enable
Repsol to get alternative way to take the control of the YPF. The bid would take place in the
Argentinean and the US stock exchange, and more 36% of the companies share will be taken
over along with 15% that was already owned by Repsol. The strategy was well scrutinized and
whether the scale of merger is manageable or not, was examined carefully. This made it easy for
Repsol to absorb YPF.
Therefore, based on the above discussion it can be said that the acquisition method that is
most suitable is the combination of share and cash payment.
The key factors that might affect the level of success of the proposed acquisition
The proposed acquisition deals with the collaboration of the two companies Repsol and
YPF (Fernandez 2015). There can be many factors like the strategies used by the company in
order to optimally utilize its resources to absorb the other company. The revenue and the cost
synergies are important factors that may influence the acquisition process. When the company is
combined with another company the streamlines of the company like the accounting and finance

16
CORPORATE FINANCE
human resource is combined leveling up the management and the company structure (Greve and
Zhang 2017). The action can save cost and improve the cession making. Further, the cost
synergies that are achieved through economies of scale, it signifies that bigger companies are
able to negotiate with better prizes with its customers and utilize the manufacturing capacity.
This may also positively affect the growth of the profit (Tremblay 2016).
The threats of the proposed deal
Although the proposal of acquisition seemed to a great success, there were many threats
that could turn out as a big disadvantage for both the companies. One of the major problems is
culture clashes. Each company has a different culture and a personality that sets up the entire
organization. When two companies are merged, there can be a great conflict in terms of cultural
background (Brueller, Carmeli and Markman 2016). In the given case, the Spanish and the
Argentinean companies are merged. Although there had been a sound understanding between the
two, cultural difference may turn out to be a major threat. The next limitation that an acquisition
may face is redundancy, that is along with the merge of the company shares and capital, the
internal managers and employees are also combined that may reduce the motivation. The
existing workers may not be even removed as it would lead to lack of efficiency of the combined
(Tremblay 2016). Two companies have different objectives.The conflict of objectives may also
take place. When one company is absorbed by another huge sum of money has to be
borrowed .The debt may increase, in the case the Repsol had to accumulate great amount that
increased the debt of the company. This can also lead to high risk and threat. Lastly, a major
problem aced is market saturation. As both the company had dominated the market for years and
when they are combined, it may lead to saturation.

17
CORPORATE FINANCE
Conclusion
The above discussion talks about the absorption the company YPF by the Spanish
company Repsol. Due to massive competition between the oil industries during the year 1999,
and increase in government regulations (Greve and Zhang 2017). The companies were being
merged in order to survive. Especially in the oil a gas exploration production where it requires
considerable investments along with numerous risk and opportunities. The economic
globalization that led to oil companies’ looking for economies of scale and cost reductions, had
to diversify their business by sorts of collaborations. The industry had witnessed several number
of mergers and small and medium sized companies were absorbed by larger business make a
sound business structure.

18
CORPORATE FINANCE
References
Barcelona, R.G., 2017. Acquire or Build. In Energy Investments (pp. 335-356). Palgrave
Macmillan, London.
Brueller, N.N., Carmeli, A. and Markman, G.D., 2016. Linking merger and acquisition
strategies to postmerger integration: a configurational perspective of human resource
management. Journal of Management, p.0149206315626270.
Capone, F., 2015. Valuation of YPF SA.
Coloma, G., 2016. The effect of the Repsol-YPF merger on the Argentine gasoline
market. Review of Industrial Organization, 21(4), pp.399-418.
Costamagna, R., Arboledas, J.R.P., Erburu, L.S., Fernández-Hidalgo, E.R., Ruz, E.S. and
Apascaritei, P., 2015. Repsol-YPF: An “illegal” expropriation. Journal of Business
Research, 68(2), pp.255-262.
de Matías Batalla, D., 2015. Spanish multinational firm and its internationalization process (No.
15-04).
Dunlap, D., McDonough, E.F., Mudambi, R. and Swift, T., 2016. Making up is hard to do:
knowledge acquisition strategies and the nature of new product innovation. Journal of Product
Innovation Management, 33(4), pp.472-491.
Fernandez, P., 2015. Valuation of an Expropriated Company: the Case of YPF and Repsol in
Argentina.

19
CORPORATE FINANCE
Graham, J.R., Harvey, C.R. and Puri, M., 2015. Capital allocation and delegation of decision-
making authority within firms. Journal of Financial Economics, 115(3), pp.449-470.
Greve, H.R. and Zhang, C.M., 2017. Institutional logics and power sources: Merger and
acquisition decisions. Academy of Management Journal, 60(2), pp.671-694.
Henson, E. and Sandberg, W., 2017. Mergers & Acquisitions: Managing GxP Compliance
Through Integration and Organizational Change. A ROADMAP TO GMP COMPLIANCE PART
3, p.12.
Holburn, G.L. and Vanden Bergh, R.G., 2014. Integrated market and nonmarket strategies:
Political campaign contributions around merger and acquisition events in the energy
sector. Strategic Management Journal, 35(3), pp.450-460.
Muñiz, C., Alvídrez, S. and Téllez, N., 2015. Shaping the Online Public Debate: The
Relationship between the News Framing of the Expropriation of YPF and Readers’ Comment.
Olivares, J.V., 2015. 5. Spanish business in Argentina and Chile since 1880. The Impact of
Globalization on Argentina and Chile: Business Enterprises and Entrepreneurship, p.135
Parola, H.R., Ellis, K.M. and Golden, P., 2015. Performance effects of top management team
gender diversity during the merger and acquisition process. Management Decision, 53(1), pp.57-
74.
Sako, M., 2016. The need for corporate diplomacy. Communications of the ACM, 59(4), pp.33-
35.
Tremblay, A., 2016. Cultural differences, synergies and mergers and acquisitions.

20
CORPORATE FINANCE
Vandenberghe, J. and Casteele, A.V., 2017, July. Referent identification in newspaper discourse
on the YPF takeover by Repsol. In The 14th International Culture & Power Conference: Identity
and Identification, Cuenca, 22 a 24 de marzo de 2010 (pp. 223-236). Ediciones de la
Universidad de Castilla-La Mancha.
Velez-Ocampo, Gonzalez-Perez, M.A. and Herrera-Cano, C., 2017. Nationalisation and
privatisation in state-owned oil multilatinas. International Journal of Business and Emerging
Markets, 9(3), pp.302-328.