(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
By Kevin Allison and Fiona Maharg Bravo
LONDON/MADRID, May 4 (Reuters Breakingviews) - Investors shouldn’t take bid speculation around Repsol (REP.MC) too seriously. The YPF (YPFD.BA) fiasco in Argentina may have wiped out a third of the Spanish oil major’s market capitalisation. But a bid for the 17 billion euro ($22 billion) company still looks unlikely.
Repsol has shed about 9 billion euros of market value since Buenos Aires first intimated it might expropriate its 57 percent stake in YPF, Argentina’s largest oil producer, in January. That’s about 2.7 billion euros more than the holding’s value at the beginning of the year.
The outsize hit can be explained partly by fears that Repsol won’t see a penny of the 1.5 billion euros of vendor financing it extended to Argentina’s Eskenazi family to buy 25 percent of YPF. Investors may also be fretting about a shareholder agreement that seems to require Repsol to buy back the Eskenazis' stake at its $3.5 billion purchase price, plus a $500 million fee if there is a change of control or if YPF’s dividend is cut. Yet Repsol has made a pretty convincing case that expropriation renders the pact invalid.
If the shares are pricing in a lot of pain, that doesn't automatically make Repsol a quality M&A target. Losing YPF will increase leverage - Standard & Poor's says YPF accounted for about 13 percent of group debt but 40 percent of EBITDA, excluding a contribution from Repsol's 30 percent stake in Gas Natural (GAS.MC). "New" Repsol will also rely more on refining, a challenged business that other oil majors are pulling back from. And the Gas Natural holding is another possible snag, since a bidder might struggle to sell it on.
Even assuming a suitor could get comfortable, it would still have to win over Repsol’s core shareholders - over-indebted Sacyr SVO.MC, Mexico’s Pemex [PEMX.UL], and La Caixa (CABK.MC). They are unlikely to sell out at a standard premium to the current share price. Madrid might object too.
Of course, there’s potential upside. Repsol has been replenishing reserves faster than peers. It may get compensation for losing YPF, and new projects may come good. That may make the shares attractive to equity investors. But it probably wouldn’t sway strategic buyers.
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- Repsol and its major shareholder, the Spanish banking group La Caixa, denied reports of a plan to merge the oil group with Gas Natural, the Spanish utility.
- Spain’s Cinco Dias newspaper had reported on April 27 that La Caixa was orchestrating a potential tie-up between the two groups to prevent a hostile takeover after its Argentine subsidiary was seized by the country’s government.
- Repsol’s shares have fallen by a third since Argentina launched a pressure campaign against YPF, which was 57 percent owned by the Spanish oil major, in January.
- Repsol owns a 30 percent stake in Gas Natural. La Caixa owns 12.8 percent of Repsol and 35.3 percent of Gas Natural.
- Reuters: Repsol weighs strategy after loss of YPF [ID:nL6E8FR1C8]
- For previous columns by the authors, Reuters customers can click on [ALLISON/] and [BRAVO/]
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