Structuring Repsol’s Acquisition of YPF

How material be the expected synergies and restructuring make? please prepare an estimate of the encourage of these.For Repsol and its partingholders, the YPF erudition deal is seen as an ideal strategic match. The Spanish oil phoner gets most of its revenues from activities like refining and gasoline stations, and must buy much(prenominal) of its crude oil from new(prenominal)s, while YPF owns substantial reserves because its activities are reign by exploration and employment of oil. As a united company, Repsol bequeath have a much better balance of moving in, quadrupling its reserves, and spring into the big leagues of the top 10 international players. But with the reserves of YPF, it entrust instead benefit from rising impairments, and expand its activities to other countries in Latin America.Repsol-YPF seeks to master a balance between upstream and downstream operations, dumbfound itself as a marketplace leader in Latin America, achieve operating and capital expenditure synergies and consolidate its business scale and fiscal strength. As part of its integration strategy, Repsol-YPF pass on begin to dispose of ingest 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.Synergies betoken Cost savings after tax of $350 million by 2000, 1.6% speak to savings in 1998, reduction in capital expenditure from $15.6 jillion to $13.6 billion, reduced finding cost by 25.0%, as a proceeds of decreased test drilling activity and the implementation of new technology, and lifting costs by 4.6%, as a result of synergies with YPFs operations and increase 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 worth that Cortina proposes to offer to YPF brothholders. At $44.78 per deal, would Repsol underpay, overpay, or save offer a fair harm?Attach ed outgo,The price of $44.78 per circumstances was a fair price as there was a strategic fit and synergies between the two companies. YPF was focused on upstream and therefrom balanced Repsols downstream activities.In the attached excel, I performed military rating of YPF by subtracting PV of Repsol from PV of Repsol-YPF combined with synergies at WACC of 10.9% ( on the whole debt pay).I got the repute as 10.472 billion dollars./ The extra (13 billion- 10.472 billion) is the allowance which Repsol is paying for geographic and business diversification.Adj PV Formula used by me EBIT Taxes on EBIT =Net Operating Profit After Tax (NOPAT) + Non bullion items in EBIT Working Capital changes Capital Expenditures and Other Operating Investments =Free hard currency FlowsTake Present Value (PV) of FCFs discounted by Return on Assets % ( too Return on Unlevered Equity %) + PV of terminal value =Value of Unlevered Assets + Excess cash and other assets =Value of Unlevered Firm (i.e. f irm value without pay effects or benefit of have-to doe with tax shield) + Present Value of Debts Periodic intimacy Tax Shield discounted by Cost of Debt Financing % =Value of Levered Firm3) Please assess the current pricing of Repsol shares in the market. Is Repsol undervalued, overvalued, or just reasonably valued in the global equity markets at this time? Is nowadays 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) canvass 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 shootation would be more attractive (assuming that the make out of consideration would be constant at $44.78 per share)?Advantages of cash fin ancing are Cheaper than equity, tax benefits from tax shields, Decrease in combined cost of capital, creating value for shareholders, largest fixed income offer.Disadvantages of cash financing are Sudden increase in Repsols leverage, downgrade in debt ratings, increased cost of debt, inability to envision future unforeseen pecuniary requirements, probability of default, reasonable to price changes, preindication to investors, shorter maturity period and uncertainties.Advantages of stock financing are Expand its reinvigorated debt capacity, prepared for aggressive growth via scholarships, maintain coverage ratios and credit ratings.Disadvantages of stock financing are Reduced EPS due to dilution, more business venture, addiction on Repsols share price, clash in investors interests between shares of substantial and developing economies.Cash financing is a better option for shareholders of YPF as they would drive a fixed price and would not participate in additional gains or l osses post acquisition.5) Whether or not you favor a cash- found offer for YPF, please compare the relative advantages and disadvantages of the (a) all-debt-financed cash offer, (b) all-equity financed cash offer, and (c) blend financing of debt, preferred stock, and equity. How significant are interpretations in default try in the assessment of the financing alternatives (see case Exhibit 10)?Attached Excel sheet,Considering Country Risk, all debt financing gives the highest valuation of Repsol-YPF and variation due to peril is least in all debt financing offer.Considering minimum Country Risk, all equity financing gives the highest valuation of Repsol-YPF but variation due to risk is highest in all equity financing offer.Blended financing gives minimum variation in valuation of Repsol YPF . The variations in default risk are significant in assessing the alternatives as that affects WACC and hence valuation.6) What course of action would you recommend that Alfonso Cortina grow regarding form of payment and financing for the tender offer for YPF? On what detect bets does your recommendation depend?Cortina should make an all cash payment to bewilder YPF at 44.78$ per share to avoid the disadvantages of equity financing and also considering bylaws of YPF.Repsols strategic plan is based on three fundamental expound growth, transformation of portfolio and profitability. The primary objective for Repsol is to guarantee sustainable dividend growth for its shareholders.Repsol give implement a strategy of profitable growth for all of its businesses, based on the optimisation of existing projects, the development of new projects, and the analysis of come-at-able business opportunities in areas of interest to the company. It states that the downstream business which includes chemicals result moderate solid growth and stable cash flow for the company.The Repsol chemical business is believed to hold a sound position in international markets, reinforced by a hi gh integration with the refining and exploration and production business areas, access to competitive technologies and the companys ongoing efforts in cost contention.7) In general, what is the influence of deal financing on other aspects of M& ampereA deal design?A widely used arise to evaluating financing alternatives is the FRICTO good example. The manikin can help to identify trade-offs along vi dimensions flexibility the ability to meet unforeseen financing requirements as they arise. Flexibility may involve liquidating assets or tapping the capital markets in adverse market environments or both. Flexibility can be measured by bond ratings, coverage ratios, capitalization ratios, liquidity ratios, and the identification of salable assets. Risk This is the sure variant in the firms operating cash flow. such variability may be due to both macroeconomic factors (e.g., consumer demand) and industry- or firm-specific factors (e.g., product life cycles, bi one-year strikes in advance of wage negotiations).To well-nigh extent, past experience may indicate the future range of variability in earnings before interest and taxes (EBIT) and cash flow. High leverage tends to amplify the impact of these predictable business swingsthis amplification is what is commonly called leverage. In theory, beta should vary directly with leverage. The firms debt rating will provide a second external measure of risk of the firm. Income This compares monetary expressions on the basis of value creation. Measures such as DCF value, projected ROE, EPS, resulting price/earnings ratio, and cost of capital indicate the comparative value effects ofalternative financial structures.Finance theory tells us that (all else equal) the value-maximizing capital structure is also that which belittles the weighted average cost of capital. Thus, the analyst can devote trouble to the capital cost resulting from the different financial structures. Finally, economic profit, or EVA, summari zes the conjugation impact of capital structure, enthronisation, and operating profit effects. Control Alternative financial structures may imply changes in run across or different control constraints on the firm as indicated by the percentage distribution of share ownership and by the structure of debt covenants. Significant investors will be sensitive to the dilution in their balloting position in the firm, implied by different acquisition financing alternatives.Timing This asks the question of whether the current capital market environment is the objurgate moment to implement any alternative financial structure, and what the implications for future financings will be if the proposed structure is adopted. The current market environment can be assessed by examining the Treasury yield curve, the trend in the movement of interest rates, the existence of any windows in the market for new issues of securities, P/E multiple trends, and so on.Chiefly, one wants to look for evidence of over- or undervaluation of securities in the capital market. Sequencing considerations are implicitly captured in the assumptions underlying alternative DCF value estimates and can be explicitly examined by looking at annual EPS and ROE streams under alternative financing sequences. Other Since no framework can anticipate all possible effects, the O reminds the analyst to consider potential idiosyncratic influences on the conclusiveness. Two such items are investment liquidity of the owners and estate planning considerations. As these examples suggest, such considerations tend to be more influential in smaller and privately held firms. However, a major other consideration for large publicly traded firms is the signaling content of their financial choices.The issuance of equity is typically accompanied by decreases in share prices issuance of debt is accompanied by increases. One interpretation of this result is that the typewrite of financing signals optimism or pessimism abou t the future by insiders in the firm.This framework can be used to indicate the relative strengths and weaknesses of alternative financing plans. To use a simple example, suppose that yourfirm is considering two alternatives for financing an acquisition a new issue of debt to fund a cash payment or a new issue of equity in exchange for the targets shares. Looking across each row, the decision maker can determine which alternative dominates on each criterion.The debt structure is favoured on the grounds of income (perhaps reflecting debt tax shields and no share dilution), the absence of voting dilution, and todays interest rate conditions. The equity structure is favoured on the grounds of flexibility, risk, absence of covenants, todays equity market conditions, and the long financial sequencing benefits.THINK LIKE AN INVESTORThe definition of a good capital structure would be one that maximizes shareholder value. This structure will also minimize the weighted average cost of capit al and maximize the share price and value of the enterprise.