Structuring Repsol’s Acquisition of YPF

How signifi drive outt argon the expected synergies and restructuring personal effects? Please prepare an estimate of the grade of these.For Repsol and its fateholders, the YPF acquisition swop is seen as an ideal strategic match. The Spanish fossil oil comp either gets most of its revenues from activities homogeneous 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 geographic expedition 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 spinning top 10 international players. But with the reserves of YPF, it will instead make headway 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, condition itself as a market leader in Latin America, achieve in operation(p) and non bad(p) expenditure synergies and consolidate its business scale and financial strength. As office staff 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.Synergies Estimate Cost nest egg after revenue enhancement of $350 million by 2000, 1.6% terms savings in 1998, reduction in smashing expenditure from $15.6 billion to $13.6 billion, reduced finding tolls by 25.0%, as a result of decreased rise drilling activity and the implementation of modern technology, and lifting costs by 4.6%, as a result of synergies with YPFs operations and increased levels for gas production, which has humble lifting costs than oil production, divesting non-core assets to refund $2.5 billion in 2002.2) Please respect the price that Cortina proposes to offer to YPF shareowners. At $44.78 per share, wo uld Repsol underpay, overpay, or just offer a sportsmanlike price?Attached Excel,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 foc employ on upstream and thus balanced Repsols downstream activities.In the attached excel, I per craped military rating of YPF by subtracting PV of Repsol from PV of Repsol-YPF combined with synergies at WACC of 10.9% ( all(prenominal)(prenominal) told debt finance).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 EBIT Taxes on EBIT =Net operating(a) Profit After Tax (NOPAT) + Non interchange items in EBIT Working enceinte changes Capital Expenditures and Other Operating Investments =Free Cash FlowsTake Present apprise (PV) of FCFs discounted by Return on Assets % (also Return on Unlevered Equity %) + PV of store value =Val ue of Unlevered Assets + Excess cash and other assets =Value of Unlevered flying (i.e. substantial value without financial support effects or benefit of evoke tax shield) + Present Value of Debts Periodic Interest Tax screen discounted by Cost of Debt Financing % =Value of Levered Firm3) Please assess the certain 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 nice time to issue Repsol shares?From Exhibit 11, the actual price of Repsol stock is 18-19 $ per share. true(a) 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 offer 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 consideration would be constant at $44.78 per share)?Advantages of cash financing are Cheaper than equity, tax benefits from tax shields, Decrease in combined cost of capital, creating value for shareholders, intumescentst primed(p) income offer.Disadvantages of cash financing are Sudden increase in Repsols leverage, rate in debt ratings, increased cost of debt, inability to equalize future unforeseen financial requirements, probability of default, sensitive to price changes, signaling to investors, shorter maturity issue and uncertainties.Advantages of stock financing are Expand its unused debt capacity, prepared for truculent ripening via acquisitions, maintain coverage ratios and credit ratings.Disadvantages of stock financing are Reduced EPS due to dilution, more business risk, betence on Repsols share price, clash in investors concerns between shares of developed and developing economies.Cash financing is a better option for shareholders of YPF as they wouldreceive a fixed price and would not participate in additional gains or losings post acquisition.5) Whether or not you favor a cash-based offer for YPF, disport compare the relative advantages and disadvantages of the (a) all-debt-financed cash offer, (b) all-equity financed cash offer, and (c) blended financing of debt, favored stock, and equity. How signifi whoremastert are variations in default risk in the sagaciousness of the financing utility(a)s (see case Exhibit 10)?Attached Excel sheet,Considering Country Risk, all debt financing gives the highest valuation of Repsol-YPF and variation due to risk 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 he nce valuation.6) What course of action would you recommend that Alfonso Cortina adopt regarding form of earnings and financing for the tender offer for YPF? On what key bets does your recommendation depend?Cortina should make an all cash payment to acquire YPF at 44.78$ per share to avoid the disadvantages of equity financing and also considering bylaws of YPF.Repsols strategic excogitation is based on three fundamental premises growth, transformation of portfolio and profitability. The uncreated objective for Repsol is to guarantee sustainable dividend growth for its shareholders.Repsol will implement a strategy of profitable growth for all of its businesses, based on the optimization of existing projects, the development of new projects, and the analysis of possible business opportunities in areas of interest to the company. It states that the downstream business which includes chemicals will contribute solid growth and stable cash flow for the company.The Repsol chemical busin ess is believed to hold a sound position in international markets, strengthened by a high integration with the refining and exploration and production business areas, gateway 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&A deal fancy?A widely used approach to evaluating financing alternatives is the FRICTO framework. The framework can help to identify trade-offs along six dimensionsFlexibility 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, liquid state ratios, and the identification of salable assets. Risk This is the sure variability 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, biyearly strikes in advance of wage negotiations).To some extent, past experience may indicate the future range of variability in earnings to begin with 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 possibility, beta should vary right off with leverage. The firms debt rating will provide a chip external measure of risk of the firm. Income This compares financial mental synthesiss 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 minimizes the weighted average cost of capital. Thus, the analyst can devote attention to the capital c ost resulting from the diametric financial structures. Finally, economic profit, or EVA, summarizes the joint impact of capital structure, investment, and operating profit effects. Control Alternative financial structures may imply changes in control 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 voting position in the firm, implied by different acquisition financing alternatives.Timing This asks the question of whether the modern capital market environment is the right 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, unmatched 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 decision. Two such items are investment liquidity of the owners and estate supply 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 type of financing signals optimism or pessimism closely 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 unanalyzable 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 delineate 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 straight offs interest rate conditions. The equity structure is favoured on the grounds of flexibility, risk, absence of covenants, todays equity market conditions, and the long-term financial sequencing benefits.THINK LIKE AN INVESTORThe explanation of a good capital structure would be one that maximize s shareholder value. This structure will also minimize the weighted average cost of capital and maximize the share price and value of the enterprise.