Thursday, July 18, 2019
Structuring RepsolÃ¢â¬â¢s Acquisition of YPF
How meaning(a) argon the expect synergies and restructuring effects? occupy prepare an foreshadow of the order of these.For Repsol and its addressholders, the YPF acquisition deal is seen as an ideal strategical match. The Spanish anoint company gets most of its revenues from activities like shade and gasoline stations, and must buy a great deal of its crude anoint from a nonher(prenominal)s, while YPF owns meaty reserves because its activities are dominated by exploration and harvest-festivalion of oil. As a united company, Repsol forget have a much better balance of crease, multiply its reserves, and vaulting into the big leagues of the top 10 international players. But with the reserves of YPF, it imparting instead return from rising termss, and spread its activities to other countries in Latin America.Repsol-YPF seeks to carry through a balance amongst upriver and downstream operations, coif itself as a grocery leader in Latin America, achieve operating and metropolis disbursement synergies and consolidate its military control scale and fiscal strength. As part of its integration strategy, Repsol-YPF leave begin to dispose of select assets which do non correspond to its core personal credit linees describe above or to its core geographic areas which include Spain, Latin America and labor union Africa.Synergies Estimate Cost savings later on tax of $350 million by 2000, 1.6% monetary appreciate savings in 1998, reduction in chief city expenditure from $15.6 billion to $13.6 billion, minify finding woos by 25.0%, as a result of decreased adjudicate drilling activity and the devouration of rude(a) technology, and lifting damages 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 bell that Cortina proposes to offer to YPFshareholders. At $44.78 per share, would Repsol underpay, overpay, or just offer a fair terms?Attached Excel,The expense of $44.78 per share was a fair price as there was a strategic fit and synergies between the two companies. YPF was cerebrate on upstream and thus match Repsols downstream activities.In the attached excel, I performed rating of YPF by subtracting PV of Repsol from PV of Repsol-YPF combined with synergies at WACC of 10.9% ( totally debt pay).I got the measure as 10.472 billion dollars./ The spare (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 run Profit later Tax (NOPAT) + Non currency items in EBIT running(a) Capital changes Capital Expenditures and opposite Operating Investments =Free Cash FlowsTake Present set (PV) of FCFs discounted by withdraw on Assets % (also Return on Unlevered Equity %) + PV of terminal esteem = nurse of Unlevered Assets + Excess interc hange and other assets = survey of Unlevered Firm (i.e. self-colored value without financial support effects or benefit of interest tax shield) + Present Value of Debts Periodic Interest Tax vindication discounted by Cost of Debt Financing % =Value of Levered Firm3) Please assess the flow checker of Repsol shares in the market. Is Repsol undervalued, overvalued, or just more than or less valued in the global faithfulness markets at this time? Is now a good time to egression Repsol shares?From introduce 11, the current price of Repsol melody is 18-19 $ per share. genuine Value of Repsol share is 7010/900 = $7.78per share from demo 3.Using valuation using DCF, I arrived at $ 22.33 per share for Repsol(attached Excel). Hence it is fairly valued.4) examine 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 reflection would be more attractive (assumin g that the amount of consideration would be constant at $44.78 per share)?Advantages of cash funding are Cheaper than equity, tax benefits from tax shields, drop in combined cost of capital, creating value for shareholders, largest fixed income offer.Disadvantages of cash pay are Sudden increase in Repsols leverage, downgrade in debt ratings, increased cost of debt, inability to come over succeeding(a) un pass judgmentd financial requirements, probability of default, metier to price changes, signaling to investors, shorter maturity period and uncertainties.Advantages of stock support are Expand its unfermented debt capacity, prepared for aggressive growth via acquisitions, declare coverage ratios and credit ratings.Disadvantages of stock financial support are Reduced EPS referable to dilution, more business hazard, dependence on Repsols share price, clash in investors interests between shares of developed and developing economies.Cash pay is a better option for sharehold ers of YPF as they would pay off a fixed price and would not participate in additional gains or losses post acquisition.5) Whether or not you favor a cash-based offer for YPF, enjoy compare the relative advantages and disadvantages of the (a) all-debt-financed cash offer, (b) all-equity financed cash offer, and (c) blended backing of debt, preferred stock, and equity. How significant are magnetic variations in default endangerment in the assessment of the funding options (see miscue Exhibit 10)?Attached Excel sheet,Considering ground happen, all debt financing gives the highest valuation of Repsol-YPF and variation due to run a take a chance is least in all debt financing offer.Considering minimum rural 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 substitute(a)s as that affects WACC and hence valuation.6) What course of action would you root on that Alfonso Cortina adopt regarding form of requital and financing for the tender offer for YPF? On what signalise 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 mean is based on three organic premises growth, transformation of portfolio and net incomeability. The primary prey for Repsol is to guarantee sustainable dividend growth for its shareholders.Repsol will implement a strategy of remunerative growth for all of its businesses, based on the optimisation of existing projects, the development of impertinent 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 changeles s cash flow for the company.The Repsol chemical business is believed to hold a sound position in international markets, strengthened by a high integration with the fine-tune and exploration and production business areas, entrance fee to competitive technologies and the companys ongoing efforts in cost capacityion.7) In general, what is the influence of deal financing on other aspects of M&A deal design?A astray used approach to evaluating financing alternatives is the FRICTO fashion model. The framework can help to identify trade-offs on six dimensionsflexibleness 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 thrifty by bond ratings, coverage ratios, capitalization ratios, liquidity ratios, and the identification of salable assets. Risk This is the predictable variability in the warms operating cash flow. such(prenominal ) variability may be due to both macroeconomic factors (e.g., consumer demand) and industry- or firm-specific factors (e.g., product life cycles, biannual strikes in erect of wage negotiations).To some extent, past engender may advise the future lead of variability in earnings forwards 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 financial constructions on the basis of value creation. Measures such as DCF value, projected hard roe, EPS, resulting price/earnings ratio, and cost of capital indicate the comparative value effects ofalternative financial mental synthesiss.Finance theory tells us that (all else equal) the value-maximizing capital grammatical construction is also that which minimizes the burthen modal(a) cost of capital. Thus, the psychoanalyst can ordinate attention to the capital cost resulting from the contrary financial organizes. Finally, economic profit, or EVA, summarizes the articulation 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 diffusion 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 current 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 sh orten in the movement of interest rates, the founding of any windows in the market for immature impressions 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 decision. 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 in camera 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 a ccompanied by decreases in share prices issuance of debt is accompanied by increases. one(a) interpretation of this result is that the type of financing signals optimism or pessimism about 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 open 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 object glasss shares. Looking across all(prenominal) 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 seizure of voting dilution, and instantlys interest rate conditions. The equity structure is favoured on the grounds of flexibility, risk, absence of covenants, todays equity market conditions, and t he long-term financial sequencing benefits.THINK LIKE AN INVESTORThe translation of a good capital structure would be one that increases shareholder value. This structure will also minimize the weighted average cost of capital and maximize the share price and value of the enterprise.