Structuring Repsol’s acquisition of YPF S.A (A). Case Solution
Significant of expected synergies and restructuring effect
The expected quantitative significance synergies and restructuring effect is that the after-tax cost saving of is $350 million, by 1998 1.6% in cost reduction. The capital expenditure will also reduce by $2 billion in 2000 from $15.6 to $13.6 billion in 1998. The merger will decrease the lifting cost of YPF by 4.6% and so will the test drilling activities, and the installation of new technology will decrease the finding cost by 25%. So as the result of this merger; the synergy will be created, which will increase the production of gas, decrease the cost of finding and will also yield $2.5 billion by divesting non-core business in 2002.
So this deal of acquisition is good for the shareholders of Repsol, because it shows the strategic fit.It is so because Repsol will also have a significantly better business balance as a unified company as YPF is getting revenue from refining activities and gasoline stations mostly, so the firm has a large number of reserves for exploration as well as the production of oil. So Repsol could get benefit from the reserves owned by YPF.
The price that Cortina proposes to offer to YPF shareholders
The proposed price to YPF’s shareholders was $44.78 per share, but the price of the DFC model is $13 per share as per the result. Repsol overpays to the shareholders of YPF, and even after adding the synergy after merger; the price of stock is $27.8, which means Repsol is overpaying to its shareholders for the stocks of YPF.
Current price of Repsol shares in the market
The actual price of the stock is $7.79, which is calculated by dividing the book value of shareholders equity in 1998,(given in the exhibit 3) by the number of outstanding shares in the same year. The current value of Repsol’s share is between $16and$18, as shown in the prices per share graph in exhibit 11. The stock is undervalued as compared to the price which we evaluated by using the DCF model, such as: $21.51 per share. The calculation is done in excel sheet exhibit 12. We discounted the given free cash flow at the WACC of Repsol 8.1%, summed the discounted cash flows and came to the equity value of $19355 million by deducting the total long-term debt of Repsol in 1998 from the enterprise value. The number of shares outstanding was 900 million, so by diving equity value to the number of outstanding shares; we found the share value of $21.51 per share.
Relative advantages and disadvantages of offering to the shareholders of YPF
Advantages & Disadvantages of Cash financing:
The significant advantage of cash financing is thatit is cheaper as compared to equity. There are also other benefits of cash financing, such as:adecrease in the capital cost after combination, tax shield benefits as well as creating value to the stockholders. Cash financing will decrease the risk of the YRF’s shareholders, which they will be exposed to after getting the stock percentage.
On the other hand,a full cash offer will increase the leverage of Repsol, which will decrease the rating grade of debt, as a result of which the cost of debt financing will increase, because debt will be risky to the investors. This option will also decrease the ability of Repsol to raise funds in the future when unforeseen financial need will arise, which also produce a negative signal to the investors. (David Rodeck, 2017)………………………
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