In Puerto Madero, the most expensive neighborhood in Buenos Aires, the skeleton of Repsol YPF’s new corporate headquarters is rising. The project, which will cost at least $134 million, is scheduled to be completed by the middle of 2008. The 36-floor skyscraper will be designed by Cesar Pelli, the famous Argentine architect. Senior managers at the headquarters building will meet at a table that overlooks the Rio de la Plata, and there will be some new faces at the table. Currently, Spanish investors control 99% of the company, and the Argentine government owns 1% of the shares. But about 25% of the company will be sold to Argentine investors in a deal whose details could become clearer within weeks; while another 20% of the company will be traded on the Buenos Airesstock exchange. Repsol therefore intends to sell 45% of its Argentinean subsidiary YPF before the summer.


Will all of this mean that the government of [Argentine president] Nestor Kirchner will be able to confidently add its one percent ownership to the 25% owned by private-sector investors? If so, the government will be able to have more decision-making power over the country’s most important company. Argentine and Spanish newspapers have mentioned three names, all well-known to the Argentine president, as possible buyers for the 25% stake in Repsol YPF: Jorge Brito, Eduardo Eurnekian and Enrique Eskenazi.


The man closest to the negotiations is Eskenazi of Grupo Petersen, which controls the banks of Santa Cruzprovince (where Nestor Kirchner was born), as well as banks in San Juanand Santa Fe. Eskenazi also owns the Petersen construction firm which has many projects in Argentina’s Patagoniaregion. Banco Santa Cruz is the institution that administers the famous $600 million that Santa Cruzprovince took (from Argentina) to Switzerlandwhen Argentina’s economic crisis broke out in 2001.


Jorge Brito is the head of Banco Macro, president of ADEBA (the association of Argentine banks), independent board member of YPF, and a member of the audit commission. Eurnekian owns Aeropuertos Argentina 2000, the company that manages the main airports of Argentinaand other countries in the region. Eurnekian is also vice-president of the Argentine chamber of commerce.


“I believe that Eskenazi will ultimately wind up with 25%,” says Rafael Pampillón, a professor of economics at the Instituto de Empresa (IE) in Spain. “In any case, the three men all come from [the movement known as] Menemismo (named after former president Carlos Menem). They are also all Kirchneristas [followers of Kirchner], and followers of Peronism and the [broader] populist movement. Kirchner has confidence in all three of them.” Nevertheless, the entrepreneur will have to pay the figure of about $3 billion.


According to Gerald McDermott, professor of management, says, “Perhaps it is a coincidence that they are all entrepreneurs who have good relationships with privatized companies that provide services to the country. You have to remember that during the past three years, Kirchner has tried to gradually regulate the economy more and more.” It is important not to forget that the one percent ownership that belongs to the Argentine government gives it the right to veto the company’s strategic decisions, and one of those decisions could involve choosing a local partner.


Stronger Role for Government


Since he became president, Nestor Kirchner has re-nationalized companies that provide key public services, such as Aguas Argentina (the water company), Thales Espectrum (which regulates Argentina’s radio airwaves), Metropolitano (Buenos Aires’ trains) and Correo Argentino (the post office).


These companies had been privatized at the beginning of the 1990s during the period of Carlos Menem through a controversial process marked by corruption. In the case of YPF, the company was first sold on the stock market to oil-rich provinces and to its own employees. However, Spain’s Repsol jumped into the game in 1999. At a cost of $15 billion, it acquired those shares that had been in the hands of private investors, as well as the 20% of the company that the Argentine government still owned at the time.


Argentine society reacted strongly when the ‘YPF’ logo was quickly added to the word ‘Repsol’ on storefronts. “The Argentine people had the feeling that things had turned out badly and that they had sold off a public sector business at a bargain price. Some people had gotten rich, and they had wound up with a monopoly. A company that was previously public had turned into a private one,” says Pampillón.


In Argentina, there is a lot of discussion about whether the sale of a portion of Repsol YPF will be a decision made by the Spanish company, or whether the Argentine government is the main force behind the initiative. According to McDermott, “You have to think about Kirchner’s possible motives given his pattern of behavior: YPF is the key to the current situation in the world of gas and petroleum in the region. There are problems with infrastructure, with prices and with supply. In other words, this is a political area. Kirchner is going to try to use this asset to exert political influence on the region. In addition, this is one more way [for him] to impose his control over the economy.”


For his part, Mauro Guillén, a Wharton management professor and director of the Lauder Institute, says that “in some sectors, such as petroleum, it is good to have local partners. However, in this case, Repsol also wants to cash in its chips.”


Kirchner is only a few months away from completing his term. During his nearly four years in office, his government has applied strong price controls and continued to freeze prices of public services within the framework of an economic policy marked by strong intervention by the government. Next October, either he or his wife Cristina Kirchner will be the candidate of the Front for Victory party. That has yet to be decided. Stronger control of Argentina’s most important petroleum company could provide Kirchner with a key tool for remaining in government.


Regarding the elections, says Pampillón, “It seems to me that Kirchner is very interested in nationalizing – not from the point of view of a public-sector acquisition but to make the oil sector more Argentine. That way, he would finish off some successful election campaigns. This would also enable him to raise rates [for public services] again. One of the biggest problems facing Spanish companies in Argentina is that their contracts have not been respected. The legal environment has not been secure; they have not been provided with what they were promised” by the government.


McDermott agrees. “The trend in the region is that the State is trying to strengthen its presence, especially in companies that provide public services.”


The Future of Repsol


The decision to sell off part of Repsol in Argentina could reflect the Spanish company’s strategy to refocus on more competitive and profitable markets than Argentina. As McDermott notes: “Repsol is trying to focus its assets in areas with better prospects. Argentina is not a very safe place; it is a highly regulated market compared with other countries. Besides, the idea of having a group of Argentine partners might improve local relationships. Uncertainty about the Kirchner government and about Cristina [Kirchner] could prove to be very costly for Repsol in the future.”


According to the official web pages of Repsol YPF, the integrated oil and gas company is active in more than 30 countries, including Spain and Argentina. It is one of the 10 largest privately-owned petroleum companies in the world, and it is the largest private energy company in Latin America, measured by assets.


According to Guillén, “For Repsol, YPF is interesting because of its reserves, not so much for its market share in Argentina. Repsol has a clear problem: It lacks reserves. The problem in Bolivia was a very hard blow (when petroleum returned to state hands). YPF was interesting to Repsol because it [YPF] has reserves in Argentina and in other countries.”


Pampillón also mentions other populist countries in the region. “Repsol has done poorly in countries ruled by such populist politicians as [Evo] Morales in Bolivia and [Hugo] Chavez in Venezuela, who are both Kirchner’s allies. There are other countries such as Mexico, led by Calderon; Colombia under Uribe; Peru with Alan Garcia, and even Brazil with Lula Da Silva, that are much more predisposed to reach agreements with the United States,” he says.


Popular Capitalism


Once Repsol has decided who will be its partner in Argentina, preparations will be made to place about 20% of the company’s shares on the Argentine stock market, perhaps at the end of 2007 or the beginning of 2008.


“The Chinese are becoming more and more important players on the global map,” stresses McDermott. “They need energy resources for their country, so they are investing in the sector, for example in Africa and in Latin America countries such as Ecuador. Repsol YPF’s arrival on the stock market can provide an incentive for the Chinese to try to compete in that sector.”


Pampillón believes that the 20% of shares that trade on the stock exchange will “provide [the company] with a measure of populism in the best sense of that word — a popular capitalism in the style of Margaret Thatcher — so that the Argentine public can acquire ownership in a company that symbolizes Argentina, as has always been the case. Repsol will continue to be in control.”


For Repsol, whose owners include construction giant Sacyr Vallehermoso and La Caixa, the financial institution, “Things are going to go well,” says Pampillón. “It is going to pocket millions of dollars, which will permit it to undertake a greater expansion and open the doors to a future that is more secure and more credible.”