News reports that Repsol YPF, the Spanish-Argentine petroleum company, is negotiating to sell 20% of its shares — now owned by Sacyr Vallehermoso, the Spanish construction firm — have set off an earthquake felt across the ocean in Latin America. The governments of both Spain and Argentina are continuing to watch every move carefully, since Repsol YPF is strategic for both countries. Moreover, the players in the deal are important — including Sacyr creditors Santander and Citgroup — and potential buyers and oil companies all over the world see an opportunity to strengthen their energy reserves in Europe and Latin America with just a single move.
The most interested party is Russia’s Lukoil, which on several occasions has appeared to be on the verge of closing a deal to purchase the shares, although that appears more and more unlikely because of the high price Sacyr Vallehermoso is asking as well as current problems in credit markets. In addition, Lukoil’s origins in the Soviet era are a source of distrust, and many observers would prefer that the Spanish-Argentine petroleum giant find a partner from Europe or America.
It may not be an easy task to find a suitable bride for Repsol YPF. That’s especially true because of the high price Sacyr is asking for the shares it owns — about 27 euros (now $37.70) per share, compared with the current trading price of between 14 and 15 euros (between $19.50 and $21). The discrepancy reflects the high price the construction firm paid for those shares two years ago — 26.75 euros per share, most of which was financed by a loan of 5.175 billion euros (then $7.23 billion) provided by a syndicate of banks headed by Santander and Citigroup. These institutions now see their interests imperiled. After all, Sacyr guaranteed that loan with the same shares that it was buying; that is to say, 20% of Repsol YPF. In addition, the collapse of Repsol YPF on the stock market has turned this guarantee into a worthless scrap of paper.
According to Rafael Pampillón, director of the economics department at the IE Business School, “Repsol YPF should not go looking for a partner. Sacyr Vallehermoso is a company that is in very poor condition, practically bankrupt. Ultimately, it will be the banks that will have to wind up with the 20.01% of the oil company. That would be the natural thing.” News has emerged in recent weeks about the leading role Sacyr’s creditors have assumed in trying to find a buyer for Sacyr’s ownership in Repsol YPF. Sacyr has given Citigroup and Germany’s Dresdner Bank the job of finding companies that are interested.
In any case, the stumbling block of settling on the right price will be present in any negotiations. Mauro Guillén, director of Wharton’s Lauder Institute, notes, “It is quite possible that no one wants to pay such a high price nowadays. Prices for assets are at rock bottom. Let’s hope that the market rebounds so that everyone gets what they want.” The political players also agree with that line of reasoning. This leaves two important questions: On the one hand, does Repsol YPF run the risk of losing its independence as a corporation? On the other hand, what buyer would be most suitable, given the national interests of Spain and Argentina?
Political Interests
Lukoil’s origins in the Soviet era are viewed with distrust by the Spanish public. But Lukoil is now a private-sector firm, and the fact that ConocoPhillips is its most important shareholder, holding 20% of Lukoil’s shares, has enabled Lukoil to continue to advance in the negotiation process for buying Sacyr’s shares, despite some problems. There are fewer misgivings about other potential candidates such as France’s Total, which is perceived with less distrust by the Spanish government. Also, there is the card of Arab government sovereign funds that would acquire the shares in Repsol without any intention of controlling Repsol YPF; the funds’ only goal would be to get a return on its investment. That would remove any danger that Repsol YPF would lose its independence.
Perhaps the clearest example of the political hurdles Lukoil faces in closing the deal — beyond the issue of price — is finding the perfect fit for Repsol YPF from a purely business viewpoint. The Russian company is the second-largest privately owned oil company in the world, measured by proven hydrocarbon reserves. Although it has a share of the energy deposits that have the greatest potential in Siberia and the Urals, it nevertheless needs to acquire a presence in Latin America. Repsol YPF would open that door for Lukoil, with the added benefit that it would enable Lukoil to sell in the United States. Beyond that business logic is the fact that the Spaniards are interested in selling, and the Russians are interested in buying. So why is it taking so many months to negotiate a deal, with no end in sight?
According to Guillén, “For Lukoil, acquiring 20% of Repsol YPF is a tempting move because of its distribution [network]. It might get them out of the mess they find themselves in: They are a gas powerhouse but as a petroleum company they hardly have any reserves. Nevertheless, Repsol YPF could lose its independence, depending on how the final agreement is structured. For Argentina, the deal does not pose as much of a problem as it does for Spain, where Repsol YPF has too much market share for Repsol YPF to lose control of the market [to Russia’s Lukoil]. Beyond that, there are a lot of unknown factors about the future of strategic companies for Spain, such as Cepsa, another oil company, as well as the country’s main utilities. So, this is a delicate situation.”
Pampillón agrees that Spain has more problems than Argentina when it comes to allowing a Russian company to acquire partial ownership of such a strategic national company. Argentina’s government also maintains better relationships with the countries of the formrely Soviet region. “I believe Argentina would not have any problem with Lukoil [acquiring ownership in Repsol YPF] because the Kirchners [the current president Cristina Kirchner and her husband, former president of the country] have very good relationships with Venezuela and Cuba, and are maintaining close ties with Russia. The recent visit of President Cristina Kirchner [to Russia] is the best indicator of her interest in building closer ties with Russia,” says Pampillón.
During the second week of December, the Argentine president traveled to Russia to meet with Russian premier Vladimir Putin and Russian president Dmitry Medvedev. Although the parties have not said anything about what topics they discussed, the speculation is that Lukoil made it clear that it is interested in participating in efforts to explore the offshore waters of Argentina, where Repsol YPF has a presence. Lukoil even offered to open an office in Buenos Aires, capital of Argentina. For her part, President Kirchner would apparently approve of letting a Russian company get into the exploration business in Argentina.
Nevertheless, Pampillón notes that the Argentine government needs to pay careful attention to those foreign investors who are already in that country, such as Spain with its investment in Repsol YPF. “The [Argentine] president has made some mistakes in recent years, such as what happened with the nationalization of [the country’s] private pension plans. But Argentina is now obliged to make a move that favors foreign companies because the country’s economy is at a crossroads due to the decline in crude oil and raw material prices, among other factors. All of this forces [Argentina’s leaders] to change their attitude toward foreign investors.”
A Consensus of Interests
There has also been a lot of talk about the ‘golden share’ and the veto power conserved by the Kirchner government in Repsol YPF, which could wind up blocking whatever deal is made concerning the 20% of the shares currently owned by Sacyr Vallehermoso. There are differing views about the real extent of this veto power; some experts say the veto would be sufficient to block the deal while others say that couldn’t happen. This much is clear: The veto provides another reason why politics are important for the future of Repsol YPF. The Spanish government, when it privatized the country’s large energy companies, also preserved a similar veto option, but the European Union forced Spain to nullify that. Nevertheless, in moments such as these, many people wonder whether it would have been preferable to preserve some sort of defense mechanism.
Guillén believes that in an effort to preserve the independence of Repsol YPF, “they could reinstate the ‘golden share’ or some sort of administrative controls.” However, he believes “[the European Union] would object to that. This is a very delicate situation, but clearly Repsol YPF needs a business partner.” Such a companion would be more ideal if its interests meshed well with the interests of the governments of Spain and Argentina. One possible candidate, notes Pampillón, is Petrobras, the Brazilian oil company. “[Petrobras] would be the company that could best balance the interests of the two countries…. I consider it a workable solution because it is a natural ally.”
Elsewhere, Petrobras already shares some corporate ownership with Repsol YPF, within a consortium of companies that discovered deposits of high-quality crude in the basin of Santos, Brazil last June. Another factor in favor of Petrobras, according to Pampillón, is that Petrobras “is a company that is close to Argentina, and also has good relationships with the United States, another area in which the Kirchners are interested in strengthening their position.”
For all that, Petrobras denied last November that it might be interested in acquiring any shares in Repsol YPF. This denial is just one of many negative statements issued by oil companies around the world ever since Sacyr Vallehermoso began last summer to search for someone to buy its shares. Still, many cards remain to be played in this game, and the key players could change their strategies at any moment.
