Repsol-YPF Plans Minority Sale to Local Argentine

UNCLAS BUENOS AIRES 001278 SIPDIS SIPDIS SENSITIVE PASS NSC FOR JOSE CARDENAS, ROD HUNTER PASS USTR FOR SUE CRONIN AND MARY SULLIVAN TREASURY FOR MATT MALLOY E.O. 12958: N/A TAGS: ECON EINV ETRD ENRG AR VZ SP SUBJECT: Repsol-YPF Plans Minority Sale to Local Argentine Banker ? A Win/Win For All? ¶1. (SBU) SUMMARY. According to press and local sources, Spanish oil and gas giant Repsol-YPF is negotiating to sell a 45% stake in its Argentine subsidiary YPF. Plans call for 25% of Repsol- YPF's shares to be bought by Argentine businessman/banker Enrique Eskenazi, who has ties to President Kirchner, and 20% floated on the Buenos Aires stockmarket. Repsol-YPF reportedly wants to lessen its exposure to the less secure Argentine investment climate and focus on more promising areas of the world (Middle East, North Africa, Mexico). At the same time, Repsol-YPF hopes that this local insider can help it gain more favorable government treatment. The GOA would view such a partial Argentine recovery of what was an emblematic state-owned enterprise an election year gain. If the deal goes through, this new YPF-GOA partnership will need to engage in serious exploration and investment projects to help deal with ever more serious energy shortages. END SUMMARY. ¶2. (U) DEAL IN THE WORKS? According to press and local sources, Spanish oil and gas giant Repsol-YPF is negotiating to sell 45% of its stake in Argentine subsidiary YPF to the Argentine market: 25% to Argentine banker and businessman Enrique Eskenazi, who has ties to President Kirchner via his investments in Santa Cruz province, and 20% floated on the Buenos Aires stockmarket. Spain-based Repsol-YPF presently controls about 98% of its subsidiary YPF, formerly a GOA-owned oil and gas company. Repsol-YPF is one of the world's ten largest private oil and gas enterprises, with 2006 revenues of $63.7 billion, employing over 30,000 people worldwide, with operations in 29 countries, and with the bulk of its assets and reserves in Spain and Argentina. ¶3. (U) YPF ONCE AN EMBLEMATIC ARGENTINE COMPANY, SOLD IN 1999 AMIDST MENEM PRIVATIZATION ERA. YPF had been one of Argentina's largest companies, a large, vertically integrated oil company, and the largest energy company in Latin America in terms of assets. It was sold in 1999 to Spanish conglomerate Repsol for $15.2 billion during the wave of privatizations under the Menem administration. The GOA retained a "golden" share, granting it the right to approve any subsequent sale of YPF. YPF currently supplies about one-third of Repsol's global earnings, but its fields are maturing and output declining. ¶4. (SBU) SEEMINGLY A GOOD FIT, BUT REPSOL'S HOPES HAVE FADED. The 1999 Repsol?YPF marriage was seen as a natural fit, as Repsol bought YPF to increase its upstream activities, and move its focus from refining to more profitable oil and gas exploration and production. The GOA claimed that this privatization would bring greater efficiency in production and exploration, given that YPF had been a loss-making enterprise during the 1990s. But for Repsol-YPF, energy price freezes, high export taxes, and an unpredictable regulatory climate have made Argentina a less attractive place since the 2001/02 economic crisis. In addition, as YPF also has assets in Bolivia and Venezuela, among other places in the region, those governments' efforts to nationalize oil and gas fields have created uncertainty, reduced profits, and blocked efforts to grow Repsol-YPF?s reserves base. ¶5. (U) DEAL'S DETAILS EMERGING. In recent weeks, details of this deal have emerged, including the possibility of incorporating a local Argentine partner to YPF's capital. Enrique Eskenazi (along with his son Sebastian),an Argentine banking and construction magnate, has emerged as the likely buyer for this 25% stake. Press reports estimate the probable purchase price at $3-$3.5 billion, and local analysts estimate YPF's total market value at around $14 billion. However, there are also reports that Eskenazi's group values YPF at only $10 to $12 billion, pointing to lower income streams due to price controls. ¶6. (U) According to reports, Eskenazi will pay about $300 to $500 million in cash, and obtain financing from Citigroup, Goldman Sachs and UBS for the rest. The loan would be guaranteed by the YPF stock, and paid by dividends that the group would acquire. The Argentine group might also be able to acquire more shares when the remaining 20% is sold on the local exchange. The press has also speculated that the group might later seek majority control. The participation of these major investment banks is seen here as building credibility for the minority investors with other shareholders and the SEC. (Note: Repsol YPF is quoted on the NYSE, and reportedly must gain SEC approval of this deal. (End Note). ¶7. (U) NO OFFICIAL GOA ROLE, BUT ELECTION YEAR POLITICS ARE IN THE AIR. Although the GOA and Repsol-YPF state that this negotiation is strictly a private sector deal, the overhang of politics is clear. The GOA has stressed that it will not obstruct the deal or intervene in negotiations, and has no interest in direct GOA ownership. However, it is openly supportive of this "Argentinization" of what was formerly an emblematic state-owned company. Observers also note the sale's timing, as even a partial acquisition of this company by an Argentine national would play well in the upcoming October presidential elections. The GOA often criticizes the privatizations of the 1990s, including the 1999 YPF sale, and the "failure" of the "neo-liberal" model. (Note: the public might also interpret this deal as a partial solution to current energy shortages, which would also play in the GoA's favor. End Note) The timing of the deal is still in doubt. GOA officials (exercising their golden share prerogative) have expressed their preference that it be closed within a month or so, while Eskenazi appears to indicate a longer timeframe, stretching into ¶2008. ¶8. (SBU) EZKENAZI?S KIRCHNER TIES. Ezkenazi's company, Grupo Petersen, includes four regional, formerly state-owned banks, including one in Kirchner's home province of Santa Cruz, with a net worth of about $1.8 billion. Although these banks are now privately held, they continue to serve as the financial agents for the provincial governments, reflecting Ezkenazi?s influence. Grupo Petersen also owns the construction firm Petersen, Theile & Cruz, which has been very active in public works in Kirchner's home province, and which owns a small oil concern, Inwell, which gives them energy-sector expertise. Business is increasingly conducted by Enrique Eskenazi's son, Sebastian, who is reportedly very close to President Kirchner as well. ¶9. (SBU) CHARGES OF CRONY CAPITLALSM, BUT COULD BE AN ADVANTAGE. Argentine opposition presidential candidate and former economy minister Roberto Lavagna this week called the plan "crony capitalism," and offered an alternative plan for the state oil an gas company Enersa to buy the 25% stake instead. Lavagna suggested tapping the federal budget surplus to make a $325 million cash payment, with additional private sector financing. His idea would be for Enarsa to seek loans and issue debt using the YPF assets, which produce some $2 billion in annual revenue, as collateral. Lavagna does, however, agree with the GOA that selling YPF was a mistake. Among examples of why the privatization was a bad move, Lavagna noted that Repsol's reserves in Argentina have dropped from 2.4 million barrels of oil equivalent in 2003 to 1.4 million barrels last year ? although he neglects to talk about how this drop maybe related to price freezes and high export taxes. When YPF was purchased, it had about 13 years of reserves, and now has eight. On the other hand, an insider like Eskenazi will hopefully understand the local scene of Argentine business and government reality, which is of no small value. ¶10. (SBU) REPSOL-YPF'S MOTIVES. Post's private sector contacts speculate that Repsol seeks to reduce its exposure to the unpredictable and difficult Argentine business climate, while also bringing in a well-connected business partner to improve relations with the GoA. Thus, this deal appears to be about Repsol bowing to the realities of the Argentine political- economic culture. Otherwise, some observers ask, in a context of high international oil and gas prices, why would Repsol want to sell almost half its control of YPF, which earns it about one-third of its world revenues? The answer, according to Post's contacts, is that Repsol finds the Argentine business climate of price controls, export taxes, and unpredictable rules, combined with GOA pressures to invest more, much less attractive. Repsol also faces many pending issues ? fields up for new concession, big investment and exploration decisions that require long-term predictability, loss-making oil and gas fields that it would like to sell (which requires GOA approval). These issues might be better navigated by an insider with an open door to the GOA, and a GOA that has more of an interest in this new local partnership doing well. ¶11. (U) PART OF AN EVENTUAL AND LARGER REPSOL PULLING BACK FROM SOUTH AMERICA? There is also speculation that Repsol might eventually seek to turn over to the new buyer the administration of all of Repsol's oil and gas fields, refineries, and other assets now in Brazil, Venezuela, Ecuador, Colombia, Chile, Bolivia and Cuba. This would be an effort to reduce risks in Latin America, as part of its global strategy to focus on what appears to be more secure areas, as in Mexico, North Africa and the Middle East, where its production and reserves outlook is also better. ¶12. (SBU) COMMENT. Although negotiations between Repsol-YPF and Eskenazi seem to fairly advanced, it is still not a done deal, and might yet encounter problems or delays. But if the deal does occur, the new YPF-GOA partnership will face intense GoA pressure to engage in new, large-scale exploration and investment projects, in order to alleviate Argentina's serious energy-sector problems. END COMMENT. WAYNE