Repsol YPF and the nationalisation of YPF – priced in?

Dear readers,

When we read commentaries on recent market movements we can often hear analysts’ comments like “the xxx-risk is already priced in” and such. Despite my confusion on how those analysts can determine exactly what is “priced in” by “the market” and what is not, and why they always come up with that after things happened, I want to try today to reconstruct the happenings at Respol and see if and to what extend the governmental takeover has been incorporated into the market price of Repsols shares.

Also in this recent case analysts were fast with their comments that the nationalization is already priced in (Nomura on 18.04: On current stock price level worst case scenario almost already priced in).

Since I wanted to write this article since a long time, it’s quite retro perspective now, however I think it might contain valuable lessons for similar cases. The question whether the market is overreacting quickly or rather slow in pricing in is especially interesting to me.

For the valuation I will use a rather simplistic approach: The uncompensated loss of YPF for Repsol will be priced in, when the market capitalization of Repsol will be reduced by the amount lost due to the nationalization of YPF.

To determine this amount lost there are several approaches.

·         Since YPF was a publicly listed company, one could multiply the prices previous the nationalization with the numbers of shares lost by Repsol

·         Repsol claimed compensation for his majority stake from the Argentinian government, amounting to 10, 5 billion USD, i.e. around 8 billion EUR.

·          Previous to the nationalization Repsol was in talks with Chinese investors –reportedly Sinopec- wanting to take over the majority holding for about 10 billion USD (7, 6 billion EUR). Here we have two willing parties, behaving rational and also the premium for the majority holding is priced into the transaction.

For this study I am going to use the third approach, which is close to a recent transaction comparison. Actually it’s even better, since the companies being compared are not only similar, but one and the same. Therefore I will take the market price that both parties agreed on as the fair value of the YPF stake.

On the following graphic I tried to follow the events and record the loss of market capitalization, starting from the 11.04.2012 as t=0. [Data from Bloomberg, lowest price/day].

So as we can see, so far there is only a loss of around 5 billion till today that is (mostly) attributable to the nationalization.

So if we consider the estimates above of 7, 6/8 billion we can see that the loss is still not fully incorporated.

This is a reminder to keep a cool head, and calculate first before considering a buy.

To me analysts’ estimates at around 20 EUR seem quite high, however there are a few pessimistic voices (25/04: JPM 15, 5 Neutral).

Continuing the time line beyond the 02.05.2012 would probably not make much since, since we have seen a sharp decline in oil price from then on (120 USD/Barrel to 113,4 closing price on the 04.05.). It would be very difficult to distinguish between the “pricing in of the nationalization” and the “pricing in of lower spot prices”.

Edit 16.02.2014:
The final sum agreed on by Argentinian gvmt and Repsol is according to reports 5 bn. EUR. Original compensation sought by Repsol was 10.5 bn. EUR.
The 5 bn. EUR was priced in on the 02.05.2012, so in less than a month, on undiscounted basis.