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Cablegate: Repsol-Ypf Plans Minority Sale to Local Argentine

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R 021242Z JUL 07
FM AMEMBASSY BUENOS AIRES
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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

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