One problem with blogging is that there are things that I do not post about, because it conflicts with teaching. Sometimes case method teaching involves laying out all the clues to a mystery and then letting the students solve it in class. That limits, obviously, what I can give away on the interwebs. The YPF nationalization has been loaded with those sorts of limits.
The YPF saga, however, may be drawing to a close. We have growing indications that Repsol and the Argentine government may be coming to a settlement. The number being tossed around is $5 billion, which is a bit above the $4.4 billion that it would have cost to purchase 51% of YPF right before the expropriation. Now, $4.4 billion may not be fair. YPF’s price in New York peaked at $39.88 in January 2012 before sliding to $21.95 in the lead-up to the expropriation. $39.88 would imply that 51% of the company was worth $8.0 billion. In fact, the price was $28.41 as late as March 30, implying a value of $5.7 billion for a 51% stake. (By March it was clear to everyone that Repsol and President Fernández were at loggerheads, but it was not clear that she was going to expropriate.)
Repsol’s share of YPF, however, did not drop from 57.4% to 6.4% after the nationalization. Immediately after the takeover, the Eskenazi family defaulted on loans from Repsol that they had used to finance part of their share in YPF, which raised Repsol’s share back to 12.4%. Repsol, therefore, only lost 45% of YPF. 45% of YPF was worth $7.06 billion in January 2012 and ... wait for it ... $5.03 billion on March 30.
There were rumors that Sinopec (or CNOOC) was going to buy 57% of YPF for $15 billion ($13.4 billion for 51%) but those are unsubstantiated. Other sources report that the Chinese companies thought $10 billion was too high. Reports of a $12 billion sale to CNOOC later proved unfounded. (Click the first link in this paragraph.)
I doubt that the Chinese wanted to pay much more than the ~$9 billion that Repsol’s 57% stake was worth around the beginning of 2012, assuming that they really wanted to buy at all.
In short, if current rumors prove correct, Repsol will have taken a roughly $2 billion hit below a reasonable valuation of its stake.
Will Repsol accept? Given that arbitration will take a very long time (with an uncertain outcome), taking $5 billion now seems reasonable. They could gamble on a favorable judgment, of course, but why? Rough calculation: say Repsol receives $7.06 billion in 2020, plus interest charges of $2.74 billion. (That uses the 4.188% rate that Occidental received in its dispute with Ecuador, compounded annually. See page 317 of the ICSID decision.) That means Repsol can choose between a certain $5.0 billion now and an uncertain $9.8 billion in seven years. As long as Repsol’s discount rate is above 8.4%, then it is better to take the cash now.
(FWIW, Bloomberg reports that Repsol has a yield of 5.2% and an inverse p/e of 6.7%. Those numbers imply a hurdle rate for new projects way above 8.4%. And waiting for an ICSID judgment against Argentina is at least as risky as other investment projects. This applies even though it is quite possible that ICSID would eventually award Repsol more than $9.8 billion; waiting is still risky.)
The Repsol settlement, if it happens, will not be an exception. Argentina has been recently settling its outstanding expropriation claims, even when the Argentine government has a good moral case. The reason for the sudden spate of settlements has been Argentina’s need for external credit combined with strong U.S. opposition to granting such credits unless the country settles with American claimants.
But why settle with a Spanish company? The American energy secretary announced that the United States supports Repsol, but that is not a reason to pay: the U.S. has already eased up on Argentina at the IADB. Even if the country feared ICSID (which in the long-run it should) there is no reason to pay now when you can pay in 2020 ... 8.4% is below Argentina’s borrowing rate!
But without a settlement, Repsol can throw wrenches into the Vaca Muerta development plans. Worse yet, there is the possibility that its legal actions could delay Argentina’s return to international capital markets. So that gives Argentina an incentive to settle. And if it can do so near the lower end of its plausible compensation (45% × $8.63 billion that YPF was worth the day before the expropriation = $3.88 billion) so much the better.
Not a terrible compromise, I do not think.