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UNCLAS BUENOS AIRES 001278 
 
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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