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China Eyes Repsol YPF's Argentine Unit

China's state-owned enterprises have been on a quest to snap up natural resource companies around the globe for several years now, and their shopping list keeps getting longer. So far this year, outbound Chinese oil and gas acquisitions are at an all-time high of $13.4 billion, up 22% from a year ago, says British research firm Dealogic. State-owned giant China National Petroleum Corp. (CNPC) has reached a deal with BP to boost production in the Rumaila field located in Kuwait and southern Iraq, and China Petroleum & Chemical (Sinopec) has bought oil company Addax for $7 billion.

Now China Inc. appears to be making its biggest move yet. This time the Chinese energy companies are eying YPF, the Argentine unit of Spanish-based energy giant Repsol YPF. YPF is the leading oil exploration and refining company in Argentina, with a 60% market share. According to media reports in Argentina and the U.S., CNPC and China National Offshore Oil Corp. (CNOOC) are offering $17 billion for the acquisition of 84% of YPF. That would be the largest-ever overseas acquisition for a Chinese company.

None of the companies has confirmed the rumors. Federico Etiennot, an YPF spokesman based in Buenos Aires, says: "We haven't received any formal or informal bid yet." Repsol YPF spokesman Kristian Rix confirms that Repsol "has not received any bid for YPF" either and denies any secret meetings or negotiations between the corporations. A spokesman for CNOOC declined to comment on the issue, and CNPC could not be reached.

Upstream and Downstream Leader There's no doubt, though, that Repsol is open to a deal for YPF, if the price is right. In a July 2 press release, the Spanish company said it was willing to consider "exploring new alternatives in order to include new shareholders for YPF." Repsol also confirmed that it had received "different kinds of proposals from different companies, being none of them a formal one."

YPF generates about two-thirds of Repsol's oil and gas production and is the leader in terms of upstream (that is, oil production and exploration) and downstream (oil refinement) operations in Argentina, with a 60% market share, making it the biggest company in this country of about 40 million people.

So why would Repsol want to walk out from YPF? In part, Repsol seems to have tired of coping with the challenges of doing business in Argentina. Latin America's second-largest economy has for the last few decades been a tough place for foreign companies to do business. Corruption is a serious problem: A worldwide ranking by Transparency International, a nongovernmental organization in Berlin, of 180 countries and their ability to combat corruption put Argentina at just 109. The company's 2008-2012 strategy outlines the goal of reducing risk through more diversification. "Repsol wants to trim its exposure in Argentina to reduce the risks of being in one country and to diversify its investment with the cash obtained from this deal in Brazil, where the future of the firm is," Rix says. Repsol sold a 15% stake to Argentina-based Petersen Group in 2007 as part of a strategy to use a local partner to get a better understanding of the country. Petersen, owned by the powerful Eskenazi family, has the opportunity to buy up to 10% more by 2012.

Interest in securing access to raw materials for its expanding economy is one motivation for China's apparent interest in a YPF bid, but energy security is not the only driver. With Chinese leaders such as Premier Wen Jiabao having expressed concern about the American economy and the stability of the dollar, Gordon Kwan, an analyst for Mirae Asset Securities based in Hong Kong, says that this deal "could just be the tip of the iceberg, given China's desire to invest in hard assets like oil to hedge against the long-term depreciation of U.S. Treasuries."

Improved Techniques Although quite expensive, taking control of YPF would help either CNPC or CNOOC obtain operational synergies and economies-of-scale cost savings from existing projects in such countries as Ecuador, Peru, and Venezuela. Moreover, the deal would offer the Chinese the possibility to raise production and reserves levels by applying improved oil and gas techniques on YPF's already mature fields.

The potential deal comes at a time when other Chinese companies are ramping up their dealmaking in the Southern Hemisphere. On Aug. 13, Yanzhou Coal Mining announced a $2.9 billion acquisition of Australian coal miner Felix Resources. State-owned China Railway Group is aiming to acquire RMA Energy, which mainly mines uranium and coal and is headquartered in Perth, Western Australia. China Investment Corp., the country's sovereign wealth fund, on Aug. 11 reached a joint agreement with Australia's Fortescue Metals Group to invest more than $1 billion in a convertible bond deal. And, according to a Bloomberg report on Aug. 12, Sinochem, China's largest chemicals trader, made an $875 million offer to buy London-based Emerald Energy in order to expand its oil and gas drilling activities in the Middle East and Latin America.

Not all the deals have gone through smoothly, though. The Chinese government appears to be still smarting from state-owned Chinalco's failed attempt to buy a $19.5 billion stake in Anglo-Australian miner Rio Tinto, which led to the arrest of four Shanghai-based employees of Rio Tinto on Aug. 12.

Government Snags? Success with a YPF purchase is also far from certain. With more than 40,000 employees, YPF is the country's largest employer. "The real problem, more than between the companies, has to do with the government," says Nuria Álvarez, an analyst for Renta 4, a financial-services company in Madrid. Indeed, there's "very little chance of it being finally realized," says a source close to the situation who spoke on condition of not being identified. Any company trying to buy a stake of YPF needs official Argentine approval. But the country's leftist government led by President Cristina Kirchner is feeling the heat after losing legislative elections in June. Allowing a Chinese takeover of a prominent company like YPF could further undermine Kirchner's position.

That means the Chinese may have to settle for something less than an acquisition. Repsol could end up keeping control over YPF so it may only sell up to 40%, says Álvarez. "They don't want to disappear from Argentina, but reduce their exposure," she says.
Baigorri is a reporter for Bloomberg News in Madrid.

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