In 1993 the Argentine government sold controlling ownership in the national oil company, YPF (Yacimientos Petroliferos Fiscales), through an initial public offering on the Argentine stock market and through an American Depositary Receipt (ADR) issue on the New York Stock Exchange, as well as a Global Depositary Receipt (GDR) issue on the London Stock Exchange. This was the largest privatization in Latin America at that time, bringing in to the Argentine government about $US 3 billion in the initial issue of about half of YPFs total shares.

The initial privatization was carried out in July 1993, when YPF was sold in this initial public offering to literally thousands of investors in the open market. The government hired and installed a team of managers who took YPF through a huge and painful restructuring of its business and then the public sale of the company. Once YPF began to operate in the private sector as a listed company, the government continued to sell its remaining shares over time. The privatization itself was not an example of foreign direct investment, since foreign investors only purchased small percentages of YPF shares or depositary receipts. However, in 1998, the Spanish oil company, Repsol, decided to purchase control of YPF, and did so by buying 14.99 per cent of YPF shares from the governments remaining 20 per cent stake at that time. Repsol was able to obtain controlling interest in YPF in 1999 for a price of $US 2.01 billion. In mid-1999 Repsol raised its stake in YPF to 97.5 per cent, by making a tender offer for all the ADRs in New York and GDRs in London, along with shares in the Buenos Aires stock exchange that it did not already own. The total cost of this tender was $US 13.1 billion.

These share acquisitions were financed by Repsol borrowing in Spain and in the euromarkets, in addition to internal funding. The net result of these purchases made Repsol the owner of almost 98 per cent of total outstanding YPF shares, with only small shareholdings outstanding to investors who failed to participate in the tender offer in 1999. The total foreign direct investment replaced portfolio investment by those investors who had purchased ADRs or GDRs back in 1993, accounting for about 40 per cent of total YPF shares. These investors probably did not reinvest their funds in Argentina once they sold their depositary receipts to Repsol, so no new investment went into Argentina at that time. Of course, the original portfolio investment in the ADRs or GDRs was an international investment, bringing new funds into Argentina to pay for the depositary receipts. Those flows were recorded in 1993, and did not appear subsequently in the 1999 FDI process. That is, the investors in New York and London who had originally purchased shares of YPF in the ADR and GDR offerings there chose to sell those shares to Repsol, thus receiving Repsols cash, but not (necessarily) sending any funds to Argentina. All that happened was a change of foreign owners of those sharesbut the new foreign owner was a direct investor rather than a portfolio, passive investor. This accounted for approximately $US 10 billion of the total direct investment by Repsol, and thus for no new money coming into the country. The shares that were purchased from shareholders in the Buenos Aires stock exchange (about $US 3 billion of the total) did likely bring new funds into Argentina, assuming that the sellers kept the funds in the country.

The purchase of the governments shareholdings in 1998 did imply direct financial transfers from abroad to Argentina, as Repsol paid the government for those shares and financed the purchase with funds from abroad. This $US 2.01 billion thus was a transfer of funds to Argentina, different from the bulk of the investment. And as noted above, Repsol obtained the funds primarily through taking out bank loans in the eurocurrency market, denominating the loans in dollars, since YPFs earnings were mostly in dollars.

What are American Depositary Receipts? Were they a useful tool for YPF in selling shares to the public?