Evaluation of M&A deals in the Energy sector

300 Pages·2017·4.15 MB·English

by  Leopoldo Della Porta

POLITECNICO DI MILANO
School of Industrial and Information Engineering
Master of Science in Management Engineering
Evaluation of M&A deals in the Energy sector:
a comparative approach
Supervisor: Prof. Alessandro Gandelli

Master Thesis of:
Nicolò Albertin N° 878897
Leopoldo Della Porta N° 878364
Academic Year 2017/2018

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Acknowledgements
We both would like to thank our supervisor, Prof. Alessandro Gandelli, for the patient
guidance, the inspiration and the advices he handed over throughout the writing of this
research. It is harsh to express how lucky we feel, to have had a supervisor who cared so
much about our work and our path, and who responded to our questions and queries so
promptly.

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TABLE OF CONTENTS
1. CHAPTER 1: INTRODUCTION…………………………………………………17
1.1. Brief history of oil…………………………………………………….………17
1.2. Oil Production………………………………………………………….….….19
1.3. OPEC production……………………………………………………….…….19
1.4. NON-OPEC production………………………………………………….…...23
1.4.1.1. China…………………………………………………….…….23
1.4.1.2. Russia………………………………………………….……...28
1.4.1.3. America……………………………………………….………33
1.5. Oil demand…………………………………………………………….……...34
1.6. Unconventional oil………………………………………………….………...35
1.6.1. Sand Oil……………………………………………………….……….35
1.6.2. Oil shale……………………………………………………….………36
1.6.3. Horizontal drilling…………………………………………….……….37
1.6.4. Hydraulic fracturing…………………………………………………...38
1.6.5. Shale 2.0……………………………………………………………….40
1.7. Innovative financing options in the oil and gas industry……………………..41
1.7.1. Banking sector…………………………………………………………41
1.7.2. Small cap explorers……………………………………………………42
1.7.3. Mid-to-large cap independents………………………………………...42
1.7.4. International oil companies………………………………………...….42
1.7.5. National companies…………………………………………………....43
1.7.6. Upstream and downstream infrastructure investments………………...43
1.7.7. Reserve-based lending…………………………………………………44
1.7.8. Project finance…………………………………………………………44
2. CHAPTER 2: M&A OPERATIONS………………………………………………47
2.1. Definition……………………………………………………………………...47
2.2. Types of M&A………………………………………………………………...47
2.2.1. Horizontal M&A……………………………………………………….48

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2.2.2. Conglomerate operations………………………………………………48
2.2.3. Negotiation type………………………………………………………..49
2.2.4. Role in the acquisition…………………………………………………50
2.2.5. Friendly takeover………………………………………………………50
2.2.6. Hostile takeover………………………………………………………..50
2.2.7. Defensive tactics……………………………………………………….51
2.3. Motives for M&A……………………………………………………………..53
2.4. Disadvantages…………………………………………………………………56
2.5. Critical factor of unsuccess……………………………………………………57
2.6. Subjective motives for mergers and acquisition………………………………58
2.7. Waves…………………………………………………………………….……60
2.8. Literacy review………………………………………………………….….….64
2.8.1. Payment method…………………………………………………….….67
2.8.2. Acquisition type………………………………………………………..68
2.8.3. Level of debt……………………………………………………………68
2.8.4. Liquidity………………………………………………………………..69
2.8.5. Industry-relatedness…………………………………………………….69
2.8.6. Scale of the target company…………………………………………….69
3. CHAPTER 3: M&A IN ENERGY SECTOR………………………………………71
3.1. Context………………………………………………………………………...71
3.2. The trend of 2018………………………………………………………………72
3.3. Premium of transactions……………………………………………………….77
3.4. M&A deals by geographic region……………………………………………..78
3.5. Renewable energy sector………………………………………………………79
3.6. Outlook on main sectors………………………………………………………..81
3.7. Case study 1: Enel’s acquisition of Endesa…………………………………….83
3.8. Case study 2: ExxonMobil ‘s acquisition of XTO Inc. ……………………….106
3.9. Case study 3: Royal Dutch shell acquires BG………………………………...127
4. CHAPTER 4: M&A IN HOSPITALITY SECTOR……………………………….148
4.1. The Hospitality industry…………………………………………………...…148

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4.2. Business models…………………………………………………………...…150
4.2.1. Leases……………………………………………………………...….151
4.2.2. Management agreements……………………………………..……….152
4.2.3. Franchise………………………………………………………………152
4.3. Industry overview…………………………………………………………….154
4.3.1. The global hotels landscape: cities……………………………………154
4.3.2. Hospitality in Europe…………………………………………………158
4.3.3. US growth drivers…………………………………………………….161
4.3.4. Chinese investments bonanza..……………………………………….162
4.4. M&A in hospitality…………………………………………………………..164
4.4.1. Wave 1: 1995-1997…………………………………………………...164
4.4.2. Wave 2: 2005-2007…………………………………………………...166
4.4.3. Wave 3: 2015-present…………………………………………………167
4.4.4. Motives for M&A……………………………………………………..170
4.4.4.1. Industry
fragmentation………………………………………………………171
4.4.4.2. Geography…………………………………………………….172
4.4.4.3. Loyalty programs……………………………………………...173
4.4.4.4. Value drivers…………………………………………………..175
4.5. Case study 4: Marriott International acquires Starwood………………………177
4.6. Case study 5: Intercontinental Hotel Group acquires Kimpton Hotel & Restaurant
Group Inc. ……………………………………………………………………198
4.7. Case study 6: AccorHotels acquires FRHI Group…………………………….220
5. CHAPTER 5: Analysis of M&A factors evidencing deal success………………...245
5.1. Energy sector: Analysis of the social implications………………...................247
5.1.1. Antitrust………………...………………...………………...…………247
5.1.2. Environment………………...………………...………………............259
5.2. Strategic determinants in the energy sector………………...…………………261
5.2.1. Royal Dutch Shell………………...………………...………………....262
5.2.2. ExxonMobil………………...………………...………………...……..265

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5.2.3. Enel………………...………………...………………...……………...269
5.3. Strategic determinants in the Hospitality sector………………...……………269
5.4. Performance measurement………………...………………...………………..275
5.5. Energy performances………………...………………...………………...…...277
5.6. Hospitality performances……

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LIST OF FIGURES
Chapter 1
Figure 1.1: OPEC proven oil reserves
Figure 1.2: cumulative production and net additions, 2007-2016
Figure 1.3: OPEC-11 compliance with supply cuts in 2017
Figure 1.4: Russian liquid production divided per company output
Figure 1.5: World Oil demand divided in OECD and NON-OECD countries
Figure 1.6: illustration of hydraulic fracturing
Figure 1.7: fracking liquid composition
Figure 1.8: oil industry bonds emission by type in 2017

Chapter 2
Figure 2.1: M&A operations’ number and value worldwide for 1985-2017

Chapter 3
Figure 3.1: M&A operations in 2017 divided by sector
Figure 3.2: M&A operations’ number and value in the energy sector worldwide for 1985-2017
Figure 3.3: bidder’s region of provenience in deals with target company in North America
Figure 3.4: Average premium of the target company in M&A activities worldwide for 2006-2018
Figure 3.5: M&A activity worldwide divided for geographic appurtenance of the target
Figure 3.6: target’s region of provenience in deals with bidder company in Europe
Figure 3.7: Enel stock price after the acquisition
Figure 3.8: Enel EBIT and Net earnings growth
Figure 3.9: Enel operative data

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Figure 3.10: Enel revenues segment for country of origin
Figure 3.11: Enel’s return on equity, return on investment and leverage
Figure 3.12: Enel’s liquidity ratios
Figure 3.13: Enel’s debt coverage
Figure 3.14: Enel’s debt structure
Figure 3.15: Enel’s debt from banks
Figure 3.16: Enel’s debt divided by currency
Figure 3.17: ExxonMobil stock price after the acquisition
Figure 3.18: ExxonMobil’s return on equity, return on investment
Figure 3.19: ExxonMobil’s margins
Figure 3.20: ExxonMobil’s crude oil production
Figure 3.21: ExxonMobil’s natural gas production
Figure 3.22: Shell stock price after the acquisition
Figure 3.23: Shell’s margins on sales
Figure 3.24: Shell’s liquidity ratios
Figure 3.25: Shell’s leverage in selected years

Chapter 4
Figure 4.1: North America vs European operating models in major hotel chains
Figure 4.2: business models for selected hotel chains
Figure 4.3: Mapping the world of hospitality
Figure 4.4: Youth employment in hospitality sector in comparison to the overall economy
Figure 4.5: GVA impact of hospitality sector
Figure 4.6: 10-Year treasury rate
Figure 4.7: Correlation between RevPAR growth rate and GDP growth rate

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Figure 4.8: Share of the global market for hotel chains in 2016
Figure 4.9: Members of the reward program for hotel chain in 2016
Figure 4.10: Marriott stock price after the acquisition
Figure 4.11: Marriott’s operating performances
Figure 4.12: Marriott’s profit margins
Figure 4.13: Marriott’s liquidity ratios
Figure 4.14: Marriott’s debt analysis
Figure 4.15: Marriott’s operating performances
Figure 4.16: Marriott’s owned hotels in the world after Starwood integration Figure 4.17: Marriott’s European
change in owned hotels
Figure 4.17: IHG’ stock price after the acquisition
Figure 4.18: IHG’ ROA decomposed
Figure 4.19: IHG’s margins and number of employees
Figure 4.20: IHG’s liquidity ratios
Figure 4.21: IHG’s debt coverage ratios
Figure 4.22: IHG’s debt structure
Figure 4.23: IHG’s bank loans structure
Figure 4.24: IHG’s bonds structure
Figure 4.25: IHG’s debt divided by currency denomination
Figure 4.26: IHG’s hotels and rooms worldwide
Figure 4.27: IHG’s hotels and revenues
Figure 4.28: AccorHotels stock price after the acquisition
Figure 4.29: AccorHotels’ hotels and rooms worldwide
Figure 4.30: AccorHotels’ profitability ratios
Figure 4.31: AccorHotels’ operating margins

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