Will Repsol Really Buy Talisman Energy?

It emerged on Tuesday evening that Spain's Repsol (REPYY 1.20%) was looking at making a takeover offer for Talisman Energy (NYSE: TLM). At first, these were just rumors. However, after Talisman's stock surged on Wednesday morning, the company came out and revealed that it had in fact been approached by Repsol and the two companies were indeed locked in negotiations.

Looking for growth
Repsol has had a tough few years, as the company's international expansion plans have fallen apart. The company's largest acquisition outside of Spain, a key part of international growth, was the $15 billion acquisition of Argentina's YPF SA in 1999. Unfortunately, Repsol's stake in YPF was snatched back during 2012, when the Argentine government nationalized a 51% stake in the company.

Argentina eventually paid Repsol for its stake in YPF earlier this year. The government paid the Spanish oil company $5 billion in bonds for the 51% share that it grabbed. Repsol sold these bonds and the remaining 12% stake it owned in YPF for a total of $6.3 billion earlier this year.

With an acquisition cost of $15 billion, it would appear that, excluding dividends, Repsol made a significant loss on this transaction.

Nevertheless, with the $6.3 billion received from YPF, plus the $7.1 billion Repsol had in cash and equivalents at the end of the second quarter, the company has a hefty war chest with which to go on an acquisition spree.

Still, having had its fingers burnt within Argentina, Repsol is now looking to invest within safer, developed economies. The company has said that it is willing to spend up to $10 billion on deals, probably in the U.S., Canada, or other developed markets, such as northern Europe.

Looking for a sale
Talisman meanwhile is looking to shrink and has many assets that could be attractive to Repsol. Indeed, Talisman generates about half its sales from stable economic regions, like North America and the North Sea; output from Southeast Asia is also a strong contributor to sales. Additionally, Talisman has been shedding non-core assets to pay down debt for the past year or so.

The company's most recent asset sale was supposed to be its Eagle Ford joint venture. While this deal did fall through, (offers came in lower than expected) Talisman is on the war path again. The company has just hired Miro Advisors Pty to sell its stake in oilfields off northern Australia. 

Response to speculation
Talisman has responded to speculation that Repsol was looking to buy the company. In a statement issued on Wednesday morning the company stated:

Talisman acknowledges that it has been approached by Repsol with regards to various transactions. There is no assurance that any transaction will be agreed. Until such time as it is appropriate to make a public announcement on any potential transaction, Talisman does not intend to make any further comment on this matter.

But with an enterprise value of $14.4 billion, Talisman may be too big for Repsol's budget, especially as the Spanish giant has stated that it is only looking to spend $10 billion. It's more likely that Talisman will sell a selection assets to Repsol, allowing the European major to pick and choose the best bits.