Financial Analysis of privatized companies in Spain (Análisis Financiero de las empresas privatizadas en España: 1995-2000)

FINANCIAL ANALYSIS OF PRIVATISED COMPANIES IN SPAIN: 1995-2000

Callejón Gil, Angela Full University Professor (University of Malaga) Diéguez Soto, Julio Full University Professor (University of Malaga) 1

I. Introduction

A little more than five years ago, the Spanish government embarked upon a programme of privatisations with the aim of strengthening the market economy, reforming and modernising the state sector and liberalising a large part of the public services. The object of this study is to evaluate whether or not there has been an improvement in the financial situation of the companies that have undergone this process. To determine this, we have applied the financial-economic model of insolvency prediction to the annual reports of some of the most significant companies undergoing privatisation. To this end we have focused on the financial years immediately before and after the date of the event in question. This study is divided into three sections: in the first we describe, albeit briefly, the financialeconomic model of insolvency prediction1; in the second, in a way which complements the previous section, we apply the above-mentioned model to the companies that constitute our sample for the period 1995 – 2000: Aceralia, Aldeasa, Altadis, Endesa, Iberia2, Repsol and Telefónica. A synthesis of the results obtained from that period is presented in the conclusions set out in the third and final section.

II. Prediction of company failure

1

The main sources of reference are the following: García Martín V. (1990); García Martín V. and Fernández Gámez, M.A.. (1992);

Cisneros Ruiz, A.J. and Diéguez Soto J. (2000). 2

The definitive privatisation process of Iberia occurred in the year 2001, and consequently the analysis has only been able to include in its

study part of the period as a public company. However, the importance of this company in the field of commerce at national level has been the reason behind our including it in the sample with the aim, in this case, of finding out financial situation of the company prior to it being privatised.

2

Starting from the pioneering work of Beaver (1966) and Altman (1968) a wide range of methodologies has been put forward aimed at predicting company failure on the basis of the financial reports published periodically by companies.

According to the statistical technique used, the

characteristics of the sample and the definition of the dependent variable, we have been witnesses to what has been fundamentally the formulation of numerous predictive models during the last decade. We can quote, amongst others, the following models, classified according to the technique used3: •

Univariant models [ Beaver (1966), Viscione (1985)],

•

Discriminating multi-variants [ Altman (1968), Deakin (1972), Edminster (1972), Altman and McGough (1974), Blum (1974), Altman and Loris (1976), Altman, Haldeman and Narayanann (1977), Altman and Brener (1981), Castagna and Matolcsy (1981), Taffler (1983), El Hennawy and Morris (1983), Laffarga, Martín and Vazquez (1985 and 1986), Gentry, Newbold and Whitford (1985), Betts-Belhoul (1987), Gabás (1990), Ferrando and Blanco (1998)],

•

Logit multi-variants [ Martin (1977),

Olhson (1980), Collins and Green (1982), Mensah

(1983), Casey y Bartzack (1984), Zavgren (1985), Peel, Peel and Pope (1986), Pina (1988), Lau (1987), Rodríguez Acebes (1990), Koh (1992), Mora (1994), Lizarraga (1997), Somoza y Vallverdú (2003)], •

probit multi-variants [ Zmijewski (1984), Casey, McGee and Sticney (1986), Barniv and Raveh (1989)],

•

Resource share multi-variants [ Lincoln (1984), Marais, Patell and Wolfoson (1984), Altman, Fridman and Kao (1985), Gabás (1990)] and

•

Neuronal system multi-variants [ Serrano and Martín (1993), Odom and Sharda (1993), Lacher, Cotas, Sharma and Fant (1995), Chye y Suan (1999), Barney, Graves y Johnson (1999), De la Torre, Melero and Román (2001)].

3

Para un análisis más exhaustivo puede verse Rodríguez Vilariño (1994) y Laffarga y Mora (1998).

3

These models have to overcome numerous difficulties such as providing an adequate definition of financial failure, limitations restricting the sample selection, the choosing of independent variables, statistical problems, temporary instability in the relations between dependent and independent variables, the difficulty of extrapolating to other environments and time periods, the difficulty of applying a model a priori when the exact year in which the crisis occurs is not known, the application of different models to different samples and time periods,….Furthermore, one of the most important deficiencies common to all these empirical models is the absence of general theory on financial failure. We cannot call into question the usefulness of these models in spite of the limitations and difficulties indicated, given that, on the whole, they do succeed in predicting failure a posteriori with a fair degree of precision – although it is unfortunate that as we move away in time from the crisis point or change the sample or environment (the country, for example) the results are not so good -, and above all they provide empirical evidence to show that there exists a correlation between economic-financial information and solvency. However, and due to the fact that there is no solid theory to support the application of these models, many of whose ratios are chosen on the basis of such a “scientific” criterion as their popularity, they are unable to explain why companies find themselves heading towards such a disastrous outcome and consequently, they fail to provide useful information that might help to indicate possible remedies if the objective is to avoid the failure of the company. Proof of this can be found in its almost non-existent application in real company business – at least in the majority of cases – both by auditors and by the company administrators themselves. In this article we develop and apply the economic-financial model of insolvency prediction, which perfectly defines the concept of solvency and which requires the individual and in- depth analysis of the financial information provided by the annual accounts of the companies that we aim to evaluate following an ad hoc methodology. In our humble opinion, it puts forward a solid theory that succeeds

4

in clarifying the reasons why companies fail or not, and therefore makes it possible to identify the factors that are crucial for the attainment of the financial stability of a company.

III. Financial-economic model of insolvency prediction.

This model is based on the concept of solvency, focusing specifically on the capacity of a company to generate funds: it claims that a company is technically solvent when the cash flow has reached a level which allows the company to meet its payment obligations punctually for each financial year, as we shall discuss in detail further on in this study. In order to determine what the financial situation of a company is, we carry out an analysis using a dual perspective: 1. Static analysis4 (distinct from patrimonial) and 2. Dynamic analysis, which responds to the genuine dynamic nature of the company. By relying on the annual report for support in carrying out a financial analysis of an economic unit, we are obliged to look for homogeneity among the areas being compared; for this reason the items are differentiated according to two separate criteria: 1.

whether or not they have a cyclical nature and

2.

whether they are permanent

Cyclical items refers to all those that undergo a regular process of renewal, normally through production. The remainder will be considered non-cyclical. The cyclical assets can be either short or

4

The fundamental difference resides in the way in which the assets are perceived: the patrimonial perspective establishes the contest of

the realisation of the assets and the exacting of liabilities, whereas the static analysis proposed for the financial-economic model analyses the assets with regard to their capacity to generate funds to meet the financial needs that they relate to, in accordance with the particular nature of each one.

5

long term, the first of these renewing themselves several times within a financial year (for example, on the assets side we find stock and clients, and on the liabilities side accounts pending payment originating from the ordinary activity), and the second requiring several financial years in which to renew themselves (including tied up capital subject to irreversible depreciation). Regarding the permanent nature of the annual report categories, we refer simultaneously to assets and liabilities items. On the assets side we find the category of Stock in trade (accounts awaiting collection and stock), which will figure as assets while the company, is operating commercially and non-cyclical assets (tied up capital and other assets not subject to irreversible depreciation and to lack of precision at the time of realisation). Similarly, those assets that individually have no realisation value (initial expenses or goodwill amongst others) will be included as non-cyclical assets. All these areas – Stock in trade and non-cyclical assets – require a permanent tied up capital of resources. All such items that represent a permanent source of financing for the company are considered permanent liabilities, because their renewal is spontaneous (e.g. suppliers) or because they tend not to be wiped out (own resources). On the basis of the explanations given above the annual report categories, in order to carry out an accurate financial analysis, would be appropriated in the following way (presentada en la table 1). By means of the static analysis we aim to find a correlation between the homogeneous asset and liability volumes5, and also to determine whether or not these are likely to generate funds to adequately meet their financial commitments, described in the liabilities areas to which they are related. The long-term structure can provide us with a guide regarding the company’s financial trend. We shall make a specific analysis of this in the comparison between the long cycle assets and the long-term

5

Stock in trade with Trade liabilities; non-cyclical assets with own resources…

6

debt, so that with the resources produced by these assets when integrated into the productive process, the long-term debt, which is the probable funding source, can be wiped out. TABLE 1 Adjustment of the annual reports Classification Liquid assets

ASSETS Character

Items Profit account

Stock in trade

P

Stocks, clients..

Long cycle Assets

NP

Non- cyclical Assets

P

Machinery, installations… Constitution costs, Permanent financial Investments

a b

Classification Non-commercial shortterm liabilities Trade liabilities

LIABILITIES Character NP P

Long- term debt

NP

Own resources

P

Items Short term loans… Suppliers, Commercial bills to pay Long term Loans,…. Company Capital, General Reserve Funds,..

Source: Draft prepared from own data. Where P: Permanent and NP: Non- permanent

However, we should not forget that solvency always occurs in the short term and consequently for each financial year, the above mentioned case should be rendered as a technical redemption payment at least equal to the financial redemption payment, in order not to make use, in so far as is possible, of other freely available funds such as profits. Following this criterion, and to complete the long term static analysis, we shall proceed to compare the non-cyclical assets with the company’s own resources, given that the former are assets that produce no funds and must therefore be financed from a source that is not wiped out and does therefore not require funds (COR). The long term static analysis can, in the light of the foregoing, be formulated in the following expressions: Long cycle Assets ≥ Long Term Debts Company’s Own Resources ≥ Non Cyclical Assets

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A detailed look at the short term reveals that both short-term assets and liabilities contain two components: one financial and the other commercial. The financial component is drawn from the liquid assets and the pure financial debt with short-term maturity date (non-commercial short term liabilities); we assign the term net liquidity to the difference between liquid assets and non-commercial short-term liabilities. NL = LA – ncstL

(1)

Where: NL = Net Liquidity LA = Liquid Assets NcstL = Non-commercial short term Liabilities

On the other hand, the commercial structure of any company is drawn from its Stock in trade (accounts to be collected and stocks) and the Trade liabilities (accounts to be paid deriving from the commercial operations). The Stock in trade involves a permanently tied up funds; whilst the company continues in existence we shall need stocks and clients. Comparably, the Trade liabilities are converted into permanent funding; whilst there is commercial activity we shall be financed by suppliers. The question is therefore to get the permanent liability trading companies to finance their asset counterparts. The difference between Stock in trade and Trade liabilities is assigned the expression: capital requirements. CR = SIT – TL

(2)

Where: CR = Capital Requirements SIT = Stock in trade TL = Trade liabilities

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As a result, the part of short-term assets (made up of liquid assets and Stock in trade) which is not financed by short-term liabilities (made up of short-term commercial and non-Trade liabilities) and the capital requirements (commercial component). With reference to the foregoing, we could define in analytical terms the short-term structure of the balance in the following manner: LA = SIT = NcstL + TL + WC

(3)

Where: LA = Liquid Assets SIT= Stock in trade NcstL = Non-commercial short-term Liabilities TL = Trade Liabilities WC = Working Capital

and if we remember expressions (1) and (2) we find that the following formula is true: WC = NL + CR

(4)

Where: WC = Working capital NL = Net Liquidity CR = Capital Requirements

and consequently by applying this formula we find that every company can be subject to two exclusive circumstances: 1) WC < CR

______________

NL (-). In this case the financing of the Stock in trade comes from non-

permanent liabilities, and that this structure does not contribute towards a financial stability, while causing a negative net liquidity. 9

2) WC > CR ________________ NL (+). With regard to this situation, the company enjoys a balance between its commercial sectors and consequently has at its disposal sufficient treasury funds to meet the pure financial debt demands when they are due.

Nevertheless, we cannot reduce the study to the static aspect since the actual nature of the company is dynamic and is subject to a circulatory structure, and therefore it will be a dynamic analysis that determines in the end the financial situation of the company. In the words of Professor García Martín6 “if we focus our attention on the causes of insolvency, we can say that there are a number of external causes, of a qualitative nature, such as bad management, an adverse economic environment, problems originating from political or social instability; economic policies that do not concur with the character of the commercial business, and even factors of an ethical nature such as bribery, corruption etc. Any of these, should they occur, has a correlation in the evolution of some or all of the economic-financial sectors – which will be indicated where appropriate – that constitute the internal causes of insolvency. For this reason it is unnecessary to make comparisons with other companies, or to formulate surveys. We are able to identify the true situation immediately because the circulatory structure of the company follows the model of a closed system that in the face of any action external to it responds with a financial reaction” and will also have a necessary economic reaction perfectly quantifiable in one of the following three areas: a) the cash flow b) the capital requirements of the working capital7 c) the contracting of financial debts8 6

García Martín, V. (2001, a)

7

This area refers to the short-term commercial element defined in the static analysis.

8

This refers to the non-commercial short-term financial demands, defined in the static analysis.

10

This analysis will enable us to define the internal causes responsible for the financial stability or instability of the company the bases of which are specified in the economic-financial areas previously referred to. Only by knowing the causes of the instability will it be possible to propose the most accurate solutions to restore normality. In order to make the empirical development easier, and before proceeding, we should remember that a company is only technically solvent for a period of time when it generates resources at a level that enables it to meet its payment commitments as defined by the payment on time of the financial debt, the capacity to cover the increase in capital requirements and, where necessary, to pay out the possible dividends within that period. Regarding the behaviour of the capital requirements, it is convenient to point out that on some occasions these may diminish, which would imply that this area collaborates with the cash flow in the injection of funds into the company. Taking as a starting point the three areas to which we have referred, we shall establish a causal relation between them, and this interrelation will provide the basis for an analysis that we call dynamic, and which the actual dynamic character of the company’s financial behaviour, and which can be summarised in the expression set out below (which simply puts in specific terms the definition of technical solvency given above): CF – ΔCR > αf + D

(5)

Where: CF: Cash flow ΔCR: Increase in Capital requirements αf : repayment of financial debt D: Dividends

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Only under this circumstance are we able to affirm that a company is technically solvent. But without prejudice to the above, we shall have recourse to a static analysis, which shows us whether or not the economic-financial structure of the company collaborates in its financial stability, being basically fixed in one specific point for the short term, that being the comparison of the working capital with the capital requirements, the guarantee of solvency being that these latter are covered by the former (company’s own resources). This static analysis is completed by observing whether the fixed structure areas are being correctly financed, basing ourselves in order to determine this on the criterion of permanence.

IV. Financial analysis.

In the following section we present an individual analysis of each of the companies that make up the object sample of this study. TABLE 2 Companies that make up the object sample and year of privatisation Companies Aceralia Aldeasa Altadis Endesa Iberia Repsol Telefónica a

Year of Privatisation 1997 1997 1998 1998 2001 1997 1997

Source: Based on own data.

In order to perform the analysis on each of the companies we shall employ the same method, that is, in the first place we shall present the Appropriated balance in order to subsequently carry out a financial analysis, this will be followed by a brief static analysis, and finally we shall resort to the dynamic analysis, which will be the one determining whether or not there exists a situation of technical solvency for each financial year. 12

IV.I Aceralia a) Appropriated Annual report9 Table 3 Appropriated Annual reports of Aceralia for financial analysis (in millions of pesetas) 1997 % 1998 % LA 25123 5.4 9046 1.86 SIT 100302 21.56 100223 20.62 LCA 19518 4.20 7604 1.56 NCA 320231 68.84 369256 75.56 T.A. 465174 100 486129 100 NcstL 11964 2.57 17329 3.56 TL 56806 12.21 52700 10.84 LTD 19420 4.17 33745 6.94 COR 376984 81.04 382355 78.65 T.L. 465174 100 486129 100 a Sources: Annual accounts and prepared from own data.

1999 4968 102716 16072 375663 499419 30630 61060 27664 380065 499419

% 0.99 20.57 3.22 75.22 100 6.13 12.23 5.54 76.10 100

2000 5612 100520 2663 417347 526142 29159 75132 37447 384404 526142

% 1.07 19.11 0.51 79.32 100 5.54 14.28 7.12 73.06 100

Where: LA = Liquid Assets

NcstL = Non-commercial short-term liabilities

SIT = Stock in trade

TL = Trade liabilities

LCA = Long Cycle Assets

LTD = Long-term Debts

NCA = Non-cyclical Assets

COR = Company’s Own Resources

T.A. = Total Assets

T.L. = Total Liabilities

b) Short Term Static Analysis Table 4 Working capital versus Capital requirements of Aceralia (in millions of pesetas) Aceralia Working capital Capital requirements Net Liquidity

1997 56655 43946 13159

1998 39240 47523 -8283

1999 15994 41656 -25662

2000 1841 25388 -23547

a

Source: Prepared from own data.

c) Dynamic Analysis

9

We have had to confine the analysis of Aceralia to the years 1998, 1999 and 2000 given that for the previous years the register does not

contain the data relating to the current assets.

13

Table 5 Dynamic financial analysis of Aceralia for the years 1998 – 2000 (in millions of pesetas) Aceralia Cash flow Plus reductions in CR Minus increases in CR Minus af (n-1) Minus dividends Fund SURPLUS Fund DEFICIT

1998 32404 -3577 -11964 -10625 6238

1999 25170 5867

2000 36123 16268

-17329 -9375 4333

-30630 -12500 9261

a

Source: Prepared from own data.

Following its privatization in 1997, this company can be rated as technically solvent given that in each of the financial years studied it achieves a level of resources sufficient to cover its financial requirements, which consist not only of pure financial debts with immediate maturity, or shareholders’ demands for their dividends, but the fact that in the year 1998 the commercial structure of this company also requires resources which will be met obviously with the funds generated by the company. In the years 1999 and 2000 the situation is even more favourable in so far as the commercial structure collaborates with the Cash flow to meet the debt and the dividend payments punctually, thus achieving a fund surplus. It should be pointed out that the short-term pure financial debt in the year 2000, which is nearly twice that of the previous year does not imply a source of risk in so far as the commercial activity of this company enables it to take on the above-mentioned debt and meet it punctually.

IV.II Aldeasa a) Appropriated Annual report.

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Table 6 Appropriated annual reports of Aldeasa for financial analysis (in millions of pesetas). 1995 % 1996 % 1997 LA 3495 16.81 656 3.36 423 SIT 5743 27.61 6506 33.30 7608 LCA 2627 12.63 2895 15.27 3183 NCA 8932 42.95 9394 48.07 19689 T.A. 20797 100 19544 100 30903 NcstL 73 0.35 3165 16.19 2771 TL 7573 36.41 5741 25.37 5541 LTD 170 0.82 265 1.36 1090 COR 12981 62.42 10374 53.08 21501 T.L. 20797 100 19544 100 30903 a Source: Annual accounts and prepared from own data.

% 1.37 24.62 10.30 63.71 100 8.97 17.93 3.53 69.58 100

1998 542 9470 3745 24112 37869 4818 6214 1048 25789 37869

% 1.43 25.01 9.89 63.67 100 12.72 16.41 2.77 68.10 100

1999 406 11082 4828 22566 38882 4686 7642 1015 25539 38882

% 1.04 28.50 12.42 58.04 100 12.05 19.65 2.61 65.68 100

2000 286 14095 4716 26094 45191 3169 9465 5403 27154 45191

% 0.63 31.19 10.44 57.74 100 7.01 20.94 4.96 60.09 100

Where: LA = Liquid Assets

NcstL = Non-commercial short-term liabilities

SIT = Stock in trade

TL = Trade liabilities

LCA = Long Cycle Assets

LTD = Long-term Debts

NCA = Non-cyclical Assets

COR = Company’s Own Resources

T.A. = Total Assets

T.L. = Total Liabilities

b) Short Term Static Analysis Table 7 Working capital versus Capital requirements of Aldeasa (in millions of pesetas) Aldeasa Working capital Capital requirements Net Liquidity

1995 1592 -1830 3422

1996 -1741 768 -2509

1997 -281 2067 -2348

1998 -1020 3256 -4276

1999 -840 3440 -4280

2000 1747 4630 -2883

a

Source: Prepared from own data.

The economic-financial structure of Aldeasa does not collaborate in maintaining financial stability since, as we observe in Table 7, in the short term only for the year 1995 the working capital manages to cover the capital requirements, but from for the remaining years we find a negative net liquidity.

c) Dynamic Analysis

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Table 8 Dynamic financial analysis of Aldeasa for the years 1995 – 2000 (in millions of pesetas) Aldeasa Cash flow Plus reductions in CR Minus increases in CR Minus af (n-1) Minus dividends Fund SURPLUS Fund DEFICIT a

1995 4882 3227 -885 -2016 5802

1996 6306

1997 7682

1998 9438

1999 7299

2000 5220

-2598 -73 -4300

-1299 -3165 -3607

-1189 -2771 -4200 1278

-184 -4818 -4200

-1190 -4686 -4116

665

389

1903

4772

Source: Prepared from own data.

Table 8 shows that only in the financial years 1995 and 1999 is Aldeasa able to guarantee its financial stability. We can see that in the first year studied, the cash flow is capable of meeting the financial debt with short term maturity date, but also, the short term commercial structure collaborates with them in injecting funds so that the Capital requirements decrease in comparison with the previous year, thus releasing funds totaling 3,227 million pesetas, which results in a fund surplus to the order of 5,802 million pesetas. The opposite occurs with the years following, given that the commercial structure in this case absorbs funds, and consequently the cash flow is insufficient to meet the requirements of both the commercial component (increase in Capital requirements) and the non-commercial one (amortization of financial debt). Only in 1998 is the cash flow capable of covering all the funding requirements, producing in this year a fund surplus generated by the company itself. From 1999 onwards, the cash flow decreases again, and we observe a return to the previous situation, characterized by a fund deficit.

IV.III Altadis a) Appropriated Annual report.

Table 9 Appropriated annual report of ALTADIS for financial analysis (in millions of pesetas)

16

1995 % 1996 % 1997 LA 17737 7.85 14222 7.08 2330 SIT 121225 53.67 102768 51.16 113996 LCA 10331 4.57 11858 5.90 12685 NCA 76554 33.89 72005 35.84 123782 T.A. 225847 100 200853 100 252793 NcstL 9565 4.23 13541 6.74 30736 TL 111519 49.37 73118 36.40 100504 LTD 8777 3.88 6148 3.06 4940 COR 95986 42.50 108046 53.79 116613 T.L. 225847 100 200853 100 252793 a Source: Annual accounts and prepared from own data.

% 0.92 45.09 5.01 48.96 100 12.15 39.75 1.95 46.12 100

1998 7290 139563 11812 129407 288072 28332 129588 16060 114092 288072

% 2.53 48.44 4.10 44.92 100 9.83 44.98 5.57 39.60 100

1999 8698 85499 13773 295375 403345 55171 106409 5594 236171 403345

% 2.15 21.19 3.41 73.23 100 13.67 26.38 1.38 58.55 100

2000 1498 85738 13649 356879 457764 100474 129577 62979 164734 457764

% 0.32 18.72 2.98 77.96 100 21.94 28.30 13.75 35.98 100

Where: LA = Liquid Assets

NcstL = Non-commercial short-term liabilities

SIT = Stock in trade

TL = Trade liabilities

LCA = Long Cycle Assets

LTD = Long-term Debts

NCA = Non-cyclical Assets

COR = Company’s Own Resources

T.A. = Total Assets

T.L. = Total Liabilities

b) Short Term Static Analysis Table 10 Working capital versus Capital requirements of Altadis (in millions of pesetas) Altadis Working capital Capital requirements Net Liquidity

1995 17878 9706 8172

1996 30331 29650 681

1997 -14914 13492 -28406

1998 -11067 9975 -21042

1999 2000 -67383 -142815 -20910 -43839 -46473 -98976

a

Source: Prepared from own data.

The working capital is insufficient to cover the Capital requirements for the period 1997-2000, and consequently Altadis does not have at its disposal sufficient liquid assets to meet the non-commercial short-term liabilities should these mature at the end of each of the respective financial years. The above corroborates the non-collaboration of the short-term structure in the maintaining of financial stability. The data for the years 1995 and 1996 shows just the opposite.

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c) Dynamic Analysis Table 11 Dynamic financial analysis of Altadis for the years 1995 – 2000 ALTADIS Cash flow Plus reductions in CR Minus increases in CR Minus af (n-1) Minus dividends Fund SURPLUS Fund DEFICIT

1995 20568

1996 15415

-22852 -9565 -5892

-19944 -13541 -6481

17741

24551

1997 25098 16158

1998 21683 3517

1999 24096 30885

2000 -21797 22929

-30736 -9427 1093

-28332 -12704

-55171 -26716

-100474 0

15836

26906

99342

a

Source: Prepared from own data.

The company does not show an optimal annual report for the period analysed, except in the year prior to privatization – 1997 -. We can see how the fund deficit is a constant feature, with the exception already noted, producing a situation that has seriously worsened in the year 2000. The regular generating of resources, along with the injection of funds coming from the commercial structure, for most of the years, have not managed even to cover the required demand of these years, due to both the increasing financial amortization of the debt and the paying out of dividends to the shareholders. The constant attention to these shows that it is a virtually obligatory practice in certain companies, in spite of the financial situation in which they find themselves. The substantial increase in the financial investments made fundamentally in the last two years, as a consequence of the merger with SEITA and other investments of a financial nature, have been funded with contributions from capital investors – in the year 1999 – and, basically, by increasing the debt. For this reason, the meeting of the debt in 2000 doubles that required in the year 1999, giving rise to the highest fund deficit level in the period analysed. As a result of this, the financial situation of Altadis has not undergone any drastic changes following privatization; rather it has seen an accentuation of the already preoccupying financial instability that affected it during the years 1995 and 1996.

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IV.IV Endesa a) Appropriated Annual report. Table 12 Appropriated annual report of ENDESA for financial analysis (in millions of pesetas) 1995 % 1996 % 1997 LA 35 0.002 59 0.003 27 SIT 95348 7.55 80139 4.61 88012 LCA 567964 44.98 820813 47.23 804983 NCA 599188 47.45 836640 48.14 1018349 T.A. 1262535 100 1737651 100 1911371 NcstL 213352 16.89 174236 10.02 157712 TL 133331 10.56 165416 9.51 105974 LTD 213560 16.91 342189 19.69 519158 COR 702292 55.62 1055810 60.76 1128527 T.L. 1262535 100 1737651 100 1911371 a Source: Annual accounts and prepared from own data.

% 0.001 4.60 42.11 53.27 100 8.25 5.54 27.16 59.04 100

1998 8022 101861 719369 1379430 2208682 259696 249840 839550 859596 2208682

% 0.36 4.61 32.57 62.45 100 11.75 11.31 38.01 38.91 100

1999 6702 140812 946253 3053882 4147649 399009 535037 1703900 1509703 4147649

% 0.16 3.39 22.81 73.62 100 9.62 12.89 41.08 36.39 100

2000 505 37716 1110 3689258 3728589 247850 467374 1616009 1397356 3728589

% 0.01 1.01 0.02 98.94 100 6.64 12.53 43.34 37.47 100

Where: LA = Liquid Assets

NcstL = Non-commercial short-term liabilities

SIT = Stock in trade

TL = Trade liabilities

LCA = Long Cycle Assets

LTD = Long-term Debts

NCA = Non-cyclical Assets

COR = Company’s Own Resources

T.A. = Total Assets

T.L. = Total Liabilities

b) Short Term Static Analysis Table 13 Working capital versus Capital requirements of Endesa (in millions of pesetas) Endesa Working capital Capital requirements Net Liquidity

1995 -251300 -37983 -213317

1996 -259454 -85277 -174177

1997 -175647 -17962 -157685

1998 -399653 -147979 -251674

1999 -786532 -394225 -392307

2000 -677003 -429658 -247345

a

Source: Prepared from own data.

None of the years studied shows financial stability from the static point of view. The Capital requirements exceed the working capital, causing financial instability, although this cannot be considered definitive until we have completed the study with the dynamic analysis. There are not sufficient liquid assets to meet the financial debt with short-term maturity dates on time. 19

c) Dynamic Analysis Table 14 Dynamic financial analysis of Endesa for the years 1995 – 2000 ENDESA Cash flow Plus reductions in CR Minus increases in CR Minus af (n-1) Minus dividends Fund SURPLUS Fund DEFICIT a

1995 199654 -79177 -213352 -48321 141196

1996 201506 47294 -174236 -72731 1833

1997 210550 -67315 -157712 -80004 94481

1998 242876 130017

1999 335262 246246

2000 109332 25433

-259696 -84023 29174

-399009 -103758 78741

-247850 -114505 217590

Source: Prepared from own data.

The alternative fund surplus/deficit, illustrative of the technical solvency of ENDESA, experienced different behaviour patterns during the period 1995-2000. While it obtained a fund surplus in the years 1996, 1998 and 1999, the years 1995, 1997 and 2000 are characterized by a deficit. Consequently, the final privatization process in 1998 did not produce any change in the erratic behaviour characteristic of the company in so far as the financial situation is concerned. The Cash flow grew on a regular basis with each financial year that passed, except in the year 2000 when they suffered a significant cut equivalent to a third of the Cash flow the previous year. The purchase of shares of a permanent or temporary nature, essentially financed by short- and longterm debts, gave rise to an increase in the short-term debt to be met each year, particularly significant in the year 1999. If we add to the aforementioned the continued policy of the pay out of dividends practised by Endesa, which have not ceased to grow during the period under analysis, and the insufficient injection of funds from the decrements made to the Capital requirements in the majority of the financial years, we can find justification for the irregular behaviour of the financial situation of Endesa in the last few years.

20

IV.V Iberia a) Appropriated Annual report. Table 15 Appropriated annual report of IBERIA for financial analysis (in millions of pesetas) 1995 % 1996 % 1997 LA 2.570 0.005 46.173 11.00 70.205 SIT 27.483 0.06 39.044 09.00 44.108 LCA 211.445 0.49 203.941 42.00 180.818 NCA 195.929 0.445 126.129 31.00 128.313 T.A. 437427 100 415287 100 423444 NcstL 90.606 0.20 15.834 4.00 12.759 TL 96.909 0.22 103.808 25.00 103.400 LTD 263.044 0.60 202.483 49.00 205.954 COR -13.132 -0.02 93.162 22.00 101.331 T.L. 437427 100 415287 100 423444 a Source: Annual accounts and prepared from own data.

% 16.00 11.00 42.00 31.00 100 3.00 24.00 49.00 24.00 100

1998 75.750 52.664 175.245 200.756 504415 35.910 123.954 193.169 151.382 504415

% 15.00 10.00 35.00 4.00 100 7.00 25.00 38.00 3.00 100

1999 85.887 59.818 276.497 220.453 642655 56.982 196.331 235.798 153.544 642655

% 13.00 9.00 43.00 35.00 100 8.00 31.00 37.00 24.00 100

2000 113.029 45.568 299.086 207.117 664800 18.980 142.468 324.086 179.266 664800

% 17.00 7.00 45.00 31.00 100 3.00 21.00 49.00 27.00 100

Where: LA = Liquid Assets

NcstL = Non-commercial short-term liabilities

SIT = Stock in trade

TL = Trade liabilities

LCA = Long Cycle Assets

LTD = Long-term Debts

NCA = Non-cyclical Assets

COR = Company’s Own Resources

T.A. = Total Assets

T.L. = Total Liabilities

b) Short Term Static Analysis Table 16 Working capital versus Capital requirements of Iberia (in millions of pesetas) Endesa Working capital Capital requirements Net Liquidity

1995 -11.980 -69.426 57.446

1996 -34.425 -64.764 30.339

1997 -1.846 -59.292 57.446

1998 -31.450 -71.290 39.840

1999 -107.608 -136.513 28.905

2000 -2.851 -96.900 94.049

a

Source: Prepared from own data.

In the case of Iberia the short-term economic-financial structure has a positive collaborative effect on the financial stability as the working capital covers the Capital requirements for each of the years. As a result there are sufficient liquid assets to meet the non-commercial short-term liabilities punctually. 21

c) Dynamic Analysis Table 17 Dynamic financial analysis of Iberia for the years 1995 – 2000 (in millions of pesetas) Iberia Cash flow Plus reductions in CR Minus increases in CR Minus af (n-1) Minus dividends Fund SURPLUS Fund DEFICIT a

1995 45.996 18.973

1996 56.342

1997 85.255

1998 77.599 11.998

1999 37.622 65.223

-73.079

-10.134 -90.606

-65.135 -12.759

-35.910

-56.982

8.110

44.398

7.361

53.687

45.863

2000 26.690 -39.613 -18.980

31.903

Source: Prepared from own data.

In the company Iberia, in the financial years 1997, 1998 and 1999, the Cash flow in addition to the reductions in Capital requirements (there are fund contributions in 1998 and 1999) is sufficient to guarantee the technical solvency of the company; however, in the years 1995, 1996 and 2000 the Cash flow by the company is insufficient to achieve a situation of financial stability. Nevertheless, this does not lead us to conclude that the company is effectively insolvent, given that in the years 1995 and 1996 new debts are formalized with both short- and long-term maturity dates, which the company makes use of in order to meet its financial commitments punctually. The technical insolvency detected in the year 2000 has not become effective due, amongst other factors, to the funds obtained through the transferring of tangible, intangible and financial assets, as well as to the reduction of dividend payouts, which have been more than sufficient to meet the fund applications deriving from financial repayment and acquisition of tangible assets. Although the different motives of fund origin and application have been numerous, the ones previously referred to represent the most important in quantitative terms. The company has therefore managed to support itself in the last years analysed as a result of the extraordinarily positive results obtained which show a rise from 18.497 to 28.205 million pesetas in the financial years 1998 and 2000, respectively. (Specifically it was the financial results that, as a 22

consequence of an abnormal increase in the category “capital share income”, succeeded in improving their results in 1999). In conclusion, Iberia should return to the course it abandoned in 1998 when the results obtained from its exploitation operations were still the main source of generating funds, since neither the trajectory of its financial operations does not appear sustainable over a period of time – proof of which can be found in its behaviour in 1999 – nor does the line of extraordinary results seem to be the most suitable, given that by definition they do not show a regularity that can be relied upon, nor can they expect to continue selling tangible assets in an unlimited fashion.

IV.VI REPSOL YPF, S.A. a) Appropriated Annual report. Table 18 Appropriated annual report of REPSOL for financial analysis (in millions of pesetas) 1995 % 1996 % 1997 LA 51875 6.37 32203 3.45 793 SIT 42515 5.22 32777 3.51 36124 LCA 4239 0.52 5013 0.54 5576 NCA 715847 87.89 862860 92.50 747945 T.A. 814476 100 932853 100 790438 NcstL 74845 9.19 64105 6.87 31628 TL 148402 18.22 138949 14.90 30705 LTD 108164 13.28 219706 23.55 211737 COR 483065 59.31 510093 54.68 516368 T.L. 814476 100 932853 100 790438 a Source: Annual accounts and prepared from own data.

% 0.10 4.57 0.71 94.62 100 4.00 3.88 26.79 65.33 100

1998 21755 50395 6184 786627 864961 33668 54066 243894 533333 864961

% 2.52 5.83 0.71 90.94 100 3.89 6.25 28.20 61.66 100

1999 8153 69217 9321 3359666 3446357 120630 29617 1812276 1481834 3446357

% 0.24 2.01 0.21 97.54 100 3.50 0.86 52.62 43.02 100

2000 665 132443 11314 3578963 3723385 345584 90680 1719100 1568021 3723385

% 0.02 3.56 0.30 96.12 100 9.28 2.44 46.17 42.11 100

Where: LA = Liquid Assets

NcstL = Non-commercial short-term liabilities

SIT = Stock in trade

TL = Trade liabilities

LCA = Long Cycle Assets

LTD = Long-term Debts

NCA = Non-cyclical Assets

COR = Company’s Own Resources

T.A. = Total Assets

T.L. = Total Liabilities

23

b) Short Term Static Analysis Table 19 Working capital versus Capital requirements of Repsol (in millions of pesetas) Repsol Working capital Capital requirements Net Liquidity

1995 -128857 -105887 -22970

1996 -138074 -106172 -31902

1997 -25416 5419 -30835

1998 -15584 -3671 -11913

1999 -72877 39600 -112477

2000 -303156 41763 -344919

a

Source: Prepared from own data.

None of the years studied shows financial stability from a static point of view. The short-term Capital requirements exceed the working capital, which gives rise to financial instability, although we cannot say that this is definitive until we have completed the study with the dynamic analysis. There are not enough liquid assets to meet the financial debt with short-term maturity date punctually.

c) Dynamic Analysis Table 20 Dynamic financial analysis of Repsol for the years 1995 – 2000 (in millions of pesetas) REPSOL Cash flow Plus reductions in CR Minus increases in CR Minus af (n-1) Minus dividends Fund SURPLUS Fund DEFICIT a

1995 54101 14875

1996 76846 285

1997 93592

-20730 -51300

-74845 -54300

-111591 -64105 -26700

3054

52014

108804

1998 124457 9090 -31628 -28800 73119

1999 101662

2000 173208

-43271 -33668 -31613

-2163 -120630 -101495

6890

51080

Source: Prepared from own data.

We can see in the table above that Repsol does not succeed in generating a sufficient level of resources to meet its financial obligations punctually, in spite of the fact that its commercial structure releases funds during the years 1995, 1996 and 1998, helping in this way the Cash flow which, on the other hand, progresses favourably during the period studied. In 1999 a structural change takes place in the company as compared with the previous year; the rising cash flow trend is interrupted, whilst at the same time as the capital requirements increase considerably.

24

And so, once again, the level of cash flow is not sufficient to meet the commercial and financial demands of the fiscal year. In the year 2000, the cause of insolvency can be attributed to the significant increase in financial demands, both from financial entities as well as from the company’s capital shareholders themselves, since out of the 111,310 million pesetas in profits obtained by the company, 9,800 million are assigned to General reserve funds and the sum of 101,510 million pesetas was approved for pay out in dividends. In the light of these considerations, we conclude that the privatization process has not led to any significant changes in the financial situation of Repsol.

IV.VII Telefónica a) Appropriated Annual report. Table 21 Appropriated annual report of TELEFONICA for financial analysis (in millions of pesetas) 1995 % 1996 % 1997 LA 5375 0.14 7561 0.18 5076 SIT 288804 7.53 333814 8.21 355969 LCA 2372792 61.93 2346957 57.77 2234590 NCA 1164070 30.38 1373957 33.82 1640262 T.A. 3821041 100 4062289 100 4235897 NcstL 361767 9.44 314967 7.75 560292 TL 293822 7.66 391957 9.64 360640 LTD 1600508 41.77 1503220 37.0 1407193 COR 1574944 41.11 1852145 45.59 1907772 T.L. 3831041 100 4062289 100 4235897 a Source: Annual accounts and prepared from own data.

% 0.11 8.40 52.75 38.72 100 13.22 8.51 33.22 45.03 100

1998 6913 347142 2095039 2591532 5040626 712056 361977 1842509 2124084 5040626

% 0.13 6.88 41.51 51.41 100 14.12 7.18 36.55 42.13 100

1999 5417 37443 93678 4382234 4518772 374105 466471 1575068 2103128 4518772

% 0.11 0.82 2.07 96.97 100 8.27 10.32 34.85 46.54 100

2000 623851 73128 5701 7262436 7965116 701904 974039 2595127 3694046 7965116

% 7.83 0.91 0.07 91.17 100 8.81 12.22 32.58 46.37 100

Where: LA = Liquid Assets

NcstL = Non-commercial short-term liabilities

SIT = Stock in trade

TL = Trade liabilities

LCA = Long Cycle Assets

LTD = Long-term Debts

NCA = Non-cyclical Assets

COR = Company’s Own Resources 25

T.A. = Total Assets

T.L. = Total Liabilities

b) Short Term Static Analysis Table 22 Working capital versus Capital requirements of Telefonica (in millions of pesetas) Telefonica Working capital Capital requirements Net Liquidity

1995 -361410 -5018 -356392

1996 -365549 -58143 -307406

1997 -559887 -4671 -555216

1998 -719978 -14835 -705216

1999 -797716 -429028 -368688

2000 -978964 -900911 -78053

a

Source: Prepared from own data.

None of the years studied shows financial stability from a static point of view. The short-term Capital requirements exceed the working capital, which gives rise to financial instability, although we cannot regard this as definitive until we have completed the study with the dynamic analysis. There are not enough liquid assets to meet the financial debt with short-term maturity date punctually.

c) Dynamic Analysis Table 23 Dynamic financial analysis of Telefonica for the years 1995 – 2000 TELEFONICA Cash flow Plus reductions in CR Minus increases in CR Minus af (n-1) Minus dividends Fund SURPLUS Fund DEFICIT

1995 712295 -49236 -361767 -71400 229892

1996 727933 53125 -314967 -83613 382478

1997 789115 -53472 -560292 -95825 79526

1998 811587 10164

1999 94915 414193

2000 117167 471883

-712056 0 109695

-374105 0 135003

-701904 0 112854

a

Source: Prepared from own data.

We must analyse the annual report of Telefonica in the light of the policy of expansion and size increase that has been the main feature of the last few years. The fund surplus (see table 23) shows a drastic decrease in the period analysed, even becoming a deficit in the year 2000. It is precisely from the year 1997, when the definitive privatization process took place, when it obtains its worst results from the perspective of the dynamic financial analysis. 26

Firstly, the cash flow, after progressing favourably until 1998, decreases drastically in the financial years 1999 and 2000. Not only do the investments made in new telephone licences and scale change fail to show an increase in the creation of funds, but they also call into question the overly optimistic expectations created for the short term. The financial investments made, both of a short- and long-term nature, which increase rapidly as from 1998, reaching their highest point in 2000, are basically funded by an increase in financing, shortand long-term debts and own resources, by means of the corresponding increases in company capital. As a result of the aforesaid, the debt redemption payments that have to be met in each financial year show an increase compared with their initial value, reaching their highest point from 1997. Consequently, the technical solvency maintained in the last few years turns into instability in the year 2000, since the increase in the Cash flow, the positive behaviour of the Capital requirements, and the abandoning of the practice of dividend pay outs, are not sufficient to meet the large fund requirements necessary to redeem the short-term debt. The increase in the debt in the year 2000 makes effect solvency possible. However, if this situation continues it may give serious cause for concern regarding the financial stability of Telefonica.

27

IV. Conclusions Table 24 Summary table of the financial situation of the privatized companies10 Financial Analysis

1995 S(1) D(2)

Aceralia Aldeasa + + Altadis + Endesa Iberia Repsol Telefónica + a Source: Prepared from own data.

1996 S(1) D(2) + + -

+ +

1997 S(1) D(2) + + + + +

1998 E(1) D(2) + + + + + + +

1999 E(1) D(2) + + + + +

2000 E(1) D(2) + + -

b

We express the static analysis (S) in terms of the comparison between the working capital and the capital requirements, represented in the following manner: + if WC>CR - if WC