Trefica of Honduras

1
Trefica of Honduras

• Mark BainesJawad Haider
• William Myers

FIN 570 Fall 2008 October 8, 2008
2
The Company

• Bekaert had original ownership
• Political unrest in S. American countries in
  early 1980s
• Antonio Vente bought Trefica in 1984
• Production and commercialization of wire-related
  products
• Rebar, chain-link fencing, nails, metal wire,
  wire mesh
• Annual wire drawing capacity at 72,000 metric
  tons
• Annual revenues at 483 million Honduran lempiras
  (1997)
• Choluteca, Honduras

3
Honduras

• Second largest country in South America
• Bordered by El Salvador, Guatemala, Pacific and
  Caribbean
• Per capita income at 750
• Emerging democracy
• Least developed economy in Americas
• 60 agricultural economy
• Emerging market

4
Honduras (contd)
5
Honduras (contd)
6
Emerging Markets

• Markets and culture are demanding
• High rates of emigration to the developed world
• Fragmented markets
• Populations are youthful and growing
• Limited income and space
• Weak infrastructure
• Underdeveloped technologies
• Weak distribution channels
• 86 of the global markets are developing

7
Treficas Market

• Virtual monopoly in 1980s
• Lack of competition
• High tariffs and import duties
• Sellers market
• Political turmoil in the region
• Honduras total external debt exceeded 3.3
  billion
• Lempira devalued exports grew
• Economic reforms introduced in 1990s
• Consumer inflation running at 36 in 1991
• Bank loan rates running at 32 in 1997

8
Problem Areas

• Financial distress
• Ownership and control
• Quality and Capacity issues
• Country debt
• Global competition
• Faulty machinery
• Sales and Marketing challenges
• Least government support
• Red flags on Income statement

9
Causes and Effects
High tariffs High import
duty
Monopoly

Political turmoil
Lack of competition
10
Causes and Effects (contd)
Illiquid financial sector
Country debt
Only S.T local debt
No foreign L.T debt
Financial distress
High selling expenses
Ownership issues
High political risk
Currency devaluation
11
Issue Matrix
Importance
LOW
HIGH
Urgency
LOW
HIGH
12
Alternatives

• Stay the course
• Find a U.S. partner
• Sell control to a Mexican supplier
• Sell control to LAEI

13
1. Stay the Course

• Solidified relationship with LAEI
• Favorable cash position
• Ownership maintained by the Vente family
• Focus on restructuring debt

14
2. Find a U.S. Partner

• 20 equity position in Trefica
• Access to new distribution channels and new
  credit
• Product rationalization
• Injection of US1.9 million capital base
  increased to US8.6 million
• Juan Antonio would remain as company president

15
3. Sell Control to a Mexican Supplier

• Buyout of LAEI
• Majority stakeholder of Trefica (66)
• Injection of US4 million capital base increased
  to US10.7 million
• Juan Antonio to remain as company president until
  1999

16
4. Sell Control to LAEI

• Sell remaining Vente stake to LAEI (55)
• LAEI proposal US5 million

17
Decision Criteria

• Maintain ownership of Trefica
• Secure long-term debt financing
• Seek opportunities for increased distribution and
  expansion

18
Ownership Breakdown
19
Debt Structure
1997
2000
20
Interest Rate Comparison U.S. vs. Honduras
21
Alternative Analysis Evaluation Alternative 1
- Stay The Course

• Generating increased cash flows, but no
  accounting profit currently
• Need to pay down high floating interest
  short-term loans which is unlikely on current
  path
• Ideal for family to maintain ownership but
  requires time they dont have
• Too risky an alternative with current limited
  market access

22
Alternative Analysis Evaluation Alternative 2
Find a U.S. partner

• 20 equity and U.S. access would increase capital
  base 1.9 million to 8.6 million (28) a
  start but not enough
• Brings needed distribution access to U.S. markets
• Enables moving some production to U.S. with lower
  costs of selling and distribution
• Not significant enough capital, but access to
  U.S. markets might be

23
Alternative Analysis Evaluation Alternative 3
Sell control to a Mexican supplier

• Family ownership drops from 55 to 34 (-38) of
  larger company - not good
• Increases capital 4 million to 10.7 million
  (167), buys out LAEI loss of major supplier
  of 10 years
• Good capital infusion, reduces cost of debt, but
  potential for loss of family interest is too much

24
Alternative Analysis EvaluationAlternative 4
Sell control to LAEI

• Buys Vente family out completely, increasing
  family capital, losing the business not certain
  this is the goal
• 5 million for Vente family interest (75 of
  current capital structure) manageable
• Not certain Vente family wants to lose the
  business and future increased cash flow
  opportunities, so not an option

25
Alternative Selection Finding a U.S. partner is
most viable solution

• Key Does Vente want capital or the business?
• Short term debt still somewhat of an issue with
  small capital infusion
• Entry into U.S. for selling and distribution
  helps by
• Immediate opportunity for distribution of
  potential overcapacity
• Greater avenue for capital growth in U.S. markets
• Opening of new foreign markets with U.S. aid
• Maintains interest of company with Vente family

26
Action Plan

• 0-3 months - Finalize U.S. partnership
• 3-6 months - Open commercial sales center in U.S.
• 3-12 months - Implement production
  rationalization with U.S.
• 6-12 months - Utilize U.S. distribution channels
  
• 12-24 months - Open commercial sales centers in
  neighboring C.A countries/Mexico and beyond
• Ongoing - Distribute increased revenues toward
  A/P for short term floating loan debt
• Ongoing - Continue toward global sales
  opportunities