TREFICA OF HONDURAS

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TREFICA OF HONDURAS

• Andres Hernandez
• Sharon Udani
• Tianyuan Wang

2
COMPANY PROFILE

• Trefiladora Centroamericana
• Production and commercialization of wire-related
  products
• Actively participates in the U.S., Mexican,
  Caribbean, South American and Central American
  markets
• Strategically located in Choluteca, Honduras

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LOCATION
4
COMPANY PROFILE

• Annual plant capacity exceeds 72,000 metric tons
• Galvanize over 36,000 metric tons of wire
• 8,400 metric tons in barb wire
• 18,000 metric tons of wire rod and rebar

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PRODUCTS BRANDS
Chain-link fencing
Nails
High-resistance rebar
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EMERGING MARKET

• Profit from a substantial economic growth based
  on
• significant productivity gains
• technological change
• change in their economic philosophy
• Frequently characterized by
• political instability
• strong currency turbulence
• high foreign debt
• High risk and return

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COMPANY BACKGROUND

• Founded in 1969
• Sold to the Vente family in the 1980s
• Virtual monopoly in Honduras, El Salvador and
  Nicaragua in the 1980s
• Short-term, high interest loans to increase
  capacity in the 1990s
• Main supplier LAEI acquired 45 ownership to
  lower interest

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OVERVIEW

• Increasing losses and cash flow shortfalls
• Foreign competitors
• International competition
• Family-owned business
• Decision on capitalization and future
• SELL or RESTRUCTURE

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ISSUES
IMMEDIATE
BASIC

• Financing Resources
• Ownership Control

• Foreign Competition
• Quality Standards
• Local Economy
• Marketing Strategy
• COGS

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IMMEDIATE ISSUE MATRIX


Ownership Control Financing Resources
Importance
LOW
HIGH
Urgency
LOW
HIGH
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BASIC ISSUE MATRIX

Marketing Strategy Local Economy COGS
Quality Standards Foreign Competition
Importance
LOW
HIGH
Urgency
LOW
HIGH
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COMBINED ISSUE MATRIX

Marketing Strategy COGS
Ownership Control FINANCING RESOURCES
Importance
LOW
HIGH
Urgency
LOW
HIGH
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MARKET DOMINANCE 19841992
Running at Full Capacity
Lack of Competition
Virtual Monopoly
High Tariffs
High Import Duties
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EXPORTS
Tariff Structure
Opened Borders
Exports Growth
Government Exports Strategy
Accelerated Local-currency Depreciation
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GLOBAL TRANSITION 1993-1996
Anemic Local Economy Illiquid Financial Sector
International Quality Standards
Borrow Locally Short-term Financing
Opened Borders
Additional Production Capacity
Foreign Banks (Regional Political Risk)
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BORROWING LOCALLY
No Foreign Banks
High Inflation Rates
High Political Risk
High Interest Rates
Devaluating Currency
Illiquid Financial Sector
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INCURRING LOSS
Reneged Government Aid
Machinery
Big Expansion
Accounting Loss
Reluctant Investors
High Interest Loans
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PRECENT OF SALES COMPARISION
Benchmark Trefica
Net Sales 100.0 100.0
COGS 89.4 79.7
Gross profit 10.6 20.3
Selling Exp 1.3 8.8
GA Exp 5.1 3.6
Op Income 4.2 7.9
Interest Exp 2.2 10.8
Currency Fluctuations 0.0 0.4
Income b/tax 4.8 -3.3
Tax 1.3 0.0
Net Income 3.5 -3.3
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ALTERNATIVES

1. Stay the course
2. Find a US partner
3. Sell control to a Mexican Supplier
4. Sell control to LAEI

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1. STAY THE COURSE

• Pros
• 55 ownership
• Maintain control
• Wait for better opportunities

• Cons
• Too much high interest debt
• Potential loss of market share
• Potential bankruptcy

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2. FIND A U.S. PARTNER

• Pros
• Maintain control
• Access to U.S. financial markets
• Increase in U.S. market share
• Rationalizing production

• Cons
• Loss of 20 ownership
• Not enough investment to relief debt burden

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Historical Interest Rates
Short term lempira debt 32.10
Short term USD debt 12.50
Long term USD debt 12.50
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3. SELL CONTROL TO A MEXICAN SUPPLIER

• Pros
• 4 million investment to relieve debt burden
• Cheaper COGS
• Stay competitive in Central America

• Cons
• Loss of 21 ownership
• Potential loss of Presidency

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4. SELL CONTROL TO LAEI

• Pros
• Walk away with 5 million

• Cons
• Complete loss of ownership control
• Possibly bring shame to the family

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DECISION CRITERIA

• Market Accessibility
• Ownership Control
• Debt Structure

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MARKET ACCESSIBILITY
Alternative Markets
Stay the course -
U.S. Partner U.S. and U.S. financial markets
Control to Mexican supplier Mexico
Control to LAEI -
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OWNERSHIP CONTROL
Alternative Vente LAEI U.S. Partner Mexican Supplier
Stay the course 55 45 0 0
U.S. Partner 35 45 20 0
Control to Mexican supplier 34 0 0 66
Control to LAEI 0 100 0 0
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OWNERSHIP DISTRIBUTION
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EQUITY VALUE
Common Shares in Lempiras 85,000,000 Exchange
Rate (Lempiras/USD) 13.50 Common Shares in
USD 85,000,000 / 13.50 6,296,296.30
Equity Sold (True)Value U.S. Partner
6,296,296.30 20 1,259,259.26 Mexican
Supplier 6,296,296.30 66 4,155,555.56
Sell to LAEI 6,296,296.30 55
3,462,962.65
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EQUITY
Investment Offer Equity Value Difference
Stay the Course N/A N/A N/A
U.S. Partner 1,900,000.00 1,259,259.26 640,740.74
Sell to Mexican Supplier 4,000,000.00 4,155,555.56 (155,555.56)
Sell to LAEI 4,000,000.00 3,462,962.65 537,037.35
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PROPOSED DEBT STRUCTURE
Debt Structure 1997 1998
Short term debt 90 35
Lempiras 66 65
US 34 35
Long term debt 10 65
Total debt 100 100
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PREFERRED ALTERNATIVE
Alternative Market Accessibility Ownership Control Debt Structure Total
Stay the course 0 4 0 4
U.S. PARTNER 4 3 5 12
Control to Mexican supplier 3 2 3 8
Control to LAEI 0 0 0 0
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IMPLEMENTATION

• Let U.S. Partner invest 20 equity
• Pay off short term debt
• Long term debt with lower interest rate
• Rationalize production

34
QUESTIONS?