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Trefica of Honduras

Trefica of Honduras. Mark Baines Jawad Haider William Myers. FIN 570 Fall 2008 October 8, 2008. The Company. Bekaert had original ownership Political unrest in S. American countries in early 1980’s Antonio Vente bought Trefica in 1984

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Trefica of Honduras

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  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 1980’s • 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 (cont’d)

  5. Honduras (cont’d)

  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. Trefica’s Market • Virtual monopoly in 1980’s • Lack of competition • High tariffs and import duties • Seller’s market • Political turmoil in the region • Honduras total external debt exceeded $ 3.3 billion • Lempira devalued – exports grew • Economic reforms introduced in 1990’s • 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 (cont’d) 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 US$1.9 million; capital base increased to US$8.6 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 US$4 million; capital base increased to US$10.7 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 – US$5 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 & EvaluationAlternative #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 don’t have • Too risky an alternative with current limited market access

  22. Alternative Analysis & EvaluationAlternative #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 & EvaluationAlternative #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 SelectionFinding 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

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