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 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

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

Honduras (cont’d)

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

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

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 (Millions of Lempiras)TreficaIndustry average Selling expenses Interest expenses

Causes and Effects Monopoly High tariffs High import duty Political turmoil Lack of competition

Causes and Effects (cont’d) Illiquid financial sector High political risk Country debt Only S.T local debt No foreign L.T debt High selling expenses Ownership issues Currency devaluation Financial distress

Issue Matrix Marketing Strategy COGS Ownership & Control Financing Resources Importance Urgency LOW HIGH

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

1. Stay the Course Solidified relationship with LAEI Favorable cash position Ownership maintained by the Vente family Focus on restructuring debt

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

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 Sell Control to a Mexican Supplier

4. Sell Control to LAEI Sell remaining Vente stake to LAEI (55%) LAEI proposal – US$5 million

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

Ownership Breakdown

Debt Structure

Interest Rate Comparison – U.S. vs. Honduras

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 don’t have Too risky an alternative with current limited market access

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

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

Alternative Analysis & Evaluation Alternative #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

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

Action Plan 0-3 months - Finalize U.S. partnership 3-6 months - Open commercial sales center in U.S months - Implement production rationalization with U.S months - Utilize U.S. distribution channels 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