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Gradiente, a listed Brazil-based manufacturer of consumer electronics, could sell a controlling stake to capitalize the troubled company, a source close to management told mergermarket.
”It was said in the press that the company did not find a recovery solution in the period between October and April because the family was opposed to giving up the control,” said the source. ”That is absolutely false. That prejudice does not exist. The shareholders’ priority is the recovery of the company and the issue of control is secondary for them.”
Gradiente’s principal shareholder, chairman and CEO Eugenio Staub has a 55.1% stake in the company, mostly via holding company, NPG. His brother, Richard Jesse Staub, has a 17.5% stake, mostly through another holding company, Res. About 10% of the shares are free-floating on Brazil’s Bovespa exchange, currently priced at USD 1.92.
Gradiente is now working on finalizing two parallel restructuring plans that are being validated by two different financial advisors, said the source. ”One of the plans requires more capital than the other. One has a more conventional business model and the other is more differentiated. One foresees a partnership with a strategic investor and the other is a reinvention of Gradiente from the assets the company has.” The first plan would require about USD 74m to USD 93m in new investments, while the second envisions USD 31m in new money and USD 31m in debt, the source added.
Gradiente hired new financial and legal advisors after a failed attempt to restructure USD 186m in debt from October 2007 to April of this year, a period in which shareholder and turnaround specialist Nelson Bastos took up the post of CEO. Bastos’ turnaround advisory firm Integra, along with the law firm Felsberg & Associados, advised Gradiente in negotiations with creditors and devised a restructuring plan extending its debt over five years, with a grace period of one year. According to the source, eight important creditors had already agreed on the deal, but the shareholders disagreed with advisors on the terms of the deal that was being reached with creditors. ”The proposed deal was too conservative in terms of what creditors could give and too aggressive in what Gradiente had to deliver.” In May, Bastos resigned and Staub reassumed the CEO position. Renato Mange Advogados Associados is the company’s new legal advisor and the names of the new financial advisors are being kept secret by management.
Gradiente already has ”interested investors lined up,” but the management team plans to step up the negotiations to capitalize the company only after signing a debt restructuring deal with its creditors next month, said the source. ”A little more than half” of the company’s debt is with banks, Bradesco being the largest financial creditor, added the source.
Gradiente has sent a draft of a restructuring agreement to 23 creditors which hold 92.6% of the company’s debt, said the source. The proposal is to reschedule the debt over 10 years, with a grace period of two years. The creditors’ reaction to the draft has been ”very good,” the source added. Now, the company has to wait for the agreement to go through the internal approval processes of creditors, including multinationals that need approval from management in other countries.
Under the proposed plan, those creditors that wish to finance the restructuring operation with the national development bank BNDES will be able to do so, as long as they guarantee the institution’s loan to Gradiente, a credit line that would be available up to the total amount of the outstanding debt. Some creditors will probably prefer to use their own sources of funding, the source added.
BNDES support would have ”exactly the same” structure as the loan given to Kepler Weber, a listed maker of silos and warehousing equipment, which last year restructured USD 198m in debt with a BNDES loan guaranteed by the creditors. ”For both of the plans, the company managed to develop a solution to obtain BNDES support that is in line with the bank’s rules,” said the source. ”Given the critical situation the company is going through, it [a conventional loan to Gradiente] is a tight-spot for a government-owned institution and wouldn’t pass the bank’s credit committee. Then they arrived at this Kepler Weber solution, in which BNDES will carry no Gradiente risk.”
After concluding creditors’ agreements in July, the company will step up negotiations with potential investors. ”In both plans, they need to attract new investors. It is a work that is underway, but which needs to be concluded by the end of September.”
In the fourth quarter, the company plans to restore operations to full capacity – currently, it is operating on and off, with spot productions and periods when the factory shuts down. ”In the fourth quarter, Gradiente would resume orders to suppliers to get back to cruise speed in the beginning of 2009,” said the source. Under the agreement, the creditors would give Gradiente a 31 December deadline to implement one of the two business plans, the source added.
Potential investors include corporate and financial institutions and state-owned companies’ pension funds, but no deal has been closed yet, said the source. ”It would be a good opportunity for any investor to take advantage of strong Brazilian consumer spending, especially in segments such as LCD televisions and notebooks, which have been growing at rates much higher than the GDP.”
Eventual strategic partners could include Asian companies with no presence in Brazil, such as China’s TLC and India’s Videocom, for instance, said the source. ”It would make sense because they would need to make a relatively low investment to get hold of Gradiente’s market know-how and assets, including the trademark, one of the most recognized in Brazil. LG must have spent USD 500m on marketing in Brazil.” Demand for digital television sets is another attraction of the market, with predictions that Brazilians will have to replace about 100m analog sets over the next 10 years, the source said.
Gradiente’s financial troubles started in 2006 when the company decided to leverage itself anticipating strong demand during the Fifa Soccer World Cup, said the source. Gradiente had tripled in size in the three previous years, reaching USD 870m in sales in 2006. ”But there was a strong decline in prices, led by LG and Samsung, which gained market share from Philips and Gradiente. The sales volumes did not meet expectations; the company was leveraged and never had a strong capital structure to begin with.” The company delayed the release of its 2006 balance sheet due to disagreements with auditors, faced a credit squeeze from banks and has not published financial results since. The management plans to release 2007 financial statements in early July and then gradually go back to releasing results on schedule, said the source.
Now some of the company’s structural problems are being solved, said the source, citing a strong reduction in Gradiente’s fixed costs. The headquarters in Sao Paulo have been reduced from four-and-a-half floors to two in the same office building. ”The plan is to reduce this even more and to keep only one of the three production sites in Manaus.” The company also has an office in Shenzhen, through which it accesses the Asian supplier market.
According to the source, Gradiente’s management is optimistic these negotiations will avoid requesting bankruptcy protection from creditors. ”Shareholders understand the proposed agreement is much healthier than the costs associated with the judicial recovery mechanism. They consider it a strong medicine they will take only if they really need to.”
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