Cemex’s Troubles Highlight Broader Risks For Investors In Mexico


Continued financial troubles at Mexico’s cement giant Cemex SAB should serve as a lesson to investors in the risks of concentrated leadership power. 

After all, Cemex’s outspoken CEO, Mexican billionaire Lorenzo Zambrano helped turn his company into the world’s largest building materials supplier but he also led it to the brink of bankruptcy. 

As the company grew, Mr. Zambrano never implemented the types of organizational changes that can help act as a system of checks and balances.  For instance, the company never appointed an independent chairman to act as a counter-balance in the board room. 

Furthermore, Cemex’s policies on executive pay oversight and transparency lag far behind internationally recognised best practices.

Concerns about Debt Restructuring

In 1997, Lorenzo Zambrano told his staff, “either we become large and international or we end up being purchased by a bigger player.”  In the years that followed, under Zambrano’s leadership, the company snapped up rival firms in the U.S., Spain, and even farther abroad, quickly becoming the world’s third largest cement producer.  Thanks to an innovative “just in time” delivery system which emulated the emergency response systems used by ambulance dispatchers, Mr. Zambrano proved that under his management, Cemex could unlock latent value in foreign firms.  During the 1990s, Cemex showed that it could introduce new technologies, streamline management and radically reduce operational costs.  In 2003 Wired magazine ranked Cemex as one of the world’s top five “masters of innovation, technology, and strategic vision.”  As investors took notice of Cemex’s success, the company’s stock price more than quadrupled between March of 2003 and June of 2007.   However, in his own words, as Cemex expanded globally, Lorenzo Zambrano made sure to staff the company with “young and inexperienced people willing to work insane hours to achieve our financial goals.”

In hindsight however, Cemex probably would have benefited from having a few powerful, independent voices in the board room to challenge Mr. Zambrano’s agenda.  In 2007, as economists warned of an imminent financial collapse, Cemex continued its shopping spree, acquiring Australian cement giant, the Rinker Group, for US$14.2 billion.  When the financial crisis hit in 2008, Cemex, already over-extended, almost collapsed under the weight of its loan obligations.  In the last three years, the company has worked continuously with creditors to reshuffle its debt and avoid bankruptcy.

In 2011, the company is still juggling its finances to restructure its debt.  In a statement filed on March 8, 2011 with Mexico’s securities market regulator, the BMV, Cemex said that it will offer $600 million of notes that mature in 2016 and an equal amount due in 2018, all of which are convertible to U.S. shares.

After the announcement, Cemex’s shares fell to a four month low. 

In late 2010 the company’s fourth-quarter loss widened to $574 million, from a loss of $209 million a year earlier.   Even as Mexico’s economy continues to bounce back from the global recession, Cemex’s problems remain a concern for investors.

In a recent article, Jorge Lagunas, who manages about $200 million at Mexico City-based Grupo Financiero Interacciones SA explained that “Cemex is one of the few companies in Mexico that continues to not generate value, and I’m talking about profit for shareholders.”

In September 2010 Carlos Hermosillo, an analyst at brokerage Vector in Mexico City, told reporters that “the doubt the market has now is that cement demand in the United States is not recovering as strongly as they proposed in their business plan with creditors.”

Ongoing Corporate Governance concerns:

Through the sheer force of his vision, Mr. Zambrano converted Cemex, the company his grandfather founded, into one of the world’s most important cement companies, making himself into a billionaire in the process. 

The meteoric rise and fall of Cemex, however, should serve a lesson in the investment risks posed by concentrated leadership.  After all, Mr. Zambrano holds the positions of Chairman and also CEO.  During the years of expansion, Cemex did not have an independent chairman who was capable of raising questions about Mr. Zambrano’s corporate strategy.  Furthermore, Mexican securities market laws require that the country’s companies reserve only a quarter of their board seats for independent directors.  Not one of the 20 biggest Mexican companies has appointed an independent chairman.  By contrast 24% of U.S. listed companies have done so.

Even in comparison to its peer companies in Mexico, Cemex’s embedded systems of accountability are weak.  For instance, one of Mr. Zambrano’s cousins has been appointed as the chairman of the company’s Remuneration Committee, the sub-group of the board of directors that sets compensation levels for Mr. Zambrano and the company’s other executives.  Only one of the committee’s five members is independent.  In 2009, a year where the company reported declining net income, the company’s executives and directors received a total of $10.3M in compensation. 

Cemex does not provide shareholders with any information on individual executive salary and bonus structures.  It is not possible for investors to determine what steps the company has taken to link executive pay to the company’s performance.  However, as the company’s stock price declines, shareholders might start to complain about Cemex’s policy of treating CEO pay as a family matter, to be settled privately by Mr. Zambrano’s cousin and the Remuneration Committee.

Bouncing Back from the Downturn

Cemex has proved itself adept at using high-tech management methods to squeeze value out of its cement operations.  In many ways, Mr. Zambrano successfully built a leading 21st century cement company.  However, when it comes to independent board oversight and compensation policy transparency, Cemex lags far behind globally recognised best practices.

According to statistics from the country’s central bank, Mexico’s economy is expected to expand by as much as 4.8% in 2011.  Clearly, there are a number of strong investment opportunities in Mexico.  Investors, however, would do well to look at Cemex’s example, and keep an eye out for companies with similar risk profiles. 

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