Vitro Sada Family May Fight for Control After Default

Monterrey’s Sada family risks losing control of Mexican glassmaker Vitro SAB after 100 years of ownership as the company prepares to restructure $1.2 billion of debt.

Bondholders may demand equity after Vitro missed $44.8 million in interest payments on Feb. 2 to preserve cash for its operations, said Wilbur Matthews, chief executive officer of Vaquero Global Investment LLC, a San Antonio-based hedge fund that owns Vitro bonds due in 2017.

Wresting Vitro from the Sadas would mark a shift in the tradition of Mexico’s richest families retaining control of their companies even after defaulting on debt. The Sadas directly own 24.9 percent of Vitro and vote an additional 18.1 percent through shares in a pension fund and stock-option plan, according to Bloomberg data and regulatory filings. Owners include Federico Sada, 59, who took over as chief executive officer in 1995 from his father and resigned in November, and his older brother Adrian, Vitro’s chairman.

“They’re going to fight like a cat in a corner,” said Carlos Legaspy, president of San Diego-based Precise Investment Management, a fund that owns bonds sold by Mexican companies, including Cemex SAB and Gruma SAB. “They are very proud.”

The Sada family declined to comment, Albert Chico, Vitro’s spokesman, said in an e-mail.

Wrong Bets

Wrong bets on natural gas left the company saddled with $358 million of derivative losses last year. Monterrey-based Vitro closed positions on its derivatives, financial instruments whose value is based on, and determined by, another security or benchmark, and locked in the losses. Those will be added to debt that’s now 12 times larger than the company’s market value.

Failure to cover the derivatives losses triggered cross- defaults on all of Vitro’s debt, according to a company filing with the U.S. Securities and Exchange Commission on Jan. 29. Vitro has a 30-day grace period to make the interest payments before officially defaulting on the bonds. Chico, Vitro’s spokesman, said this week the company won’t pay the interest.

Vitro’s American depositary receipts rose 2 cents to 82 cents at 4:15 p.m. in New York trading, up 2.5 percent from yesterday’s record low of 80 cents. The ADRs are down 53 percent this year, compared with a 7.9 percent drop in the Standard & Poor’s 500 Index and a 12 percent decline in Mexico’s Bolsa.

Vitro’s Mexican shares rose 10 centavos, or 2.4 percent, to 4.25 pesos at 4:12 p.m. New York time in Mexico City trading. The shares have dropped 78 percent in the past 12 months.

Shrinking Equity

Vitro’s debt restructuring may leave creditors with securities worth just 30 cents on the dollar, Matthews said. Eric Ollom, a corporate debt analyst with ING Groep NV in New York, said he expects bondholders may recover 40 cents to 56 cents per dollar of bonds they own, depending on profit estimates for Vitro’s businesses.

“When you take that kind of haircut on the debt, there really shouldn’t be any residual value to equity holders,” Matthews said.

Vitro, like most Mexican companies, has sold debt for its financing needs instead of equity, keeping the family in control, Dan Kastholm, managing director for Latin America at ratings service Fitch Inc. in Chicago, said in a telephone interview.

The families of Mexican companies, including papermaker Corp. Durango SAB, Cydsa SAB, Sanluis Corp. and Alfa SAB’s former steel unit Hylsamex, have retained control after defaulting on debt and working out new terms with creditors. Vitro’s bylaws, which force the trustee representing owners of ADRs to vote with the majority of Mexican-owned shares, give the Sada family even more control over the company. Vitro had 59.9 million shares in the form of ADRs as of April 2008.

‘Almost Worthless’

“The question is really are existing shareholders willing to dilute and will anybody be willing to pay what existing owners think it’s worth when some people on the street are saying the equity is almost worthless,” Kastholm said. The company’s market capitalization has dropped about 85 percent to $96.9 million in the past 12 months.

Vitro has struggled for years to bring its debt down to manageable levels, selling off businesses, cutting costs and focusing the company on glass. In 2007, it convinced investors to buy $1 billion of bonds maturing in 2012 and 2017, touting the consolidation of its debt into the two bonds as alleviating its long-time debt problems and allowing the company to grow again.

Plastic Containers

Once one of Mexico’s largest companies, Vitro was weakened during the 1990s after acquiring Tampa Bay, Florida-based glass- bottle maker Anchor Glass Corp., just as consumers began turning to plastic containers, and buying a stake in a Mexican bank.

Vitro declared Anchor Glass bankrupt in 1996 after purchasing the company for $820 million in cash and assumed debt in October 1989. The Mexican government confiscated Banca Serfin, the Sada family’s Mexico City-based bank, after Vitro stopped shoring up the bank’s balance sheet following Mexico’s economic crisis in 1995.

The company returned to its glassmaking roots after selling a home-appliance unit to Whirlpool Corp. in 2002, a fiber-glass company to Toledo, Ohio-based Owens Corning Inc. in 2004 and a tableware unit to Libbey Inc., also of Toledo, in 2006, among other divestitures.

Vitro is now a low-cost producer able to fill small orders that are unprofitable for other glassmakers, said Aaron Holsberg, a corporate debt analyst with ABN Amro Inc. in New York. The company’s management should be able to negotiate a traditional debt workout in which creditors get a minority equity stake in exchange for reducing the amount of debt to a sustainable level.

“I’m hoping this will be a reasonable, amicable restructuring done within a reasonable amount of time because Vitro hasn’t had any bad intentions here,” Holsberg said. “They’ve really tried.”

Takeover Attempt

Vitro pledged to keep serving its customers as it renegotiates its debt payments, according to the Jan. 29 statement.

Some investors want new management and a cash infusion to reverse Vitro’s decline. The Sada family fought off an attempt last year by a group of investors to take a controlling stake. The group was led by Roberto Hernandez, the chairman of Citigroup Inc.’s Mexican unit Banamex, and Mexican businessman Alfredo Harp Helu, according to an annual report Vitro filed with the SEC in June.

Those shareholders may be at odds with the Sada family in debt talks, Matthews said. Hernandez didn’t respond to a message left yesterday with his secretary.

Now, the Sada family needs to convince bondholders there’s value in the company and they should be left in control, said ABN Amro’s Holsberg.

“It’s a total wipeout for equity holders,” Legaspy said. “The only reason there’s a potential recovery there is because you need someone to run the business.”