One Billionaire Took in Millions in Deal at Heart of Pemex Probe
(Bloomberg) -- For months now, much of Mexico has been riveted by a corruption scandal unfolding at its state oil company, the country’s largest such probe in decades. A business executive has been arrested, others were banned from government positions and President Andres Manuel Lopez Obrador has made it a prime example of his commitment to root out graft.
But what has escaped government scrutiny is just how much one of the two sweetheart deals in question helped out a bank owned by billionaire Ricardo Salinas Pliego, a Lopez Obrador ally who has had a previous run-in with regulators over accusations of self-dealing.
At issue is an agreement Petroleos Mexicanos made during the previous administration in 2016 to buy the struggling owner of a fertilizer plant, Grupo Fertinal. Last month, amid wide-ranging investigations into the transaction, the comptroller concluded that Pemex overpaid for a company that was behind on its bills to suppliers. As part of the deal, Pemex assumed more than $400 million of the money-losing company’s debt and then quickly paid it off in full. Most of it was owed to Salinas’s Banco Azteca, which began lending to Fertinal in 2008.
The deal is one of two involving fertilizer plants that has led to the anti-corruption crackdown. Prosecutors have arrested one executive, levied fines, and issued a warrant for former Pemex Chief Executive Officer Emilio Lozoya in connection to the cases. Through his lawyer, Lozoya has denied any improprieties.
Salinas hasn’t been accused of wrongdoing. A decade ago, he was, though, and for a deal that also involved a sudden payment of old debts. In that case, Salinas bought up debt owed by one of his own companies at a deep discount while knowing, according to U.S. regulators, that the company was about to receive a large cash injection.
After the transaction, the company -- a mobile-phone service provider called Unefon -- paid off the debt in full, allowing Salinas to pocket a quick gain of $109 million, said officials at the Securities and Exchange Commission, who sued him for financial fraud in 2005. He agreed to pay a fine, without admitting or denying the allegations, and then proceeded to delist the companies he controls from U.S. stock markets.
Salinas has denied being involved in any malfeasance related to Fertinal, which Banco Azteca started loaning to in 2008. But the benefits he received from the purchase raise questions about his relationship to Lopez Obrador and how that may play into the president’s efforts to root out graft.
The billionaire has several ties to Lopez Obrador, popularly known as AMLO. He sits on the president’s business advisory board, and the man who led Salinas’s charity for more than 15 years is now education minister. Since Lopez Obrador took office in December, Banco Azteca won a no-bid contract to be in charge of distributing millions of debit cards for federal assistance programs.
Lopez Obrador’s press office said the administration offers “no privileges for anyone” and that authorities intend to probe “everything” related to the fertilizer-plant purchases. “It doesn’t matter who is involved,” spokesman Jesus Ramirez said. “They’ll be investigated.”
Salinas, with a fortune of $12.9 billion, according to the Bloomberg Billionaires Index, is also the owner of TV Azteca SAB, Mexico’s second-largest broadcaster, and retail and banking conglomerate Grupo Elektra SAB, the parent company of Banco Azteca. The bank usually focuses on making small loans to finance purchases by Elektra’s retail customers.
While it isn’t unusual for an acquirer to quickly pay off the debt of a company it bought, wiping out Fertinal’s obligations was a break for Banco Azteca because the lender got its money back in full despite the borrower’s financial distress. A Pricewaterhouse Coopers audit cited in a criminal complaint showed that Fertinal wasn’t creditworthy when the deal was struck. An independent auditor, an affiliate of U.K.-based BDO International Limited, valued Fertinal’s net assets at $15 million in 2017 and 2018, after the sale to Pemex.
In the years leading up to the deal, Fertinal recorded net losses, negative operational cash flow and negative working capital, relying on borrowed money to operate, according to documents from a congressional investigation by Mexico’s Superior Audit Office, or ASF, that was completed in 2017. It fell behind on bills owed to suppliers and was charged fees related to late payments, according to the documents, which show Banco Azteca and affiliate Arrendadora Internacional Azteca were owed $406 million.
Pemex received financing to pay for the $635 million purchase price, which included $426 million of debt and $209 million for the company’s capital. About 20% of that financing came from Banco Azteca itself, with the balance coming from government development banks. This gave the lender another chance to profit from Fertinal, though this time the debt is backed by Pemex, a much more creditworthy borrower with an implied government guarantee.
Amid the accusations, Fabio Covarrubias, who controlled Fertinal before selling to Pemex, and Lozoya’s lawyer have both denied wrongdoing and argued that neither was keen on the deal, implying that others had more to gain. Pemex spent more than two times as much to retire the company’s debt from Azteca as it paid for Fertinal’s capital.
In an emailed response to questions, Grupo Salinas, a collection of businesses run by the billionaire, called Fertinal a “success story,” whose earnings before interest, taxes, depreciation and amortization, or Ebitda, from 2010 to 2014 totaled $255 million. Fertinal operated “in a productive, efficient and profitable manner, and had a promising future,” it said. “These conditions are what made Grupo Fertinal attractive to multiple buyers.”
An external auditor in 2015 found the maximum valuation for Fertinal was $663 million, according to the ASF, above the $635 million price Pemex paid for its equity and debt. But ASF noted that some in Pemex didn’t agree with those figures, and said it couldn’t complete its own evaluation because it lacked critical documents and Pemex refused to provide details on the advisory group that supervised the purchase. The investigation concluded that Fertinal’s financial books reflected “inconsistencies” months before Pemex sought to buy it.
It cited among other things a 65% increase in the reported value of the company’s physical assets in one year. It noted Pemex found it would need to pay $315 million to restore the fertilizer plant, which suffered from environmental damage and outdated technology.
Less than a month before the final agreement to buy Fertinal, members of Pemex’s investment committee met to decide on how much to offer for the capital of the company. The working group led by Lozoya would later be accused of criminal wrongdoing in a complaint by Pemex to the Attorney General’s Office seen by Bloomberg.
In the midst of the discussions, Lozoya suggested hiking the purchase offer. He wanted to pay $260 million on top of the debt Pemex agreed to pay off, saying the oil producer should avoid “the psychological barrier” of offering less than $200 million, the complaint shows.
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