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In their own words. (Ricardo Salinas)

Jul 1, 1998

Ricardo Salinas Pliego, TV Azteca/Grupo Elektra
Since assuming the presidency in 1981 of Mexican home electronics and furniture retailer Grupo Elektra, Ricardo Salinas Pliego has guided the company through a series of market crises to its position as one of Mexico's premier companies today. In 1993, he led a group of investors in the purchase of two privatized television channels from the Mexican government, forming TV Azteca, which has since captured 35% of Mexico's prime-time viewing audience. In 1997, TV Azteca's highly successful $605.1 million IPO was the largest equity issue out of Mexico since the peso devaluation and earned the company Honorable Mention accolades in LatinFinance's Deal of the Year competition. Salinas Pliego recently discussed Elektra, TV Azteca and the twists and turns of Mexico's markets with LatinFinance.
What was financing like for Elektra during the 1980s debt crisis?
In the early 1970s, bank credit in Mexico was only channeled to the government and to industrial concerns that were supposed to generate high employment. So the only way to get bank debt was outside. It had to be dollar debt. And, of course, when the devaluations started in 1976 and then in 1982, it was terrible for our company because all the accounts receivable on the asset side were denominated in pesos, but the accounts payable on the debt side were dollars. So we lost all our capital twice. The first time we lost it in 1976, we were able to restructure with the banks and to keep on going and sort of turn it around. But in 1982 and 1983, we were not able to do that, and we had to go into Chapter 11, into bankruptcy, because the devaluation was so immense.
By the late 1980s, then, what was your financing situation?
Because we learned a lot from that event, we decided that was not going to happen to us any more. So, as of 1983, while my father was working out this problem with the bankruptcy court and the banks, I took to running the company on a day-to-day basis. So what we did is, we operated only on a cash basis. We stopped selling on credit. So the working capital needs were reduced. And basically we would sell in cash and then pay the suppliers in cash. And that's how we turned the company around. We cut a lot of merchandise lines. We used no credit at all. And we reduced the work force and that's what stabilized the company.On a cash basis, we started again to grow very fast until 1987, when we decided that the economy in Mexico had stabilized and that we could start giving credit again. So we started with a credit program once more, and it's been very successful.
What do you think are some of the events or trends that have turned the markets and economies of the region around?
Well, number one has been the privatization trend. Because all our countries, in Latin America and Mexico for years, until the 1990s basically, were infested with big government, big spending, state enterprise, state banks, regulations. All these things were a real drag on the economy, to the development of our country.In the late 1980s and early 1990s, the privatization of Telmex was a major milestone here. Then the privatization of the banks, and the closing of many, many state enterprises that were not feasible, the TV privatization, all of these things-what they did was make the government smaller. And that's very good, because when the government is small, it cannot steal so much. It cannot be so inefficient. And it cannot get its finger in everybody's pie.Unfortunately, another huge task ahead is for our governments to really impart justice, because the justice system here, the justice process, is very backward, unwieldy, slow. So you can commit a crime, and there's absolutely nothing that happens to you. You get off scot-free. And that's something that our governments have not faced yet, and they have to face.
Can you set the record straight on the transaction involving Raul Salinas and your Panama holding company?
We could have a whole book for the record. We've been over this 100 times. This was a legal credit transaction where he decided to invest some money as a bondholder in one of our companies, and the bond is outstanding. He will be paid for that, plus interest, and we do not view this as a business relationship any more so than I have a business relationship with Fidelity, who holds some of our bonds, or with whomever it might be.There is a relationship. There always has been. We have been on the record as having a friendly relationship with Mr. Salinas. But what I call a business relationship is when somebody sits on your board or holds some of your stock or you hold frequent business meetings with that person to discuss business. This is not the case with Raul Salinas. For us, fortunately, it was investigated by the Mexican Congress. The allegations that his presence might have affected the (TV Azteca) privatization are totally groundless, because when you're buying something from the government, you want to buy it as cheap as possible and we paid 30% more than the next competitor's bid! It's impossible for Raul to have exerted his influence and then I end up paying 30% more. I don't need friends like that, right?How did you get into Mexican television?First, I was in the satellite television business, and that sort of whetted my appetite for telecommunications in general. Then we went into PBX phones that we were selling here, and then we tried to get the cellular phone concessions that were issued in 1991. At the end of the day, we did not get anything.Then, when the Mexican government started to talk about privatizing television, I immediately thought that it was very interesting and started to investigate all I could about it. And then gradually I started to get involved in it and I saw that there was a great opportunity to break the monopoly of television.For two years I was out all over the world talking to people about what the television business was, trying to find partners who would help us run the business, trying to raise money, because we knew it was going to be a lot of money. So it was a long, long process.
Did you get private equity partners?
Yes. It was all done in Mexico through GBM and Bursamex. Basically, GBM and the bank syndicate put together the $450 million. Then the Saba family put in $160 and Bursamex put in a hundred and something million in private equity plans that we raised here in Mexico.
Any individuals who have been crucial for the development of Mexico's or Latin America's markets?
I think definitely President Salinas in that he decided that (privatization) was the way to go, and he implemented the policy against the will of the majority of people in Mexico. People did not want to get privatized. And all the bureaucrats and all the politicians, they lost a lot in these deals. So they're not happy. And that's why they're crucifying him now. That's on a political level.On an enterprise level, there are many people who I would mention. For example, Lorenzo Zambrano of Cemex, the way that he's grown his company internationally is admirable. And the way that he's taken on huge amounts of debt and then invested it wisely, I think, has been a major development. Carlos Slim, with the way that Telmex was turned around, is also a major player in the capital market.What people in the capital markets business need to know is who to entrust with their capital. So there's some groups like ours, like Cemex, like Telmex with Carlos Slim, who have been delivering a track record of being able to invest the capital wisely, taking care of their shareholders and creating value.
Anything that really stands out over the last decade for you personally?
It's hard to choose one-things that have marked us, for better or for worse...the devaluation of 1976, of 1982, another one in 1987, and another in 1994. And it's taught us that this is a country with cycles and with instability inherently built into it. So the only way you can survive is by having your financial affairs in order and that you will be able to take on the next crisis when and if it comes. Will it come? I hope not. But if it does, we're ready.

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