Bufete Industrial, S.A. de C.V.

views updated

Bufete Industrial, S.A. de C.V.

Moras 850, Colonia del Valle
Mexico, D.F. 03100
Mexico
Telephone: (525) 723-4721
Fax: (525) 420-8903
Web site: http://www.bufete.com

Public Company
Incorporated: 1977
Employees: 12,986
Sales: 5.56 billion pesos (US$561.1 million) (1998)
Stock Exchanges: Mexico City New York (ADRs)
Ticker Symbol: BUFETE (Mexico City); GBI (New York)
NAIC: 23491 Water, Sewer and Pipeline Construction; 23331 Manufacturing and Industrial Building Construction; 23493 Nonbuilding Structure Construction; 54133 Engineering Services; 551112 Offices of Other Holding Companies

Bufete (or Grupo Bufete) Industrial, S.A. de C.V. is a Mexican holding company that, through its subsidiaries, provides integrated engineering, procurement, and construction services in ten countries. These services are divided into three areas: industrial process and power generation plants; urban projects; and infrastructure projects and manufacturing plants. Bufete also provides planning, consulting, and appraisal services to its clients. The company has completed more than 1,000 large-scale projects in a variety of industries. It has the largest engineering work force in Mexico.

Successful Start-Up: 1949-77

Bufete Industrial was founded in 1949 by José Mendoza Fernandez and two other recent chemical engineering graduates of the National Autonomous University in Mexico City, one of whom was Rafael Pardo Grandison (who was president of operations as late as 1977). Mendoza had already distinguished himself while working part-time for Sosa Texcoco S.A., a producer of caustic soda and soda ash, by acting promptly in manually closing a recalcitrant safety valve whose malfunction threatened to cause an explosion. Mendoza won a scholarship to the Massachusetts Institute of Technology but turned it down to go into business.

Bufete was Mexico’s only process engineering firm for about ten years, a period in which Mendoza never took a vacation. Its first contract came from a friend of Mendoza’s father, who hired the fledgling firm for technical consulting and then entrusted it with the construction and start-up of a US$3 million sodium sulfate plant in Viesca, located in the state of Coahuila. Another important early client was the Mexican subsidiary of E.I. du Pont de Nemours & Co., for which it built a plant for titanium bioxide in Altimira, Tamaulipas. By the end of the 1950s Bufete’s roster of clients also included Union Carbide Corporation and Celanese Mexicana. Soon after, General Motors Corporation, Kimberly Clark de Mexico, S.A. de C.V., Petroleos Mexicanos (Pemex), and Mexico’s federal electricity commission were also clients for engineering, procurement, or construction contracts.

Pemex, Mexico’s biggest industrial company, was an especially important client in the 1960s. Bufete’s first major project for the government-owned firm, a cyclohexane plant, was the first Pemex facility for which all the project engineering work was done in Mexico. By the end of 1977 Bufete had performed about 20 projects for Pemex, including a refinery in Cadereyta, Nuevo Leon, on which the company spent more than one million man-hours for the engineering. Some 35 percent of its engineering personnel were devoted to the petroleum and petrochemical industries at this time.

Other Bufete projects completed by that date included a newsprint plant, various sugar refineries, a General Motors factory in Toluca, a thermoelectric power plant in central Mexico, and a Kimberly Clark plant in Orizaba using sugarcane bagasse for paper production. The company had been offering its services abroad for more than ten years, with completed projects including a paper plant in Argentina, sugar and textile plants in Venezuela, and food and pulp and paper projects in the Dominican Republic.

Good Times and Bad: 1977-94

By 1977, when Bufete was reorganized as a holding company, it was the 53rd ranking Mexican company, with sales that year of 2.01 billion pesos (US$88.2 million) and some 8,000 to 10,000 employees. In an interview for the Mexican business magazine Expansion, Mendoza described the firm’s principal objective as “to offer all services necessary to start up a factory, from its conception to the beginning of production.”

In the following years Bufete became a major builder of refineries and plants for government-owned petroleum, fertilizer, steel, and power generation companies. Business boomed so much in this period that the company had to import steel, cement, and skilled personnel. By 1982 Bufete had developed more than 600 projects, including ones for the petroleum, petrochemical, steel, paper, and sugar industries, and it had exported its technology to Europe, Latin America, the United States, and Japan. Among its nine subsidiaries was Houston-based Process Projects International.

The collapse of the peso in 1982, following the end of the oil-price boom that had fueled economic expansion in Mexico, was costly to Bufete. Sales dropped 65 percent in 1982. Mendoza later told Christopher Palmeri of Forbes, “It took six years to recover from the 1982 crisis.” In return for its loans, Banamex, Mexico’s largest private bank, held a 40 percent share of the company in 1984. As late as 1985 Bufete was still slashing employment, from 6,000 to 4,050.

By 1988 Bufete was conducting 750 projects in many areas of industry, including chemicals, petrochemicals, petroleum, sugar refining, pulp and paper, textiles, food, electrical energy, hydraulics, public transportation, and urban development. The company was employing more than 14,000 workers and had six subsidiaries in Mexico City, two in Guadalajara, two in Monterrey, and an international group that began work on a project to modernize some 20 hotels in Havana. The following year Bufete sold a 25 percent interest in the firm to Houston-based M.W. Kellogg Co., a U.S. corporation also engaged in engineering and construction services. Bufete’s association with Kellogg enabled it to win contracts in the next few years for engineering work on an ethylene plant in Westlake, Louisiana, and a smaller one in Bulgaria, and two petrochemical plants in Kuantlan, Malaysia.

Bufete was trying to wean itself from dependence on government contracts and on Mexico’s boom-and-bust economy generally. “It was the recession of the 1980s that made Bufete decide it was time to no longer depend so much on Mexican economic cycles and to go abroad,” a company executive later told Michael Tangleman of Infrastructure Finance. But, he added, “Going abroad is no easy feat. It takes years of bidding in different countries to develop the necessary image and profile that allows you to win contracts.”

In addition to Kellogg’s 25 percent share, Bufete was 60 percent owned by Mendoza and 15 percent by the company’s employees when it went public in 1993, selling about 25 percent of its shares on the Mexican stock exchange. Mendoza still owned 52 percent of the stock at the end of 1993. That year Bufete was doing business in ten countries—for the most part in Latin America, but also in the United States, Bulgaria, Malaysia, and Spain. Nearly 90 percent of company revenues were coming, however, from projects for Pemex and Mexico’s federal electricity commission. Services related to infrastructure work, manufacturing plants, and urban projects accounted for the remainder. Revenues came to 1.33 billion pesos (about US$420 million) and consolidated net income amounted to 113 million pesos (about US$36 million) that year. Subsidiaries now included an environmental engineering firm and a computer services company.

In the past the Mexican government and its state-run enterprises, such as Pemex, would parcel out projects among subcontractors: for example, one for engineering, another for design, a third for procuring materials, and a fourth for actual construction. But by the 1990s, to avoid duplication and other inefficiencies, it increasingly turned to “turnkey” contractors—that is, companies who would do the entire job. (Bufete’s first such project had consisted of two thermoelectric plants in Chihuahua for a Japanese firm, contracted in 1982 for US$100 million.) In 1994 Bufete’s big projects included the construction and management of a system of water distribution for Mexico City, in collaboration with the French firm Lyonnaise des Eaux Dumet.

Struggling to Survive in the Late 1990s

The flight of capital in late 1994, followed by the devaluation of the peso and subsequent economic crisis was a major blow to Bufete, as to other Mexican companies. Bufete lost 808.2 million pesos (US$123.8 million) in 1995 and 79.5 million pesos (US$10.4 million) in 1996. Its debt reached as high as US$384 million in 1995, and the majority of that was short-term bank debt. There were some bright spots, however. The 1994 purchase of Chilean general contractor Empresa de Obras y Montajes Ovalle Moore, S.A. won it many lucrative contracts in Chile’s booming mining, engineering, and construction markets. In the United States, Bufete was participating with Kellogg in petrochemical and oil refinery projects, along with urban and infrastructure projects of its own. Foreign-earned income grew from less than 3 percent of total revenues in 1993 to 29 percent in 1995.

Key Dates:

1949:: Three young chemical engineers found the company after graduating from National Autonomous University in Mexico City.
1977:: Bufete has performed some 20 projects for Petroleos Mexicanos (Pemex), Mexico’s state-run oil monopoly.
1982:: Bufete has completed more than 600 projects of all kinds.
1989:: M.W. Kellogg Co. purchases 25 percent of Bufete.
1993:: Now a public company, Bufete is active in ten countries.
1999:: Three banks take control of debt-ridden Bufete.

Bufete was a very different company by the time the worst of this economic crisis had passed. With the Mexican government forced to cut back on its spending, more than 82 percent of the company’s US$570 million backlog in orders in mid-1996 was from private companies. Among the projects in which Bufete was engaged in 1996 was the construction of a steel plant in Lazaro Cardenas for an Indian company, Ispat, which had purchased a company previously owned by the Mexican government. Another was a resin plant in Altamira for a subsidiary of Shell Oil Co. In 1997 Bufete formed a unit focused on the disposal of medical waste.

The company earned 50.6 million pesos (US$6.4 million) in 1997, but its revenues fell from 6.03 billion pesos (US$786.24 million) the previous year to 4.1 billion pesos (US$627.9 million), and its short-term bank debt began to rise again. The Mexican government, wary of spending money for big projects, was awarding concessions to companies that would finance, build, and operate such facilities itself. To raise the money and assemble the necessary expertise, Mexican contractors needed to form joint ventures with foreign partners. Of the nation’s big three—the other two being Empresas ICA and Grupo Tribasa—Bufete was having the most difficulty creating such alliances. “It’s the first time that for these large projects the name of the game is not engineering and construction so much as operating and financing,” a Bufete executive conceded to Henry Tricks of Financial Times.

At the end of 1998 Bufete was executing projects in the Bahamas, Chile, Columbia, El Salvador, Peru, Trinidad, Tobago, and the United States, as well as Mexico. About 38 percent of its 1998 revenues and 14 percent of its backlog at the end of the year were related to projects outside Mexico. Bufete’s backlog of work in early 1999, according to the company, included mineral-metallurgical, chemical, petrochemical, and pharmaceutical projects, electrical cogeneration plants, a variety of manufacturing plants, and the construction of a new building for General Motors Mexico.

Although Bufete raised its revenues to 5.56 billion pesos (US$561.1 million) in 1998, it suffered a loss of 495.8 million pesos (US$50.1 million). The short-term bank debt swelled to 1.43 billion pesos (US$144 million). Bufete was able to meet payments on its debts in 1998 only because it received 846 million pesos (US$90.5 million) from the federal electricity commission for work on two earlier projects and five loans from a government bank. By 1999 Bufete was scrambling to find enough money to pay more than US$100 million due in debt over the next six months. The company defaulted on a US$100 million Eurobond in July. Its total debt was about US$280 million.

In February 2000, Citibank of Mexico, the Bank of New York, and Banco Serfin, the principal representatives of Bufete’s creditors, decided to assume control of the enterprise, proposing to exchange about half its debt—US$92 million—in return for 90 percent of its capital. Mendoza, who had held 41 percent of the company, retained the remaining ten percent but retired from active management. Enron Corporation signed a preliminary agreement to provide a management team for Bufete and financing for ongoing projects. The largest of these was a US$170 million oil drilling platform for Pemex and a US$76 million gasoline plant at a Colombian oil refinery.

Principal Subsidiaries

Bufete Industrial Inc. (U.S.A.); Bufete Industrial Construcciones, S.A. de C.V.; Bufete Industrial Disenos y Proyectos, S.A. de C.V.; Bufete Industrial Infrastructura, S.A. de C.V.; Bufete Industrial Ingenieria, S.A. de C.V.; Bufete Industrial Ingenieria Ambiental, S.A. de C.V.; Constructora Urbec, S.A. de C.V.; Empresa de Obras y Montajes Ovalle Moore y Cia. Ltda. (Chile); Tecnologia y Servicios de Agua, S.A. de C.V. (51%); Urbec Construction Inc. (U.S.A.).