Grupo Carso, S.A. de C.V.

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Grupo Carso, S.A. de C.V.

Paseo de las Palmas 726
11000 México, D.F.
Mexico
(525) 625-4900
Fax: (525) 540-7492

Public Company
Incorporated: 1980 as Grupo Galas, S.A.
Employees: 41,525
Sales: 17.87 billion pesos (US$2.34 billion) (1995)
Stock Exchanges: Mexico City
SICs: 1021 Copper Ores; 1031 Lead and Zinc Ores; 1044 Silver Ores; 2111 Cigarettes; 2676 Sanitary Paper Products; 3011 Tires and Inner Tubes; 3084 Plastics Pipe; 3241 Cement, Hydraulic; 3253 Ceramic Wall and Floor Tile; 3334 Primary Production of Aluminum; 3496 Miscellaneous Fabricated Wire Products; 3353 Aluminum Plate Sheet and Foil; 3714 Motor Vehicle Parts and Accessories; 5311 Department Stores; 5812 Eating Places; 6719 Offices of Holding Companies, Not Elsewhere Classified; 7379 Computer Related Services, Not Elsewhere Classified

Grupo Carso, S.A. de C.V. is the biggest business group in Mexico, a conglomerate with holdings, in 1997, in mining; the manufacture of metals, cables and wires, plastic pipe, automobile tires and parts, tiles, paper tissues, cement, and cigarettes; computer-related services; and department stores and restaurants. Carlos Slim Helú, its founder and chairman, was believed to be the richest man in Latin America, with a fortune estimated at $6.1 billion in 1996. Grupo Carso remained profitable despite the economic crisis that gripped Mexico after the devaluation of the peso in December 1994. Its long-term debt was 10.58 billion pesos (about $1.4 billion) at the end of 1995.

Forging an Empire, 1965-97

Slim, who made his first stock purchase at the age of 12, built his fortune without connections to Mexico’s closely knit business elite. The son of a Lebanese immigrant who became successful in business, Slim started buying stocks at the age of 12 and received a degree in civil engineering at the National Autonomous University of Mexico. By then he had a net worth of $400,000, which he used in 1965 and 1966 to found a brokerage house, real estate firm, construction company, and soda bottling plant. In 1976 he bought a 60 percent share of Galas de México, a small printer of cigarette-pack labels, for $1 million. Slim acquired a majority stake in Cigarros la Tabacelera Mexicana (Cigatam), Mexico’s second largest producer and marketer of cigarettes, in 1981.

During the years that followed the meltdown of the peso in 1982, Slim bought controlling interests in many Mexican companies cheaply, mainly using Cigatam’s revenues. These included the mining firm Empresas Frisco for only $50 million; Industrias Nacobre, a manufacturer of copper products; and a majority share in the retail and restaurant chain Sanborn Hermanos. During the 1990s Slim’s Grupo Carso expanded its holdings still further and took over management of privatized Teléfonos de México (Telmex), the nation’s telephone monopoly. (Telmex was spun off into another holding company in 1996.) In 1997 Grupo Carso purchased a majority share of the department-store chain Sears Roebuck de México. (Independently of Grupo Carso, Slim also created Grupo Financiero Inbursa, which became Mexico’s fourth-largest financial group.)

Slim stressed cost control in his business empire, which he managed, with only about a dozen staff members, from an unpretentious two-story house in Mexico City. His approach was to let each subsidiary run its own affairs but to look for savings and synergies between different group members without, however, any special deals or favors. When he acquired a company, he dismissed the management and sold corporate headquarters, moving his own people into nondescript offices at the production sites. These, according to the head of an executive-search firm were, “unswervingly loyal, capable people” recruited by relatives and friends of relatives and “willing to put up with the mercurial nature of the boss.” The labor force was reduced, sometimes provoking strikes, and unprofitable lines of business were dropped, but investment in new machinery rose sharply.

Although Grupo Carso’s stock became publicly traded on the Bolsa de Valores Mexicanas, Mexico’s stock exchange, in 1990, about 60 to 65 percent of the shares were retained by Slim and his immediately family—his wife and six children, three of whom worked for the group. The stock had risen tenfold by early 1994. When the value of the peso fell by more than half in dollar terms in December 1994, Grupo Carso was not badly hurt because only $130 million, or 12 percent, of its debt was denominated in dollars.

Cigatam, 1907-97

Cigarros la Tabacalera Mexicana (Cigatam) was founded in 1907. By 1919 this company and its associate, El Buen Tono (with whom it merged in 1960) produced more than half of the national consumption of tobacco. Its share of the market subsequently was considerably reduced by new rivals, however. In the mid-1970s Philip Morris held 27 percent of the stock, while a government body held 36 percent. After absorbing the fourth-and fifth-largest tobacco companies in Mexico, Cigatam moved into second place, behind Cigarrera La Moderna, with 34 percent of tobacco production in 1976 and 25 percent of sales.

Cigatam’s brands in 1995 included Marlboro—Mexico’s bestselling cigarette since 1990—and Benson & Hedges, both manufactured and marketed under license from Philip Morris. Cigatam accounted for 26 percent of Grupo Carso’s revenues in 1994 and 17 percent in the first quarter of 1997. In June of that year Philip Morris International Inc. said it planned to increase its stake in Cigatam from 29 to 50 percent in a transaction valued at $400 million. Cigatam held 47 percent of the Mexican cigarette market in 1997.

Manufacturing Acquisitions, 1986-97

Grupo Carso acquired 51 percent of Grupo Condumex in 1992 for 818 billion pesos (about $264 million) and subsequently increased its share to 96 percent. Founded in 1952, this company was engaged in the electromanufacture of cables and wires, the production of plastic pipe and other products, and the manufacture of auto parts. Its holdings included 48 percent of Cobre de Mexico, which was founded in 1943 and refined and produced cathode used to make cable. Following Grupo Carso’s takeover, the number of Condumex subsidiaries was cut from 52 to 25, the labor force was reduced by 30 percent, and the company’s luxurious headquarters was sold. Grupo Carso acquired Latincasa, a manufacturer of cable for the construction, telecommunications, and energy sectors, in 1997. Since Latincasa held 9 percent of Cobre de Mexico, Condumex’s share in the enterprise increased to 57 percent. Condumex was the biggest revenue earner in Grupo Carso during the first quarter of 1997, accounting for 31 percent of its sales.

Industrias Nacobre was founded in 1950. Grupo Industrial Carso, a predecessor of Grupo Carso, acquired a majority share in the enterprise in 1987 and subsequently almost all the rest. Through subsidiaries it was making copper and steel pipes and tubes and also auto parts and accessories. In 1992 Nacobre also acquired 78 percent of the shares of Grupo Aluminio, Mexico’s largest aluminum producer, including a 44 percent interest purchased from the Aluminum Co. of America for $50 million. This stake was soon increased to 98 percent. In 1995 Industrias Nacobre was manufacturing copper and copper-alloy products for the construction, automotive, and electrical industry and, through Grupo Aluminio, aluminum sheet, foil, and ingots. It was also producing PVC pipe in 1997. Nacobre accounted for 15 percent of Grupo Carso’s sales in the first quarter of 1997.

Empresas Frisco was founded in 1924. Grupo Industrial Carso acquired a majority interest in the 1980s. At this time it was operating mines producing silver, gold, copper, lead, and zinc from extracted ores, and also chemical products such as hydrofluoric acid. With two partners, it opened what was described as the world’s largest silver mine in 1982 and bought out the remaining partner in 1993. Empresas Frisco, which was also producing molybdenum, accounted for 6 percent of Grupo Carso’s revenues in the first quarter of 1997.

Compania Hulera Euzkadi, Mexico’s largest tiremaker, was producing about 2.5 million tires in 1981, when it had four plants in Mexico. B.F. Goodrich Co. held a 35 percent interest in the firm. Grupo Carso acquired Goodrich’s share in 1991 for about $35 million and 50.06 percent of the outstanding shares in January 1993. Also in January 1993, Grupo Carso acquired General Tire de México, a unit of Germany’s Continental AG, for $40 million. Euzkadi and General Tire were merged into Corporación Industrial Llantera, which had four plants turning out Euzkadi, General Tire, and Continental tires. This company held about 30 percent of the Mexican tire market. Corporación Industrial Llantera accounted for 8 percent of Grupo Carso’s sales in the first quarter of 1997.

Grupo Carso acquired majority ownership of the tilemaker Porcelanite in 1990. This investment was assigned to an associated company, but in 1995 Grupo Carso increased its equity stake to 83 percent and made it a subsidiary. Porcelanite accounted for 4 percent of Grupo Carso’s sales in the first quarter of 1997. (Another tilemaker, P&M Tile Inc., was established in 1994 as a joint venture by Mannington Mills Inc. and Inmuebles Cantabria, another Grupo Carso subsidiary.)

A tissue-products company, Fábricas de Papel Loreto y Peña Pobre, was acquired by Grupo Galas in the 1980s. In July 1997 Grupo Carso agreed in principle to sell Procter & Gamble de México, a subsidiary of The Procter & Gamble Co., a manufacturing plant in Apizaco and the company’s Lypps, Pampys, and other toilet-tissue brands for about $170 million. All other facilities with the Loreto y Peña Pobre name were to continue as a part of Grupo Carso.

Retail Stores, 1903-97

Walter and Frank Sanborn were Americans who opened a drugstore in Mexico City in 1903 and named their company Sanborn Hermanos in 1909. The business later became a chain of stores offering meals and a variety of goods. A group of unidentified Mexican investors bought Walgreen Co.’s 46 percent share of the business in 1984. Grupo Industrial Carso subsequently acquired majority control of Sanborn Hermanos, which had 30 stores in 1989, and Grupo Carso raised its stake to 67 percent by 1993. Under Grupo Carso’s management the business continued to expand. In 1997 there were 89 full-service Sanborns and 39 Sanborns Cafe restaurants. The company also owned 10 Mix-Up record stores and 12 other outlets and was planning to test its units in the United States before the end of the year. Sanborn Hermanos contributed 12 percent to Grupo Carso’s sales in the first quarter of 1997.

Sears, Roebuck de México was established in 1945 as a wholly owned subsidiary of Sears, Roebuck & Co. and opened its first department store in 1947. The company revolutionized retailing in Mexico but subsequently had difficulty meeting growing competition and fell into the red. Despite a resurgence in the late 1980s, the company was losing money again in the mid-1990s. Grupo Carso acquired a 60 percent share from the parent company in 1997 and indicated it would rehabilitate the chain by updating the stores. Sears, Roebuck de México was expected to account for 6 percent of Grupo Carso’s sales in 1997.

Telmex Holding, 1990-97

In December 1990 Grupo Carso and two foreign partners— Southwestern Bell and France Telecom—acquired about 20 percent of the equity (and 51 percent of the voting shares) of Teléfonos de Mexico (Telmex), the nation’s telephone monopoly, from the government for $1.76 billion. Grupo Carso put up $860 million and received operating control of the company, with Slim becoming its chairman. His Condumex acquisition gave Grupo Carso control of a major supplier of the materials needed for a network of new fiber-optic cable to upgrade the outdated telephone system, while Nacobre was producing the needed copper and copper alloy.

Under Slim’s management, Telmex surpassed the government’s target for line expansion and reduced the average wait for a telephone hookup more than sixfold. Repairs that used to take months were being completed in 24 hours. By the autumn of 1995 Telmex had spent $10 billion on plant and equipment, completely rebuilding its long-distance network, adding more than 3 million new lines, and laying 8,400 miles of fiber-optic cable. Grupo Carso’s 8.4 percent share in Telmex was spun off into a separate holding company in 1996.

Grupo Carso was a major investor in International Wireless Inc., which in 1996 purchased the Prodigy online service from International Business Machines Corp. and Sears, Roebuck & Co. for close to $250 million in cash and stock. The other major investor was Greg Carr, co-chairman of Cambridge, Massachusetts-based International Wireless, a closely held concern investing in cellular-phone properties in Mexico, Asia, and Africa. The new owners planned to make Prodigy available outside the United States in other languages and use its communications network to expand its Internet-access business. International Wireless merged its operations with Prodigy’s, and renamed the combined company Prodigy Inc. A Spanish-language version of the online service was being planned for the Mexican market.

Grupo Carso also held a one-third interest in Corporación Moctezuma, an international cement consortium founded in 1982. The other two-thirds was held by Spanish and Italian investors. Among the company’s holdings was Cementos Portland Moctezuma, a Mexican firm founded in 1942. Corporación Moctezuma contributed 175 million pesos ($50 million) to Grupo Carso’s sales in 1994.

Orient Star Holdings was a Grupo Carso subsidiary established in the United States in 1994. Its principal activity was the trading of shares and securities of issuers in the United States.

Principal Subsidiaries

Cigarros la Tabacalera Mexicana, S.A. de C.V. and subsidiaries (71.06%); Corporación Industrial Llantera, S.A. de C.V. and subsidiaries; Empresas Frisco, S.A. de C.V. and subsidiaries (98.72%); Fábricas de Papel Loreto and Peña Pobre, S.A. de C.V. and subsidiaries (98.83%); Galas de México, S.A. de C.V. (88.71%); Grupo Condumex, S.A. de C.V. and subsidiaries (96.39%); Industrias Nacobre, S.A. de C.V. and subsidiaries (99.83%); Inmuebles Cantabria, S.A. de C.V. and subsidiaries; Orient Star Holdings (U.S.A.); Porcelanite, S.A. de C.V. and subsidiaries (82.93%); Proveedora Inbursa, S.A. de C.V. (90%); Sanborn Hermanos, S.A. and subsidiaries (81.67%); Sears, Roebuck de Mexico, S.A. de C.V. (60%); Servicios Administrativos Lava, S.A. de C.V.; Servicios Corporativos Cigatam, S.A. de C.V. (71.2%).