ELSEVIER
MAVESA: Strategic Alliance
John C. Ickis
INCAE
In this case, MA VESA, a major Venezuelan agribusiness firm, must decide
what actions to take in the face of tumultuous economic and political
change. The lowering of trade barriers, the deregulation of the currency,
and the promotion of foreign investment have opened the Venezuelan
economy to global competition. Political uncertainty in the aftermath of
an aborted coup d'etat has depressed the Caracas stock exchange and
placed financial pressure on the company. The president, Juan Fernando
Roche, faces an intimidating array of options that include offers from
three multinationals to form different types of alliances. The crisis of a
local company facing global competitors in a policy environment of trade
liberalization is a story repeated many times in Latin America. The
MA VESA case, though, has some unique elements. One such element is
innovation. As the case traces the company history from its beginnings
in 1949, the reader may detect numerous instances of innovative achievement, from its professional Board of Directors to its marketing strateff~es.
From the outset, it is clear that MAVESA is not just another importsubstitution industry, dependent on tariff protection for its survival. Latin
American firms, and even those of the United States and Europe, have
lessons to learn from the MA VESA experience described in these pages.
Another element of the MAVESA case is the interplay that we observe
among national policy, industry structure and behavior, and corporate
strategy during several distinct periods of Venezuelan history. It is seldom
that a company, even in Latin America, is exposed to such wide swings
in government policy or to such unexpected events as the aborted coup
or the massive housewives' protests against the elected president. The case
offers insights into the impact of macro policies on industry behavior. It
also enables us to evaluate the evolving strategy of an industry leader.
One of the most unique elements of the MA VESA case is the way in which
corporate strategy takes advantage of a changing and often hostile political
environment. The case centers around MAVESA's search for a strategic
partner. This raises the fundamental question of why an innovative,
successful company that has dominated its local market for over 40years
should want to share its success with a newcomer to the Venezuelan
market. The purpose of strategic alliance is a question that many Latin
American and U.S. companies should explore as they "go global." In
evaluating the array of options that confront him, Mr. Roche must of
course push the numbers to understand the economic implications qf
different courses of action. The quantitative analysis required is daunting:
Address correspondence to John C. Ickis, INCAE, P.O. Box 960-4050, Alajuela,
Costa Rica.
Journal of Business Research 38, 77-87 (1997)
© 1997 Elsevier Science Inc.
655 Avenue of the Americas, New York, NY 10010
operating synerg~es, discounted cash flows, and projected share prices all
come into play. It is clear that the successful Latin American managers
of the future must be increasingly sophisticated in the use of analytic
techniques as they face the investment bankers from the North. But the
responsible managers must also see beyond the numbers, to consider the
various stakeholders in the situation. Although the case does not focus on
the internal organization, it is clear that MAVESA has a strong corporate
culture that has contributed to its success. Could such a culture be preserved under the ownership of a Unilever or a Kraft? How do we assess
the operational and financial implications of an eroding culture? The
dilemma confronting MAVESA is not an isolated one. As the economies
of Latin America are opened to international trade and investment, many
companies that previously enjoyed protection in their local markets must
compete with, or ally themselves with, the leader multinationals in their
industries. Strateff~c alliances, if forged out of operating synergy and
mutual understanding, may bring advantages to both parties. © 1997
Elsevier Science Inc.
j BUSNRES 1997. 38.77--87
('(" P T "~ he choice is simple. Either we become the junior
partners in an alliance with an agribusiness multinational or we sell off core businesses as the price of
our independence." In these words Juan Fernando Roche,
executive president of MAVESA, summed up the situation to
the Board of Directors in May 1993.
MAVESA was one of Venezuela's largest manufacturers,
marketers, and distributors of branded consumer processed
food products and laundry soap. In fiscal 1992 it had sales
of 15,420 million bolivars (U.S.$223 million) and total assets
of 21,670 million bolivars (Tables 1 and 2). The company's
products were sold through a distribution system that serviced
over 54,500 stores throughout Venezuela, representing 90%
of all outlets that sold consumer food products and soap.
Most of its products had gained a dominant share of the
national market (Table 3).
However, the changing Venezuelan business environment
had confronted MAVESA with new challenges from global
competitors, some of whom were proposing alliances. Faced
with an array of alternatives, Mr. Roche was aware that the
I
ISSN 0148-2963/97/$17.00
PII S0148-2963(96)00120-8
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J.C. Ickis
Table 1. MAVESA, S.A., Consolidated Income Statement (thousands of bolivars, except for per share amounts)
Year Ended October 31,
Net sales
Cost of sales
Gross income
Selling, general and administrative expenses, net operating income
Interest expense, net
Income tax
Income before equity in affiliates and extraordinary item
Equity in results of affiliates
Income before extraordinary item
Extraordinary item
Net gain from sale of shares
Effect on income tax of prior-year loss carryforwards
Net income
Income per share, before extraordinary item (bolivars)
Net income per share (bolivors)
1992
1991
1990
15,419,923
11,376,299
4,043,624
2,024,424
2,019,200
1,111,032
88,998
819,170
37,708
856,878
345,595
1,202,473
1.46
2.05
12,327,469
9,132,693
3,194,776
1,356,212
1,838,564
803,056
47,968
987,540
2,377
989,917
18,683
1,008,600
1.68
1.72
9,854,289
7,204,606
2,649,683
1,077,048
1,572,635
650,353
77,871
844,411
28,162
872,573
77,697
950,270
1.48
1.62
Table 2. MAVESA, S.A., Consolidated Balance Sheet (thousands of bolivars)
October 31,
Assets
Current assets
Cash
Short-term investments
Accounts and notes receivable
Inventories
Spare parts and prepaid expenses
Reacquired capital stock
Deferred income tax, current portion
Total current assets
Property, plant and equipment
Long-term investments
Deferred income tax
Deferred charges and other assets
Total assets
Liabilities and shareholders' equity
Current liabilities
Bank loans
Current portion of long-term loans and debentures
Accounts and notes payable
Income tax
Current portion of accrued employees termination benefits
Total current liabilities
Debentures
Accrued employee termination benefits
Long-term loans
Provision for contingencies
Total liabilities
Shareholders' equity (see accompanying statement)
Total liabilities and shareholders' equity
1992
1991
1990
402,875
4,683,798
2,675,286
3,527,243
775,123
3,243,333
32,189
15,339,847
462,678
3,648,395
3,369,686
2,485,103
355,956
27,536
9,439,354
206,031
2,466,109
1,753,205
2,112,470
304,812
14,422
6,857,049
4,434,308
167,027
114,127
1,614,468
21,669,777
2,470,619
131,425
97,629
936,209
13,985,236
2,471,818
104,723
506,418
9,940,008
9,368,419
608,230
2,149,265
50,412
60,285
12,236,611
3,317,940
48,408
1,590,048
31,737
46,995
5,028,128
2,930,223
120,356
766,429
37,477
31,748
3,886,233
1,423,800
928,000
382,675
173,167
15,144,253
2,000,000
723,404
214,710
413,516
8,379,758
1,000,000
482,806
339,425
439,666
6,148,130
6,525,524
21,669,777
4,605,478
12,985,236
3,791,578
9,940,008
MAVESA: Strategic Alliance
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79
Table 3. MAVESA: Sales and Market Share by Product
Margarine
MAVESA metric tons
MAVESA market share
Kraft
GRASVAL
COPOSA
Edible oils
MAVESA metric tons
MAVESA market share
GRASVAL
FACEGRA
COPOSA
Laurak
Others
Mayonnaise
MAVESA metric tons
MAVESA market share
Kraft
Laurak
Hellmann's
Others
Laundry Soaps
MAVESA metric tons
MAVESA market share
FACEGRA
GRASVAL
Others
Cheese spreads
MAVESA metric tons
MAVESA market share
Kraft
Others
(%)
(%)
(%)
(%)
(%)
1986
1987
1988
1989
1990
1991
1992
38,842
91
5
5
42,595
92
4
4
43,255
91
4
4
1
41,562
85
2
8
5
43,038
85
2
8
5
47,144
89
2
4
5
43,136
87
2
5
7
63,680
30
15
12
18
7
10
71,537
32
17
11
17
7
8
50,187
27
19
14
15
8
12
61,588
29
17
]6
16
7
12
67,259
38
13
12
15
7
11
70,082
40
1]
11
15
7
11
79,740
42
10
11
14
7
10
5,856
24
20
21
4
32
7,358
24
17
20
3
37
8,587
30
19
18
3
31
10,015
32
17
18
2
31
11,039
33
20
16
1
30
12,319
36
22
16
1
25
13,186
36
16
17
31,780
72
17
9
2
38,950
75
20
4
1
33,670
72
21
6
0
35,976
75
20
5
1
40,090
76
18
3
3
46,352
79
15
4
3
40,597
75
10
4
12
74
7
93
0
658
28
72
0
1,049
38
60
2
1,755
42
56
2
1,988
47
53
0
1,651
46
53
1
30
Industry Profile
• GRASVAL. A family-owned firm that was strong financially and had a good market position with well-known name brands in margarine
(Estancia) and cooking oil (Diana). It had little capability in research and development and little raw material production, though it had
planted 2,000 hectares (1 hectare = 2.5 acres) of African palm in 1990. It was not known as an aggressive marketer, and its sales force
was less than half that of MAVESA. Its cooking oils had achieved fair distribution, but its margarine appeared in only 26% of food stores
and its soap (Carey brand) in only 7% of retail channels that carried laundry soaps.
• FACEGRA. This company was known for its good managers and its strong brands, especially in sesame oil (El Rey). Its salesforce was
only a fourth of that of MAVESA, and its cooking oils were sold in only 28% of the food stores (vs. 48% for MAVESA), but these stores
accounted for 62% of all cooking oils sold. The company also had excellent plant facilities. It had little agricultural production except for
2,000 ha of African palm that it had recently planted. It was in very poor financial condition, and in 1991 its owners sold the company
to Unilever, at reportedly much more than its market value.
• COPOSA. This was a consortium of cotton producers whose major strength was its captive source of raw materials. Its farmer base had
also given it a strong lobbying position with the government. It had a sales force of 60, roughly equal to that of
• GRASVAL. It was considered in the industry to be weak in marketing, and its Mirasol brand margarine was distributed in only 7% of
food stores, versus 59% for MAVESA brand.
• Laurak. This was one of the smaller firms in the industry. Up until its purchase by Cargill in 1990 it had been a family firm with wellregarded brands of cooking oil, mayonnaise, capers, and olives (Torre del Oro). Like GRASVAL and FACEGRA, it had planted around
2,000 ha of African palm. However, its small volumes made it difficult to achieve scale economies, and consequently, the business suffered
cash flow problems that prompted it to sell to Cargill at twice its book value.
• Kraft. This multinational's major strengths were its high-quality brand image, long-standing presence in the market, product development
capability, and financial capacity. It did not have integrated manufacturing facilities and its costs were believed to be higher than those
of MAVESA. It was also believed by MAVESA management that its international organizational structure reduced its flexibility and
responsiveness to changes in the market. It pursued a differentiated marketing strategy and was thought to be uncomfortable in price
competition.
80
J Busn Res
1997:38:77-87
decision on a strategic partner was the most important in the
company's history.
Setting
Venezuela is the sixth largest South American country, with
a land area of 912,000 km 2 and a population of 20.7 million
(1993), of which 88% were literate and 40% lived in cities
of over a half million, the result of rapid urbanization process
that took place after 1945. Caracas, the capital and the largest
city, had a population of 2.8 million. Valencia, a major industrial city of over 1 million inhabitants and the site of most
MAVESA plants, was located approximately 2 hours by fourlane highway to the west of Caracas.
Venezuelan history following independence from Spain in
1830 was marked by long periods of dictatorial rule punctuated by brief but unstable experiments in democracy and
continued civil conflicts. Democracy finally took hold in 1958
after the ousting of a military dictator by the founders of the
Democratic Action (AD) Party, which has contested national
elections with COPEI, the Christian Democratic Party. Both
were centrist parties with similar platforms, although AD (at
least until recent years) advocated a stronger state role in the
economy and tended toward more populist rhetoric.
Since the 1920s, the Venezuelan economy had been highly
dependent on oil revenues, and the economic fortunes of the
country swung widely with variations in world crude oil
prices. Following the formation of OPEC and the first oil
increases in 1973-74, there was a burst of investment and
growth, though much was absorbed by large-scale public
investment projects that later proved difficult to sustain. By
the early 1980s a combination of lower oil prices, capital
flight, and erratic government policies led to a balance-ofpayments crisis. In 1984, fixed investment had fallen to 16.4%,
as compared to 42.5% in 1976. By 1988 Venezuela's foreign
exchange reserves were practically exhausted. An orthodox
stabilization program was begun in 1989 that had a severe
impact on the purchasing power of Venezuelan consumers,
leading to rioting in the streets. A windfall gain from sharply
higher oil revenues in 1990 alleviated the foreign exchange
situation and reignited economic growth, but continuing popular dissatisfaction with economic adjustment policies produced political instability and uncertainty about the future
(Table 4).
Company History
MAVESA was founded in 1949 by Alberto T. Phelps, son of
a wealthy U.S-born Venezuelan importer and distributor, as
a professionally managed company using modem technology
to produce margarine from imported vegetable oils as a new
product in the Venezuelan market (Austin and lckis, 1991).
He invited Andr4s Boulton, who brought expertise in distribution; Angel Cervini, knowledgeable of Venezuelan politics;
J.C. Ickis
and William F. Coles, a well-known corporate lawyer to form
one of the first nonfamily boards of directors in a Venezuelanowned company.
After its advertising and promotion efforts had succeeded
in overcoming the resistance of Venezuelan consumers to
margarine, MAVESA grew rapidly through policies of aggressive pricing and mass distribution. The first general manager,
a veteran of the Spanish Civil War, organized campaigns in
military style to conquer new markets. From the beginning
it was a strongly market-oriented company, a rare thing in
Venezuela at the time.
In the early 1950s the company expanded into vegetable
oils under the VATEL brand, and in 1956 it purchased the
dominant laundry soap manufacturer, Las Llaves. Demand
grew vigorously, and agreements among the six vegetable oil
producers not to compete with one another were common.
In 1961 Mr. Phelps sold 30% of the shares of MAVESA to
Proctor & Gamble, whose president had been Phelps's classmate at Yale, as part of an agreement in which P&G refrained
from entering the fats and oils business and MAVESA agreed
not to enter the market for detergents and cosmetic soaps.
The deal, in which the price of the shares was reportedly
$1.6 million, was the only instance in which P&G became a
minority shareholder in a joint venture.
The growth of MAVESA was interrupted by government
controls imposed on raw material imports by President Carlos
AndrCs P4rez in 1974. All purchases had to be made through
a public marketing corporation, the CMA, which distributed
crude soybean oil and other inputs according to market share
and set prices for cooking oil based on the import price of raw
materials plus processing costs. The dozen or so participants
in the Venezuelan fats and oils industry, mostly small and
inefficient in comparison with MAVESA, formed ASOGRASAS
as an association to negotiate prices with the government.
"Gone were the days of the vacas gordas," recalled one compa W
veteran. CVacas gordas," or "fat cows," refers to the period of
rapid market expansion with virtually no government regulation and very little competition, during which executive compensation and benefits were commensurate with high company profits.) The first P4rez administration was recalled, not
fondly, as the CMA period because "it controlled our purchase
quantities and prices, our margins, our selling prices.., there
was little left to manage."
During the CMA period MAVESA played an active role as
ASOGRASAS spokesman in the negotiations with government.
"We saw our role as that of educating the government with
respect to the industry," explained one MAVESA executive.
Management shared industry cost data and argued vociferously on behalf of the smaller, less efficient producers. The
marketing function was deemphasized, and sales levels were
stagnant as the company sought to increase its share of raw
material imports to void the higher prices of local agricultural
products. "It was marketing in reverse," the company executive commented.
MAVESA: Strategic Alliance
J Busn Res
1997:38:77-87
81
Table 4. Venezuela:Selected Macroeconomiclndkatom
1987
Real growth rate (%)
Gross domestic product (GDP)
Agriculture, forestry, fishing
Petroleum
Manufacturing
Price indicators (% increase)
Consumer prices in Caracas
Consumer food prices
Salaries in real terms
Public finances (% GDP)
Fiscal revenues
Fiscal expenditures
Fiscal surplus (-deficit)
1988
1989
1990
1991
1992
4.5
nd
5.2
2.5
6.2
4.6
4.1
6.9
-7.9
-5.1
0.0
-11.8
6.9
-1.5
17.9
6.0
9.7
2.4
9.5
9.7
6.8
2.7
2.0
2.6
40.3
60.5
-15.1
35.5
52.1
-8.8
81.0
102.9
-15.8
36.5
40.0
-7.9
31.0
32.4
-8.2
31.9
31.3
3.8
27.5
32.0
-4.5
23.9
32.5
-8.6
29.0
30.1
-1.1
33.5
33.3
0.2
34.0
33.3
0.7
23.8
29.9
-6.1
nd
nd
nd
34,680.0
74.3
3,866.0
- 1.6
-27.4
34,845.0
59.6
2,768.0
-28.4
-60.4
32,479.0
79.1
17,882.0
546.0
373.3
33,273.0
69.7
29,317.0
63.9
25.1
34,372.0
65.3
19,874.0
32.2
-48.6
nd
nd
10,437.0
-8,870.0
1,567.0
991.0
-2,238.0
-1,619.0
-91.0
-1,390.0
- 16.0
0.0
283.0
267.0
- 1,628.0
1,357.0
0.0
2,985.0
10,082.0
- 12,080.0
- 1,998.0
970.0
-2,863.0
-1,771.0
- 147.0
-5,809.0
21.0
0.0
- 1,923.0
-1,902.0
-4,594.0
3,731.0
0.0
8,325.0
12,915.0
-7,283.0
5,632.0
1,113.0
-2,029.0
-2,368.0
- 187.0
2,161.0
77.0
- 158.0
-5,148.0
-5,229.0
- 1,650.0
-1,095.0
964.0
1,519.0
17,444.0
-6,807.0
10,637.0
1,374.0
-2,675.0
-774.0
-283.0
8,279.0
96.0
13,579.0
- 18,231.0
-4,556.0
1,981.0
-4,843.0
1,900.0
-4,924.0
14,968.0
-10.131.0
4,837.0
1,437.0
-3,591.0
-598.0
-349.0
1,736.0
1,769.0
192.0
-420.0
1,541.0
1,761.0
-2,445.0
221.0
-3,985.0
13,955.0
-12,266.0
1,689.0
1,497.0
-4,476.0
-1,719.0
-356.0
-3,365.0
545.0
61.0
1,523.0
2,129.0
- 1,638.0
1,214.0
- 183.0
2,669.0
Finance
Caracas Stock Exchange
Share Price Index (197 = 100)
As % of change
As % of change in real terms
Total foreign debt (U.S.$millions)
as % of GDP
Foreign trade (U.S.$millions)
Merchandise exports FOB
Merchandise imports FOB
Trade balance
Exports of services
Imports of services
Net inflows/outflows
Net transfers (private + official)
Current account balance
Direct investment
Portfolio investment
Other capital
Capital account balance
Overall balance (T errors, omissions)
Financing: reserves
Use of IMF credit
Other sources
The state interventionist policies of Carlos Andres Perez
combined with declining oil prices from the boom years of
the 1970s had produced a crisis of fiscal deficits, inflation,
foreign debt, and recession by 1980. His successor, Luis Herrera Campins from the opposing COPEI party, reduced government subsidies, eliminated the CMA, and sought to liberalize the economy, but was unable to halt inflation or capital
outflows, and devaluation appeared inevitable. When he relaxed import quotas, vegetable oil producers rushed to fill
their storage tanks. Oversupply in a recessionary economy
ignited a price war that led to the demise of several MAVESA
competitors. Devaluation from 4.3 to 14 bolivars to the dollar
caused further financial constraints in the industry, including
that experienced by ALACA, a new oils and mayonnaise factory in the western city of Valencia, whose construction was
financed with foreign loans.
In the aftermath of the price war, MAVESA moved its
vegetable oil and margarine operations from Caracas to Valen-
cia, where it had acquired four additional plants, including
the ALACA plant whose assets were acquired in a stock swap.
As part of this transaction Mr. Anibal Rojas, the eldest brother
of the family owners, was invited to join the Board in accordance with the unwritten "5% rule." Anyone owning more
than 5% of the outstanding shares was entitled to one seat
on the Board, except for the Phelps family, which was entitled
to two seats.
By 1984 there was a severe foreign exchange crisis in Venezuela. The COPEI party had been turned out of office by a
large margin, and the new president, Jaime Lusinchi of Perez's
AD party, sought to establish strong controls through a system
of differential exchange rates. The system was to be administered by a government agency, RECADI, that would allocate
scarce foreign exchange at the still official rate of 4.3 for all
essential imports, while all other transactions would be made
at a parallel rate now around 18 to the dollar. Jonathan Coles,
son of co-founder William F. Coles and company president
82.
J Busn Res
1997:38:77-87
since 1982, was concerned by the broad discretion of RECADI
in the administration of exchange controls. It was rumored
that the president of a MAVESA competitor, COPOSA, had
strong influence with the new government.
In 1986 the Ministry of Agriculture issued a new regulation
by which the allocation of preferential dollars for oilseed imports would be contingent on each company's production or
financing of local oilseed producers, in the same proportion.
At the time MAVESA purchased 7% of its raw materials in
the local market and did not provide financing to farmers.
The contingency regulation, as it came to be called, placed
strong pressure on the company for vertical integration. It
took three actions with the goal of increasing local inputs to
50% within 7 years: (1) it organized OLEOAGRO as a subsidiary to finance, provide technical assistance, and purchase
sesame and sunflower seeds from farmers in western Venezuela; (2) it invested U.S.$30 million to establish PALMONAGAS, a 10,000-ha African palm plantation and processing
plant in the eastern part of the country; and (3) it formed a
joint venture with a U.S. biotechnology company and an
international agribusiness consulting firm to increase the productivity of local sesame and sunflower seeds. The funds
for crop financing were borrowed by MAVESA at 8.5%, as
mandated by the government's banking laws that required
banks to fill lending quotas to agriculture at preferential rates.
MAVESA had use of these funds until it relent them to farmers
at the same borrowing rate. By thus financing palm oil to
smallholders, MAVESA negotiated the use by the company of
1 acre of rent-free agrarian reform lands for every 2 acres
financed.
The evolving company strategy rested on three pillars in
the late 1980s: (1) leadership in the fats and oils industry;
(2) vertical integration; and (3) product diversification. To
maintain industry leadership MAVESA had extended its product lines to include low-fat margarine and specialty oils and
had further strengthened its national distribution network.
Vertical integration included several projects, including vegetable oil refining, PALMONAGAS, and the manufacture of
PVC containers for its cooking oils. MAVESA had even purchased machines for producing PVC pellets. With respect to
diversification, the company sought opportunities for joint
ventures in nonrelated agribusiness ventures for export that
would generate foreign exchange and hence enable the company to circumvent RECADI. It founded a subsidiary, Siembramar, to cultivate shrimp and planned to cultivate macadamia. It formed a joint venture, DANIMEX, with a Danish firm
to process egg whites, a mayonnaise by-product, for export
in powder form. It joined with a Mexican partner to form
Sesatech for the cultivation, processing, and export of sesame
seeds to Japan.
A New Competitive Environment
In 1989 Carlos Andrds Perez was returned to power, but his
policies bore little resemblance to the state interventionism
J.C. Ickis
of the 1970s. Instead, he imposed a program of structural
adjustment that included liberalized trade, the elimination of
price and foreign exchange controls, a reduced role for the
state, privatization of telecommunications and other state enterprises, and the encouragement of foreign investment. Tariffs
on agricultural imports would be reduced from 50% to 20%
from 1990 to 1993, in 10% increments, as part of a policy
to make Venezuelan agriculture more competitive in world
markets. To implement this policy, he chose Jonathan Coles,
President and CEO of MAVESA, as his Minister of Agriculture.
As Mr. Coles took a leave of absence to go to the Ministry
in June 1990, the Board appointed Juan Fernando Roche to
the chief executive position. Mr. Roche, an MBA from the
University of Wisconsin who had joined the company in 1982
as a marketing executive, was concerned about the impact of
structural adjustment policies on MAVESA. He questioned
the advantages of vertical integration in an environment of
liberalized trade and international competitiveness, and he
wondered whether the company should be devoting so much
time and managerial energy to export projects when there
were no longer foreign exchange restrictions. He was also
concerned about new competitive threats to MAVESA's core
businesses as global agribusiness companies responded to the
changing investment climate of Venezuela.
These concerns were soon borne out. In September 1990
one of MAVESA's local competitors in margarine and mayonnaise, Laurak, was purchased by Cargill, the privately held
international grain trader, at a price that was reportedly twice
its book value. Later in the same year a small, but efficient,
competitor in cooking oils, FACEGRA, was purchased by the
European agroindustrial giant, Unilever.
In October 1991 Proctor & Gamble, which had never
played an active role in MAVESA other than occasionally
lending its support in negotiations with foreign suppliers,
announced its decision to sell its entire share of ownership
in MAVESA which totaled 28.3%. Though ostensibly part of
a strategic divestiture of its food businesses, some observers
surmised that P&G needed the capital gain from the sale to
show a satisfactory operating profit in the current fiscal year
ending December 31. P&G Venezuela made known its intention to sell the shares to Cargill and assumed that MAVESA
shareholders would follow suit. "It was the best possible time
to sell," recalled one industry observer. "Venezuela was booming. There was unbounded confidence in the country's future.
Foreign investment was entering at an unprecedented rate.
The Caracas stock market was reaching record highs and
Venezuelan securities were soaring." Therefore P&G was
astounded when MAVESA announced that it would exercise
its option to purchase their full block of shares, an action that
would require the company to borrow heavily and would pit
it against the world's agribusiness giants.
P&G's investment bankers had valued its client's shares at
$140 million. MAVESA offered $60 million, backing this figure with analysis prepared by its own financial department and
MAVESA: Strategic Alliance
reviewed by a team of international management consultants.
During tense weeks of negotiation P&G made a firm offer of
$90 million and MAVESA raised its counteroffer to $70 million. The transaction was eventually concluded on February
2, 1992, for the amount of $80 million, equivalent to 36
bolivars per share, of which MAVESA would borrow $60
million and use $20 million of its own funds to make payment
on the stipulated date of April 1.
MAVESA management intended to divide the P&G shares
into two packages: the largest, 20% of the company, would
be sold to a strategic partner who could offer manufacturing
and product development technology, and the remaining
8.3% would be sold in an initial public offering (IPO) on the
Caracas stock exchange, providing transparency in the value
of the shares and instant liquidity to current stockholders
who might wish to sell some of their shares in the company.
Enthusiasm was running high. On that very day, February 2,
the Caracas stock exchange hit an all-time high of 36,000
points on the index. Mr. Roche estimated that at current
market prices of its shares, MAVESA easily stood to gain over
$30 million on the IPO.
Two days later, on February 4, several army battalions
staged a military coup to oust President Carlos Andrds Pdrez.
The coup failed, but amid the death and destruction, investors
panicked and the Caracas index dropped to 27,000 points.
"Under the circumstances, we thought it best to postpone our
road show," Juan Fernando Roche recalled.
In the weeks that followed it became clear from reactions
to the military coup that there was widespread discontent
with the Pe,rez government. The policies of structural adjustment had taken a heavy toll on an urban population long
accustomed to subsidized prices. "We're willing to sacrifice,"
said one irate taxi driver, "but not while the politicians line
their pockets." In a sign of protest, housewives staged "noches
de cacerolas" in which they beat on pots and pans late into
the night. At a given hour, urban dwellers in all major cities
throughout the country switched their apartment lights on
and off to demand President Perez's resignation. The stock
exchange continued tumbling, to a low of 18,000 points.
Meanwhile, MAVESA's consultants had persuaded the International Finance corporation of the World Bank to consider
a modest equity investment in the company. The IFC, more
interested in the fundamentals of the business than in sensationalist reporting of events in Venezuela, was sufficiently impressed with company management and operations to buy a
2.6% interest in MAVESA at 45 bolivars per share. The IPO
was finally launched in May 1992, but rumors about the
company's future had soon depressed prices to around 40
bolivars per share.
Notwithstanding, MAVESA cleared a 25% margin in dollars
on the 8.3% of the shares sold to the public (which included
the 2.6% sold to the IFC). But the company still held 20%
of the shares in treasury and was paying interest on a total
debt of $82 million, which included: $52 million still out-
J Busn Res
1997:38:77-87
83
standing of the $60 million borrowed to purchase the P&G
shares; $20 million in business debt; and $10 million for the
financing of noncore projects in African palm and shrimp.
Commented Mr. Roche:
We discovered that we had been very naive in thinking
that we could find a company willing to buy a 20% share
of the company and to provide us with technology. Of all
the companies located by our consultants, we contacted
30 with the profile that we were looking for. Eighteen
showed interest and we finally sat down at the table with
eight of them. But all these companies wanted either majority control or a clear path to control in the near future.
As the months passed, the serious candidates for strategic
partner were reduced to three: Unilever, Kraft, and Cargill.
Mr. Roche formed a top management team of himself, Financial Vice President Manuel Sucre, and Corporate Planning
Vice President Ronald Hirschl to review the three candidates.
"We were a balanced team," recalled Mr. Sucre. Juan Fernando's experience was in marketing and Ronald had a strong
technology background. I was worried about the financial
aspects. And initially each of us favored a different company."
The Unilever Offer
Unilever, based in London, was one of the world's largest
agribusiness companies in 1990. Among its major products
were margarines and cooking oils. It had recently acquired
vegetable oil companies in Mexico in a series of privatization
transactions, and London headquarters was now looking at
the large Andean market. The purchase of FACEGRA by Unilever was interpreted by MAVESA executives as an opening
bet in a high-stakes game. One industry observer commented
that "MAVESA stands as an obstacle to Unilever's grand strategy for the Andean region. One way or another they will get
MAVESA to the negotiating table."
Unitever representatives in Caracas made known the cornp a w ' s desire to acquire a controlling interest in all company
operations, but the MAVESA Board of Directors demurred,
believing that current share prices were influenced by political
events and did not reflect underlying company value. Some
members of the founding family were against ceding control
to a multinational at any price. Unilever countered with an
offer to form a j oint venture in which MAVESA would contribute all of its core business assets and the debt associated with
those assets, valued in this transaction at $289 million (net
book value) and Unilever would contribute assets with a net
book value of $95 million plus a cash payment of $65 million
in exchange for a 45% share in the venture. For an additional
cash payment of $30 million, Unilever could acquire an additional 10% of MAVESA shares convertible in 5.5% of the joint
venture within 3 years. Noncore assets currently valued at $20
million (less $10 million project financing) would continue
to be owned 100% by MAVESA. (Note: certain amounts,
84
J Busn Res
1997:38:77-87
percentages, and terms of the offers by Unilever and Kraft
have been altered to protect confidentality agreements.)
A joint venture with Unilever would enable MAVESA to
protect and develop all its products, incorporate new formulation technologies, segment its brands and increase its prices
for additional revenues that company management estimated
at $11 million. The joint venture could extend the Las Llaves
laundry soap line and introduce personal care products, detergents, and other food products such as ice cream or tomato
sauces and pastas. The new joint venture would also have
expanded geographic coverage, sourcing and marketing products throughout the Andean region. There were also significant
operating synergies: MAVESA and Unilever could consolidate
warehouse marketing, reducing distribution costs by $4.5
million. MAVESA's sales and marketing costs would be cut
by an estimated $5 million, and the reduction of administrative
overlap would provide savings of an additional $7.5 million.
A joint venture would also enable MAVESA and Unilever's
FACEGRA to concentrate production in only two plants, gaining production efficiencies of up to $15 million. This strategic
alliance also had defensive value in that Unilever would not
enter the margarine market, and it practically eliminated the
possibility of a price war in edible oils, since the new joint
venture would have a 50% market share, twice that of its
nearest competitor.
The Kraft Offer
Kraft, a subsidiary of Philip Morris, had entered Venezuela
to process and market margarine, mayonnaise, and cheese
spreads. It had invested little in manufacturing operations,
preferring to import refined vegetable oils and other highquality raw materials. By 1980 it had captured 15% of the
margarine market and dominated the mayonnaise market with
over 60% market share. It was virtually the sole producer of
cheese spreads. By 1989 aggressive price competition with
MAVESA had reduced its share in the margarine market to
3.8%, and its position in mayonnaise was eroded to under
50%. Moreover, MAVESA had introduced a non-dairy cheese
spread, Rikesa, that now rivaled Kraft with roughly 45% market share each.
Kraft was not interested in cooking oils. Its objective was
to maintain leadership in high-value-added products such as
margarine, avoiding destructive price wars. Kraft proposed a
joint venture in the combined margarine, mayonnaise, and
processed cheese spread business that would be formed of
U.S. $165 million of MAVESA assets and $75 million of Kraft
assets. Kraft would make a cash payment of $95 million for
66.7% of the shares in the new venture. This transaction
would not affect MAVESA's ownership and control of its soap,
edible oils, and other businesses. MAVESA would continue
to carry $82 million of debt on its books.
A strategic alliance with Kraft would enable the new joint
venture to build a dominant position in cheese spreads (95%
market share), mayonnaise (82%), and margarine (90%). The
J.C. Ickis
deepened market penetration and combined muscle would
give the joint venture the ability to increase prices by an
estimated $0.8 million and eliminate price discounts of $7.7
million. It also offered the possibility of introducing other
food products (such as tomato products) and an alliance to
expand to Colombia. The alliance would result in savings of
$2.5 million through cheaper sourcing. It would permit the
closing of at least one production facility, with production
savings of $2.5 million and one-time gains from the sale of
fixed assets. It would also be possible to merge the distribution
network, eliminating distribution centers and reducing inventories for savings of $0.5 million. The sales force could be
rationalized with savings of $1.1 million, and administrative
overlap could be eliminated with savings of $2 million. The
alliance would have strong defensive value, as Kraft was committed to regaining market share in the margarine business
and had shown willingness to engage in price wars to preserve
market share in mayonnaise.
The Cargill Offer
Cargill was the largest privately owned company in the world,
with headquarters in a wooded area outside Minneapolis,
Minnesota. Its principal business was the purchase and sale
of grain, with distinctive competence in logistics and distribution. It had also become a low-cost vegetable oils refiner
and processor, with highly efficient plants operating in the
southern United States. Cargill seldom dealt in branded products and did not boast marketing expertise.
In Venezuela, Cargill distributed pastas made from wheat.
It had entered this business in search of high-volume outlets
for agricultural commodities. During the RECADI years when
foreign exchange for raw material imports in Venezuela was
controlled, competition between Cargill and other industry
giants, such as Continental Grain of the U.S. and Bunge of
Argentina, was fierce. MAVESA had traditionally been a major
client of Cargill. With the purchase of Laurak, Cargill obtained
7% of the Venezuela cooking oils market but at the expense
of its oilseed sales to MAVESA, which reduced its purchases
from Cargill from 50% to 20% of its total import requirements.
A strategic alliance with Cargill would strengthen
MAVESA's edible oils business, with market penetration that
would provide price increases estimated at $7.5 million and
fewer price discounts, with savings of $9.5 million. Such an
alliance would prevent Cargill from entering oils and margarines. There were synergies in building operations of scale
that could generate cost savings of up to $10 million, with
production operations shifted to larger, more specialized factories. The merging of distribution centers could result in the
closure of many centers with savings of $3 million, and the
significant reduction in sales force and other marketing costs
would yield savings of $1.5 million. Elimination of administrative overlap would yield an additional savings of $2 million.
However, Cargill was not seen as adding long-term strategic
value to the majority of MAVESA's businesses, nor did it open
MAVESA: Strategic Alliance
J Busn Res
1997:38:77-87
85
Table 5. Projected Cash Flows, MAVESA Oils and Shortenings
1993
Premises
Average exchange rate
Inflation rate (%)
Corporate t a x rate (%)
Discount rate (%)
Growth of cash flow in perpetuity (2.5% real growth)
Gross sales (millions of bolivars)
Edible oil
Industrial oils
Shortenings
Cost of sales
Edible oils
Industrial oils
Shortenings
Gross margin
Edible oils
Industrial oils
Shortenings
Fixed costs
Edible oils
Industrial oils
Shortenings
Net income
Edible oils
Industrial oils
Shortenings
Total
-taxes
-change in working capital
=free cash flow
Cash flow adjusted for inflation
1994
1995
1996
1997
1998
1999
88.2
34.1
10.0
12.9
114.7
35.0
10.0
12.9
146.3
32.6
10.0
12.9
183.0
30.1
10.0
12.9
224.4
27.6
10.0
12.9
269.5
22.6
10.0
12.9
317.0
17.6
10.0
12.9
8,611.0
307.0
672.0
12,135.0
427.0
940.0
16,752.0
584.0
1,292.0
22,647.0
782.0
1,743.0
30,045.0
1,028.0
2,308.0
38,446.0
1,298.0
2,935.0
47,308.0
1,572.0
3,581.0
6,517.0
219.0
581.0
9,162.0
305.0
812.0
12,747.0
417.0
1,116.0
17,222.0
558.0
1,506.0
22,827.0
732.0
1,994.0
29,186.0
924.0
2,535.0
35,894.0
1,117.0
3,094.0
2,094.0
88.0
91.0
2,973.0
122.0
128.0
4,005.0
167.0
176.0
5,425.0
224.0
237.0
7,218.0
296.0
314.0
9,260.0
374.0
400.0
11,414,0
455.0
487.0
1,524.0
23.0
41.0
2,091.0
33.0
62.0
2,791.0
45.0
80.0
3,728.0
59.0
109.0
4,884.0
78.0
143.0
6,169.0
99.0
183.0
7,500.0
119.0
222.0
570.0
65.0
50.0
685.0
68.5
141.0
475.5
475.5
882.0
89.0
66.0
1,037.0
103.7
51.0
882.3
573.5
1,214.0
122.0
96.0
1,432.0
143.2
23.0
1,265.8
554.6
1,697.0
165.0
128.0
1,990.0
199.0
70.0
1,721.0
527.0
2,334.0
218.0
171.0
2,723.0
272.3
95.0
2,355.7
522.2
3,091.0
275.0
217.0
3,583.0
358.3
134.0
3,090.7
530.4
3,914.0
336.0
265.0
4,515.0
451.5
169.0
3,894.5
550.7
opportunities to develop new products or expand geographically.
Cargill suggested breaking the MAVESA business along
vertical lines to form two separate joint ventures: one for
consumer lines in which MAVESA would have a majority
share, and the second for procurement, refining, and processing in which Cargill would be majority partner. There
were, however, a number of unresolved issues such as the
allocation of MAVESA's debt. In the ensuing discussions between MAVESA's and Cargill's management, a novel idea
arose. Instead of forming two joint ventures, the companies
might establish two separate businesses, each with 100% ownership. MAVESA would sell Cargill all assets necessary for the
processing of raw materials and the bottling of cooking oils,
including its original Vatel brands, as well as its industrial
oils and its branded shortening products. Projected cash flows
from these businesses are presented in Table 5. Cargill, in turn,
would sell MAVESA its mayonnaise, vinegar, and mustard,
including the brand name Torre del Oro and the equipment
necessary for their production. Projected cash flows for these
businesses are shown in Table 6.
Under this modified Cargill offer, MAVESA would retain
high-value-added products with dominant market shares and
would relinquish price-sensitive products that were subject
to import restrictions and price controls. However, by relinquishing a high-volume business, MAVESA's distribution
channels would be significantly underutilized. The company
would have to make an effort to fill these channels, either
through alliances with other companies or as sales representatives of foreign companies.
With respect to manufacturing, MAVESA could consolidate
all operations in two plants--one for soaps and the other for
food products. Low-cost vegetable oils for use in margarine
and mayonnaise could be obtained through a supply contract
with Cargill, which would take over oil refining operations.
However, the labor aspects of this option were highly sensitive.
Some 800 workers, affiliated with two labor unions, worked
in the refining plants and morale was already suffering amid
rumors of sale to a multinational. Uncertainty had spread to
the management ranks. Said one plant manager, "can it still
be MAVESA without VATEL?"
The Sunny Day Option
MAVESA did not rule out the option of doing nothing. This
meant holding onto its shares in treasury and continuing to
meet the financial burden of its $82 million debt, waiting for
86
J BuSh Res
1997:38:77-87
J.C. Ickis
Table 6. Projected Cash Flows, Cargill Mayonnaise, Vinegar, and Mustard
1993
Premises
Average exchange rate
Inflation rate (%)
Corporate tax rate (%)
Discount rate (%)
Growth of cash flow in perpetuity (2.5% real growth)
Gross sales (millions of bolivars)
Mayonnaise
Vinegar
Mustard
Cost of sales
Mayonnaise
Vinegar
Mustard
Gross margin
Mayonnaise
Vinegar
Mustard
Fixed costs
Mayonnaise
Vinegar
Mustard
Net income
Mayonnaise
Vinegar
Mustard
Total
-taxes
-change in working capital
=Free cash flow
1995
1996
1997
1998
1999
88.2
34.1
10.0
12.9
114.7
35.0
10.0
12.9
146.3
32.6
10.0
12.9
183.0
30.1
10.0
12.9
224.4
27.6
10.0
12.9
269.5
22.6
10.0
12.9
317.0
17.6
10.0
12.9
3,287.0
377.0
299.0
4,766.0
524.0
413.0
6,718.0
716.0
562.0
9,253.0
960.0
750.0
12,513.0
1,231.0
981.0
16,275.0
1,593.0
1,232.0
20,310.0
1,930.0
1,486.0
2,756.0
240.0
225.0
3,973.0
334.0
310.0
5,619.0
456.0
423.0
7,723.0
611.0
564.0
10,420.0
773.0
738.0
13,523.0
1,015.0
928.0
16,846.0
1,230.0
1,118.0
531.0
137.0
74.0
793.0
190.0
103.0
1,099.0
260.0
139.0
1,530.0
349.0
186.0
2,093.0
243.0
2,752.0
578.0
306.0
3,464.0
700.0
368.0
479.0
66.0
15.0
690.0
91.0
21.0
928.0
124.0
27.0
1,252.0
165.0
37.0
1,657.0
215.0
48.0
2,111.0
269.0
61.0
2,580.0
323.0
52.0
71.0
59.0
182.0
18.2
6.0
157.8
103.0
99.0
82.0
256.0
25.6
10.0
220.4
171.0
136.0
112.0
382.0
38.2
17.0
326.8
278.0
184.0
149.0
563.0
56.3
25.0
481.7
436.0
243.0
195.0
815.0
81.5
40.0
693.5
641.0
309.0
245.0
1,129.0
112.9
57.0
959.1
884.0
377.0
295.0
1,488.0
148.8
79.0
1,260.2
a "sunny day" to realize maximum value from the sale of its
shares or the negotiation of a strategic alliance.
Proponents of the sunny day option favored comparing
the value of MAVESA as an independent business against the
various proposals that had been received from multinationals.
For this purpose, a stand-alone valuation of MAVESA was
conducted by a well-known investment bank in March 1993
which resulted in a discounted cash flow (DCF) value of $262
million, as follows (in millions of U.S.$):
Margarine business
Soap
Cooking oils and shortenings
Processed cheese spread
Mayonnaise
Noncore assets (African palm; shrimp)
Less: debt
1994
127
117
42
29
9
20
-82
By exercising this option, MAVESA shareholders would
retain a going concern with a 1993 equity value of $262
million. It would enable the stockholders to retain control,
with no dilution of their shares. However, the impact of burdensome financial costs on profitability made this difficult.
Lending rates in bolivars were rising (Table 7) as exchange
rates slid against the dollar (Table 8).
458.0
73.0
The sunny day option might be enhanced through programs of cost reduction. The payroll had recently been cut
by 10%, benefits and training programs had been reduced,
strict controls had been placed on travel and representation
costs, lower cost formulations had been used, cheaper sourcing sought, and idle assets were sold off. However, all these
measures were considered necessary by MAVESA management
just to maintain current profitability in a situation of greater
competition, in which slimmer margins were expected.
An opportunity for significant cost savings was in the specialization of plants. A detailed project for consolidating soap
production and oil refining had been developed by the opera-
Table 7. Annual Interest Rates in Venezuela (%)
Average for Year
Lending Savings
1987
1988
1989
1990
1991
1992
12.62
12.69
37.20
35.87
37.35
41.25
8.64
8.95
35.09
29.37
31.56
36.27
Average for Month
Lending Savings
Jan. 93
Feb. 93
Mar. 93
Apr. 93
May 93
53.09
52.65
55.71
64.78
66.65
48.53
47.39
49.49
64.94
51.10
MAVESA: Strategic Alliance
J Busn Res
1997:38:77-87
Table 8. Foreign Exchange Rates in Venezuela (bolivars/U.S.$)
Ending
1987
1988
1989
1990
1991
1992
30.70
39.30
43.05
50.58
61.65
79.55
Average
28.09
33.84
38.95
47.44
57.32
69.03
Jan. 93
Feb. 93
Mar. 93
Apr. 93
May 93
Table 9. MAVESAPrice per Share (bolivars)
Ending
Ending
81.65
83.45
84.90
85.95
87.85
Jul. 92
Aug. 92
Sep. 92
Oct. 92
Nov. 92
Dec. 92
tions department. This project would result in cost savings
of $8 million per year, but it required an initial investment
of $15 million. An investment of this magnitude would mean
leveraging the corapany even further, which in the opinion
of management was "highly risky."
One means of reducing the financial risk inherent in the
sunny day option would be to seek a "bridge option" to reduce
leverage and pressure. Several Venezuelan banks and financial
institutions had expressed interest in acquiring MAVESA's
treasury shares. They would expect a return of 25% to 30%
87
Ending
30.53
31.43
30.00
29.51
29.96
30.75
Jan. 93
Feb. 93
Mar. 93
Apr. 93
May 93
28.88
29.81
27.38
24.68
26.25
that, given the current political uncertainty as reflected in
share prices on the Caracas exchange, would mean that
MAVESA could expect an offer of around 28 bolivars per
share (Table 9). This mechanism would enable MAVESA to
reduce its debt burden by U.S.$31 million, but the Financial
Department advised Mr. Roche that it would result in an
accounting loss of 1,600 million bolivars.
Reference
Austin, J. E., and Ickis, J. C., MAVESA, Harvard Business School
Monograph N9-391-164, Harvard University, Cambridge. 1991.