CEMEX: GLOBAL COMPETITION IN A LOCAL BUSINESS
To make smart mid-term decisions, CEMEX must consider several potential threats in an industry that has the tendency to consolidate, intensify and stay hostile. Before acquiring and executing joint ventures in the current complex global environment, important risks should be considered. Those risks include foreign exchange risk, market risk, governmental and cultural threats while entering emerging markets, credit-risk exposure when financing its acquisitions with debt, and challenges to constantly produce the right efficiencies to maximize shareholders wealth.
CEMEX next move was to continue with its acquisitions program by financing transactions through heavy debt issuing and entrusting (in my personal view, relying to much on it) its “CEMEX way” program in order to reduce costs and increase margins. CEMEX intended to repay its debt with flows that were supposed to produce a higher return than the hurdle rate of every investment. But, in the following years, the devaluation of the MXN to the USD, CEMEX’s hedging operations, and the increase of financial leverage for the 2007 acquisition of Rinker, an Australian cement maker, for USD$17,298 mm, increased its leverage issues. This increase combined with the credit crisis of 2008 resulted in a lack of solvency and a high level of indebtedness for CEMEX.
The best way for CEMEX to translate its past success in an increasingly complex business environment is to modify its capital structure by refinancing debt, consolidating operations by reducing costs, expenses, and selling useless assets to increase efficiencies. CEMEX must also focus on its current operations in order to increase cash flows. In the long-term, once the prior issues are addressed, it must acquire companies by using short-term financing to cope with volatile market conditions.
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