More Than One Way to Find Value 207steel producer, was indicative of the family ’ s ability and competence
in operating steel companies in Latin America.
At the time, Ternium had an enterprise value (EV market
cap net debt) of $ 7.5 billion. In 2006, free cash fl ow was some
$ 840 million. In 2005, free cash fl ow was over $1 billion. Earnings
before taxes, depreciation, and amortization (EBITDA) for 2006
was $ 1.84 billion, implying that Ternium was selling for only 4.1
times EBITDA. Even for a steel company, this was absurdly low.
A quick comparison of peers yielded an average EBITDA multiple
of just over 7. Operating margins, at 27 percent, were among the
highest in the world. Ternium boasted a low cost structure that was
best in its class. Ternium ’ s Mexican operations included access to
iron ore, the main component in steel production, providing the
company with a cheaper supply of this raw material.
So what was the catch that made Ternium so incredibly cheap?
Simply, the market couldn ’ t seem to get over Ternium ’ s exposure
in Venezuela. Ternium ’ s operations in Venezuela were its interest
in SIDOR, a Venezuelan steel mill. At the time, there were threats
that Venezuelan president Hugo Chavez would nationalize SIDOR,
which was owned 60 percent by Ternium and 40 percent by the
Venezuelan government and SIDOR employees. Some careful anal-
ysis suggested that the odds of nationalization were low.
In any case, Venezuelan operations represented 25 percent
of Ternium ’ s EBITDA. So if the worst - case scenario played out
and SIDOR was nationalized and Ternium received nothing from
Venezuela, EBITDA would decline from $ 1.84 billion to $ 1.4 bil-
lion. At this rate, Ternium was still selling for much less than com-
parable international steel companies. In the end, nationalization
of SIDOR would not substantially impair the overall operating
profi tability of Ternium. Ultimately an agreement was reached that
avoided nationalization. In exchange, Ternium agreed to sell more
steel to Venezuela at a slight discount ( ~ 5 percent) and agreed to
make some capital investments in SIDOR.CH010.indd 207CH010.indd 207 9/2/09 11:50:55 AM9/2/09 11:50:55 AM