Is Hugo Chavez going to put his mitts on your cement plant? That's a question posed in a recent Reuters article, and it makes sense to give the possibility a thought, because we know that Comrade Chavez has announced his attempt to "nationalize" (or, as I call it, "steal") assets that belong to others, such as Venezuelan telco CANTV
So, these would all seem to be a nice, ripe target for someone like Chavez, whose ultimate aim is likely not only to appease the hungry masses by appearing to take back what the capitalist pig-dogs have built, but also -- as pointed out here -- to get his hands on some nice, predictable cash flows, especially since he can't count on the windfall of crazy oil prices these days.
To my knowledge, Chavez hasn't said anything about grabbing up his country's biggest cement producers, and analysts think the odds are slight, but I wouldn't put much past old Hugo. So the question for me, as a potential Cemex shareholder, was, "What would it mean, in a worst-case scenario?"
Fortunately for shareholders at Cemex, the answer seems to be, "not a ton." Unfortunately, it's also not "nothing."
As of Cemex's latest annual report, the Central, South America, and Caribbean segment (consisting of operations in Venezuela, Colombia, Costa Rica, the Dominican Republic, Panama, Nicaragua, and Puerto Rico) came to 7% of assets.
The Venezuelan firm's revenues, which includes operations in the Dominican Republic, Panama, and Trinidad, over the trailing 12 months (as of June 2006) were $681 million, with operating income of only $71 million. Moreover, the operating environment is difficult in Venezuela. According to that same annual filing, inflation in 2005 was clipping along at 14.4%, and the government has put price controls on cement.
You might be tempted to conclude that Chavez would be doing shareholders something of a favor by taking that kind of a regulatory mess off their hands, but according to the numbers I get from Capital IQ, revenues for the Venezuelan company have increased (in constant dollar terms at today's rate) from $289 million to $640 million for fiscal 2005. Moreover, because the Venezuelan cement market remains highly fragmented, there are still prospects for consolidation and associated scale advantages -- in theory. Clearly, there's a growth opportunity here, though not nearly what there might be if the oil money in Venezuela were fueling real investment and reinvestment, rather than funding Chavez's expensive socialist giveaways.
With annual revenues clipping in above the $16 billion mark, and the Venezuelan-specific revenue estimated to come in at only about 2% of the total, Cemex could clearly survive the theft, er, "nationalization" of the Venezuelan business, but not without taking a hit on current and future prospects. As distasteful as it is, shareholders will remain better served if the company can play ball with Hugo.