Dodgy dealings of Salinas Pliego: TV Azteca boss faces slew of investigations in wake of Unefon financing scandal.

Ricardo Salinas Pliego likes to build big companies and make money. In doing so, he is willing to take all kinds of risks and has no problem losing a couple friends along the way. A recent debacle surrounding Unefon, a Mexican mobile operator, once again sees this skipper sailing rather close to the wind.

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At the beginning of February, The Financial Times reported that TV Azteca--which had a 46.5% stake in Unefon until the telecom company was spun off last December--is under investigation for fraud by the U.S. Securities and Exchange Commission (SEC). Although the television operator has yet to be formally charged, financial authorities on both sides of the border are reportedly looking into disclosure irregularities concerning last year's bailout of Unefon after it defaulted on interest payments to Nortel Networks, a Canadian infrastructure provider.

The news rocked TV Azteca's share price, which lost nearly a quarter of its value in just over a month. Already, angry U.S. investors have launched a private class action suit seeking damages for the loss of stock value.

TV Azteca officials refused to comment to BUSINESS MEXICO or the media at large until an ongoing internal investigation into the matter is completed. If found guilty by the SEC of securities fraud, the firm, which has launched its own investigation into the episode, could find itself de-listed from the New York Stock Exchange.

THE STORY BEHIND IT ALL

Unefon was conceived in 1997 when Salinas, a majority shareholder in both TV Azteca and electrical goods retail chain Elektra, joined forces with Moises Saba, a wealthy entrepreneur.

Their first challenge was to raise the US$360 million needed to purchase the required radio frequency concessions from the Mexican government. Unable to find the cash on the capital markets due to "unfavorable conditions," the duo turned to TV Azteca. Thus, the world's second largest producer of Hispanic television (behind Univision) became half owner of Unefon.

In July 2001, Salinas once again used TV Azteca's financial strength to the advantage of Unefon. The board approved a one-year credit US$80 million guarantee to help increase the operator's network capacity.

Thus, investors who thought that they had bought shares in a television company found, without warning, that they were exposed to a risky telecommunications business.

A BUSINESS PLAN FORMS

Mobile networks are not comprised of thin airwaves alone. They require costly infrastructure. For that, Salinas had to go elsewhere. In fall 1999, he brokered a US$600 million deal with Nortel. Unefon agreed to purchase US$480 million worth of telecom gear over five years in return for a US$320 million loan from the provider. Armed with a handsome CDMA cellular network that now extends to 15 cities, Unefon set sail in January 2000.

The strategy was simple--hit the mid-to-low-end market consisting of 50 million Mexicans without landlines. With tariffs 77% lower than its competition, Unefon hoped to steal market share.

But by 2002, Unefon appeared to be suffering in the telecom downturn. Despite surpassing the one million subscriber mark, the operator was saddled with debt and found it tough to compete with the mighty Telcel--which then, as now, controlled some 80% of the market. In October that year, Unefon defaulted on a US$6 million interest payment to Nortel. Both firms sued each other, and Unefon's future was placed in serious doubt.

To avoid liquidation, Unefon needed to find somebody else to buy the debt. No one from the capital markets was prepared to take on the risk, and the value of the bonds went to zero. TV Azteca had promised the market that it would no longer financially support Unefon.

LAST-MINUTE BAILOUT

As the summer rains dampened dwindling hopes, a group of unnamed white-knight investors suddenly rode to the rescue in June 2003. An out-of-court settlement was brokered with Nortel that left Unefon in the clear. The operator paid US$43 million in cash to its creditor.

The new backers purchased the rest of the debt via a holding company called Codisco for 70% reduction of its face value--a price that Nortel executives would have been pleased with at the time, as they had probably given up hope of seeing any of their investment again. Codisco gave Unefon repayment terms that extended into 2013.

Investors were so relieved that the fledgling wireless operator had survived its darkest hour that no one seemed to be too concerned as to the identity of the backers. Instead of trying to keep the wolves from the door, Unefon was at last able to focus on the business of winning more customers.

More good news was to come, as Unefon CEO Adrian Stekel announced a US$268 million deal (paid in October 2003) to lease its excess frequency capacity to another Mexican mobile operator for 16 years. The buyer, which has only recently been identified as Telcel, had so many customers that it was unable to meet demand across its own frequencies.

DISCLOSURE COMES AFTER PAYDAY

As any sensible finance director would agree, when one has cash in the bank and nowhere to spend it, it best to pay back creditors and save on burdensome interest payments. So Unefon quickly drafted checks to those benefactors who had pulled it back from death's door. But instead of getting back the bare amount that they had lent plus interest, the white knights where paid back the entire face value of the original debt--all US$320 million of it. These unidentified creditors pocketed US$218 million in profits between them.

Although some may find such a nice little earner hard to swallow, it is probably, depending on the terms of their agreement with Unefon, totally legal.

It was the tardy disclosure of the identities of the gentlemen that control Codisco that caused the furor. Surprise, surprise, Codisco is owned by Salinas and Saba and they waited until January this year, after they had successfully spun off Unefon from TV Azteca to fully disclose their dealings.

By delaying disclosure, they have, claim many disgruntled investors and commentators, failed to inform the market as to their activities as major stockholders in Unefon. Once again, Mexican impresarios have profited while their minority shareholders have suffered.

The markets displayed their displeasure on TV Azteca's share price, which dropped some 23% between Dec. 20 and Jan. 26. This was despite positive news regarding its commitment to make a US$125 million bond payment as part of its wider plan to pay back some US$250 million in debt and make distributions of some US$500 million to shareholders in the coming years.

Since the TV Azteca shares are publicly traded on the NYSE, on Jan. 27, the U.S. law firm Brodsky and Smith announced a class action lawsuit on behalf of investors who had lost money. Shareholders claimed in a statement that TV Azteca and its owner "denied any affiliation with a 'white-knight' group of investors that had saved Unefon from bankruptcy ... defendants stonewalled disclosure of the true facts."

Meanwhile, TV Azteca's independent Board of Directors has launched a private investigation via a third-party Los Angeles law firm, Munger, Tolles and Olso. They have been given the charge of discerning whether Unefon complied with the U.S. Sarbanes-Oxley Act. This legislation was introduced last year to better protect investors after a swathe of corporate scandals.

MOUNTING LEGAL PRESSURE

But the buck may not stop there. As BUSINESS MEXICO went to press, pressure rose for action to be taken against Salinas and Saba. According to El Financiero, a Mexican daily, various politicians were demanding an inquiry by the CNBV (Comision Nacional Bancara y de Valores) and the BMV (Bolsa Mexicana de Valores).

The head of the Chamber of Deputies Commission on Radio and Television, the Party of the Democratic Revolution (PRD)'s Dolores Gutierrez, claimed that "Mexico can no longer go on having impresarios of this size, moral profile and ethic."

Another PRD politician, Alfonso Ramirez Cuellar, accused Salinas of being "a successful businessman to whom the norm rarely applies and who does not respect the rights of minority investors."

The reported U.S. SEC investigation is the first of its kind into a Mexican company. Investigators will be looking particularly hard at the timing of the transactions. They will want to know whether Salinas and Saba knew about the Telcel deal before they agreed to buy back the debt from Nortel. They will also want to know whether Unefon or its owners misled Nortel regarding its financial position when the deal was struck.

However, Ernesto Piedras, a telecommunications expert with Mexican think tank CIDE, expects that any financial damage to Unefon will be minimal. "The main cost will be to the sector in general, in terms of loss of credibility within the capital markets," he said. "When we lose market credibility it can be very hard to win back."

Other insiders believe that any legal actions probably would be focused on Salinas and Saba as individuals and not on any of the corporate entities involved, since punishing Unefon or TV Azteca would be to the detriment of the minority investors that they are trying to protect.

Some even argue that Salinas and Saba may not be quite as bad as they have been portrayed. One banking analyst put it to BUSINESS MEXICO this way: "If Salinas was prepared to bail out the firm when no one else was, what is so bad about that? At the end of the day, they saved the firm and those who could have ended up with nothing still have something."

Salinas himself has often argued that, by acting out of self-interest, he is more likely to make money for his investors.

Apart from his ability to enforce tight operational efficiency, as proven at TV Azteca, where last year's third quarter EBTIDA margins reached 44%, Salinas is also well known for his tough negotiating skills, particularly when it comes to debt. He applied these skills in rescuing the floundering mobile operator Iusacell, which he purchased last year from Vodafone and Verizon for US$12 million along with US$815 million of debt.

Ethical or not, despite several major investigations and legal battles, Salinas has never been found guilty of any illegal activity. The Unefon case may change that. But by once again pushing the boat out, this old sea dog has surely taken a very calculated gamble. The market may not like him, but his bank manager probably does.

Randolf Hummings is a freelance reporter specializing in Mexican telecommunications.