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Lorenzo Zambrano.

With protective tariffs in Mexico on the wane, Cementos Mexicanos CEO Lorenzo Zambrano had visions of being swallowed by foreigners unless he moved quickly to make some acquisitions. Thus in 1989, he shelled out $800 million for cement companies in Mexico, Texas, and California, and last year he picked up the pace, spending $1.9 billion for majority holdings in two Spanish cement companies.

The acquisitions made Monterrey-based Cemex the largest cement company in North America and the fourth largest in the world. But they disappointed some shareholders, who were troubled that the company was no longer a pure play in the thriving Mexican construction market. Wall Street also reacted with concern, questioning the amount of debt needed to finance the transactions and whether Cemex had sufficient international management expertise.

"We had to become one of the biggest global companies," Zambrano says, chafing at criticism of the feeding frenzy. "If we didn't, someone undoubtedly would have acquired us." He argues that the offshore deals protect Cemex against the possibility of a price war on cement in Mexico and give it a beachhead in the fastest growing cement market in Europe. Besides, he adds, the price tags of the Spanish subsidiaries--La Auxiliar de la Construccion (Sanson) and Compania Valenciana de Cementos Portland (Valenciana)--were some 50 to 70 percent lower than when the Spanish market peaked in 1990.

"Every time we acquire a company, we are told that we paid too much, that we are buying at the wrong time, and that we are crazy," Zambrano says. "Our critics know a lot about Mexico, but not enough about the cement industry."

Zambrano, 49, likely is counterpunching against analysts and regulators north of the border. Moody's Investors Service placed the senior debt rating of Cemex on review after the Spanish purchases, though the company retained its Ba-2 designation. Another sore spot remains a 58 percent countervailing duty slapped on Cemex by the International Trade Commission to protect American producers. The company is disputing the sanctions with the ITC and under the General Agreement on Tariffs and Trade. Cemex has a 5 percent share of the U.S. market, it owns the Western U.S. affiliates of Blue Circle Industries plc and two Houston companies, Houston Shell & Concrete and Gulf Coast Cement.

Overall, Cemex reported crackling results for the year ended December 31. Sales jumped 29 percent to $2.2 billion, while net income rose 24 percent to $548 million, including $8.5 million from consolidated operations of the Spanish companies. Sales for the first quarter ended March 31 increased 55.6 percent to $678.8 million.

Analysts offer mixed reviews of the company's Spanish strategy and short-term growth potential.

"Spanish construction activity has peaked and may be at an important turning point," says Mark Stockdale of S.G. Warburg Securities. "Investors must focus on 1994-1995 to see the potential benefits. To the extent that Cemex diversifies into lower growth markets than Mexico, the rate of growth in earnings potentially comes under pressure."

But Gary S. Schieneman, who follows Cemex for Smith New Court/Latin America, counters: "Strategically, the acquisitions provide Cemex with a European base to compete in a globally consolidating industry. They make strategic sense, and they are not dilutive. Just about all the company's income will continue to be earned in Mexico. An investment in Cemex remains an investment in Mexico.

"Demand for cement has been growing at double the rate of Mexican GDP growth, and an increase in cement prices to world levels should increase profit margins," Schieneman adds. "Further, Cemex stands to benefit from the direct investments and overall growth that NAFTA should provide."

Zambrano, who has an MBA from Stanford and an engineering degree from Monterrey's Instituto Technologico, is an outspoken proponent of the North American Free Trade Agreement--though he points out that the opening of the Mexican economy has sparked significant dislocation.

"Many of our companies have disappeared, because they were not yet strong enough in managerial expertise, in technology, and in marketing," he says. "That process will continue. A lot of industries have been hit heavily, among them, textiles, toys, and shoes."

The chief executive notes, however, that Monterrey is somewhat ahead of the learning curve because of its long-standing free trade mind-set and its proximity to Texas and the Southern U.S. "You go to Southern U.S. cities and talk to the business people there," he says "They are used to doing business with Mexicans, and their economies are highly linked to ours. Already, there is a regional, mini-trade zone that has developed.

"Because of that, we treat Arizona's markets much the same as those in Chihuahua; Baja's the same as southern California; and southern Texas, the same as Monterrey. That's why we've been positioning ourselves in this part of the world. That's why it's important for us to remain strong."
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Title Annotation:N.B.; CEO of Cementos Mexicanos
Author:McCarthy, Joseph L.
Publication:Chief Executive (U.S.)
Date:Sep 1, 1993
Previous Article:William Y. O'Connor.
Next Article:Hey, Bill: get out of the way on pay.

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