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Companies in crisis pass command to restructuring experts

Exame Magazine - 10/11/ 2016

By Naiara Bertão

Business owners in crisis have handed over the command of their companies to specialists in restructuring businesses. In some cases, this is the only way out.

The manufacturer of cleaning products Bombril ended 2015 like so many other companies in Brazil, counting the cents. With the recession, sales fell, the operation hurt and lacked money to pay the creditors. Without receiving more than six months ago, some of its suppliers stopped delivering supplies, and, with that, the production of certain factories had to be paralyzed.

If nothing changed, its owners, the Sampaio Ferreira family, knew that Bombril could seek judicial recovery - a painful process they had already faced between 2003 and 2006 and wanted to avoid at all costs. This time, the family decided to try something new and radical: hand over the business to a consulting firm specializing in restructured companies in difficulty that would have “carte blanche” to change whatever they wanted, from products to employees.

That's what RK Partners started to do a few days before Christmas. In early 2016, the president, almost all directors and 60% of managers were dismissed. In addition, the total of products manufactured fell by 35% (only those who had high profitability remained in the catalog), the marketing budget was reduced from 4% to 1% of sales and contracts were renegotiated. "In less than a month, we've introduced a new payment schedule for suppliers. About 90% of them accepted and resumed supplies”, "says Luiz Gustavo da Silva, a former director of RK who was appointed President of Bombril.

The results have already improved: in the first half of the year, the company earned 46 million reais. Bombril earned 1 billion reais last year. To survive in the country's worst recession, companies know they need to cut costs, renegotiate debts, and be more productive. "It is necessary to take tough measures, such as shutting down factories and firing, that many executives and entrepreneurs are not prepared to face or simply do not want to do”," says Marcelo Gomes, executive director for Latin America for restructuring consultancy Alvarez & Marsal. The exit, then, is to go to consultants: if it does not work, you can always blame the consultants.

Critical phase

Companies are in crisis for a variety of reasons - problems in succession, strategic mistakes, economic changes, competitors' arrival. But those who decide to turn management over to a specialist consulting firm are usually at a critical stage when they can not afford suppliers, banks and even employees. Today, there are more companies in this situation. According to a survey by the Brazilian Capital Markets Institute's Study Center, which analyzed 605 publicly-held and privately-held companies, half of them do not generate enough cash to pay interest on their debt.

When the restructuring ends, the consultant leaves the company, but the executive who led the changes may continue. As this model is new in Brazil, there are few restructurings completed and no study on the subject, and this makes it difficult to say if specialized consultancies can actually pull a large number of companies out of the hole.

One successful example is that of the manufacturer of bicycle and motorcycle tires Levorin. After spending a year and a half in front of Levorin, André Pimentel, a partner in the consulting firm Performa Partners, managed to increase the cash generation four times and broker the sale of the company to the French Group Michelin, announced in August this year.

A dramatic case is that of the Vulcabrás footwear manufacturer. The restructuring, which began in 2013, was conducted by consulting firm Galeazzi. After three years of losses, Vulcabrás made a profit in the first half of this year, but its operation is a fraction of what it was in the past: 23 of the 25 factories were closed and 22,000 employees were dismissed.

An important test of this model should happen in the coming months. Mining company MMX Sudeste, part of the group of businessman Eike Batista, has just sold part of its mines to the Mubadala fund and to Trafigura, a company specializing in transporting and trading commodities. The sale is part of the judicial recovery plan, which has been coordinated by RK consultancy since 2014. The operation has been frozen since then. Of the almost 2,000 employees, there remain only 40, who care for the maintenance and security of the mines. "With the plan completed, the company, leaner, can be re-started," says Ricardo Werneck, chairman of MMX, which was nominated by RK. A modest start has never been in Eike's plans, but in the current situation, being able to produce is already a victory.

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