Sharks investors, Orizonia … “it is the balance sheet, stupid”

foto shark


Bill Clinton said, “is the economy, stupid!”, and I will take his style to say “is the balance sheet, stupid!”.  I think it is appropriate to reflect further on the reasons for the fall of companies. Unfortunately Orizonia and Marsans cases will probably be given as “cases” for MBAs. Both will be great examples to learn from the mistakes, which often teaches more than successes! Perhaps one day I will take a step ahead and I will write a case.  – For readers outside of Spain, Orizonia and Marsans were top players in the tourism industry in Spain, with more than 9.000 employees, and the biggest bankrupticys (Feb 2013 and Apr 2010) in tourism in the last decades in Spain.

I remember back in 2009 the stock market was in panic, and the CEO of a company listed in London, in an executive board of partners he informally asked me which was in my opinion the most critical factor for the crisis to succeed. The truth is that I was not expecting the question, and wander with the “classics”: agility, added value and profitability, but he said to me that I was wrong that in the crisis the most important thing was the cash … “Cash is the king my friend …” How right he was!

Companies develop in bonanza through the income statement and if a shark disguised as a financial investor helps you to grow with strong leverage through debt, without paying much attention to the risk of the balance sheet (because it is not his risk, but the banks , employees, customers and suppliers one), it is sowing further a drop in cold weather. Crisis arrives, and if your company has not got strength in the balance sheet (real assets, cash availability …), they fall. No matter if you have a positive EBITDA. The EBITDA should be within the acceptable ratios of debt (depending on the business, between 2 and 7), and the companies that have a lot of debt with an EBITDA going down, and a weak balance sheet, may be closed because credit shortage. The trip is even harder for workers who know they have a solid P&L (or at least not as negative to close down), and do not understand or expect closure. When you break seriously the limits of DEBT/EBITDA and there is no assets/cash, it is unstoppable, and in very little fraction of time, the managers focus on increasing the short term cash-flow, the suppliers get longer payment terms, thus increasing distrust and the solution is increasingly difficult.

In this crazy sport that consists in finding the limits of the human body in the records of apnea without fins, the easy part is going down … after a certain depth, the water pressure sink the diver into the abyss with no effort. The hard part is getting back. I give you an awesome video … with the debt is similar, there comes a time to get out of this vicious circle is increasingly difficult … and sometimes the air is not enough to get back.  Loans do not get renewed, cash is needed, so actions for improvement of the cash take place, even if they hurt the EBITDA, as the EBITDA goes down, credit closure increases …

Orizonia, like Marsans were viable businesses. Of course they were suffering cash tensions, but it was not because of the EBITDA, but by difficulties in their balance. This tension provoqued in both companies that during the last year, daily management was focused on cash, and therefore could be heard sometimes uninformed potshots like: About Orizonia “sure, doing 2×1 (sale offer), they were loosing money”, or some nerds opinions about Marsans, whose argument against was that “they giving away hams” (an original marketing campaing to improve advanced sales). That was not the problem, the actions commented (and others) were the result of the lack of cash, and the weak balance sheet. The cash pressure pushed very hard and a company like Marsans or Orizonia could survive many years with zero EBITDA or even significant losses if they had a strong balance sheet. We are talking about companies that by their nature have half year with high cash surpluses, and therefore no financial need.

Marsans fell because the hole that a parent company made to them (an airline called Air Comet), the bankrupticy of the airline caused a hole of 250 M € on loans made from Marsans, causing bankruptcy in balance. For Orizonia the end is similar, but the cause was different. Growth based on a very agressive debt strategy leading the company to the limits of Debt / Ebitda in good times. The crisis come,  Ebitda went down, and all (banks) alarms sounded, and created a shortage of loans renewal. The end is known, closed for lack of ability to pay, after selling it salable at bargain prices, but that was the least important.

Then there is an inside story especially sad, and I hope that time will put everyone in their place, with an offer of Barceló, subsequent delivery to another bidder who later step back and made it fall. I think very few people know what really happened, there are some gossips about personal distrust with the funds. 5000 people have suffered a lot, and if this could have been avoided it is terrible.

A couple of years ago, a great customer told me about his company. Great Spanish listed company and with a significant percentage of equity still held by the founders. The company has no debt, and also a balance to show off, some investors demanded at the shareholders’ meeting to distribute a special dividend, set the company into debt, with a multiple to EBITDA accepted by the investors, and distributing the remaining cash as an extra dividend … great from the point of view of equity optimization … but the CEO replied that he was not going to do it because he preferred that everyone, including himself, but also employees, suppliers and customers will sleep like a baby.  What a vision! A manager is not only to optimize, but to ensure the future viability of the company. Of course, then there are extremes, like Apple, which not only earns $ 40,000 M year and a bigger free cash flow, but also has 130,000 M $ in cash … too much … their problem, and it is no joke, is that APPL does not know what to do with so much cash … Blessed problem!

By last but not least we do need a more agressive regulation regarding responsability from the managers, in Spain we can play it risky (if we want) as managers. In other european countries, the responsabilities are biggers, and managers (specially financial directors) face personal responsability of not informing about balance sheet needs on time.  On the other hand, funds are guilty of pressing and caring only about the EBITDA, as a multiplier that will fill their pockets.

Finally, lots of encouragement to employees Orizonia, I’ve been there, and passed bad. In the end we believe that our companies are and are not … keep strong! As you saw in the video, there is air above …


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