Exxel's Shaky Empire

Bankruptcy and loan defaults are plaguing buyout king Juan Navarro

At first glance, Juan Navarro wears the trappings of success just as naturally as when he was crowned Argentina's buyout king in the 1990s. The 48-year-old founder and president of Exxel Group, a private-equity outfit with some $2.2 billion in assets, still smokes Cuban Cohiba cigars, jots notes with a Mont Blanc pen, and from his penthouse suite overlooking Buenos Aires, can speed-dial anyone from the U.S. Ambassador to the heads of any number of Wall Street investment banks.

But below the surface, the empire Navarro rules over is showing some serious cracks. As Argentina's recession enters its fourth year, several of the 13 companies Exxel owns are now on life support. Saddled with a combined $688 million debt, Navarro's businesses, which have a total workforce of 20,000, have been scrambling to stay afloat. Exxel ordained a 20% pay cut for nonunion employees last year. Now it's resorting to more extreme remedies, like renegotiating loans and deferring payments to suppliers. But it hasn't been enough. Over the course of the past month, one of Exxel's companies has filed for bankruptcy, a second missed a payment on a bank loan, and a third has ceded management control to a creditor. Meanwhile, several other of Exxel's businesses are desperately searching for buyers. "We're in survival mode," says Navarro.

For the man who blazed the trail for American and European private-equity investors in Latin America, that's as close to a self-critique as it gets. An unauthorized biography of the Uruguayan-born financier is titled The Hunter, a reference to his habit of preying on cash-strapped, family-owned companies. Navarro began stalking big game in 1991, the year he left a cushy job at Citibank's Argentine venture capital unit to start Exxel. Backed by a roster of big-name U.S. investors, such as GE Pension Trust, Rockefeller & Co., Liberty Mutual, and Columbia University, Navarro plowed $4.8 billion into 73 businesses ranging from electric utilities to the local MasterCard franchise.

BIG PROFIT. Navarro's prescription for turning around struggling enterprises called for a capital injection and an emphasis on cost control. Once spruced up, the companies were then sold at a substantial profit. Take Supermercados Norte: Navarro acquired the Buenos Aires-based supermarket chain in 1996 for $440 million in what was Latin America's largest leveraged buyout. Two years later, he sold a 49% stake in the chain to Promodes, now owned by Carrefour. The French retailer acquired the balance in April for an undisclosed sum. Navarro claims the deal yielded a 60% internal rate of return on Exxel's initial investment.

But now some are starting to wonder whether the man known as the Henry R. Kravis of South America has lost his Midas touch. Some of Navarro's most prominent holdings are drowning in red ink and may have to be liquidated or sold at a loss. Exxel's chief blames his current troubles on the moribund Argentine economy. But industry insiders, along with former associates, contend that management missteps have also been a factor. The most common complaint is that Navarro overpaid for some of his acquisitions, such as Musimundo, a music and electronics retailer whose $230 million price tag was equal to 9.2 times its cash flow. "Whether [Exxel] paid too much for some assets was an open question even before the recession," says Paul E. Tierney Jr., a general partner of New York-based Darwin Capital Partners who was one of Navarro's first backers.

Breakneck expansion may also have played a role in the decline--or demise--of some Exxel companies. That certainly appears to be the case with Musimundo. Unable to keep on servicing its $206 million debt, the retailer filed for bankruptcy on Aug. 30. Shortly after Navarro bought the chain in 1998, Musimundo embarked on a furious expansion, going from 68 to 122 stores in less than 18 months. With net sales down by 50% from 1998, the company began to reverse course last year, shutting down 27 outlets. It also stopped paying suppliers, who in retaliation withheld merchandise. According to a former Musimundo executive, Exxel's top brass was slow to capitalize on opportunities, such as the introduction of an in-house credit card, and allowed the chain's image to languish. "Managers were always afraid of contradicting Navarro and [vice-president Jorge] Demaria because they made every decision," he says.

Certainly, this wasn't the only time Navarro tried to leverage a brand and failed. When Exxel acquired Freddo in 1998 for $82 million, the family-run gourmet ice-cream vendor boasted a cult status similar to that attained by Ben & Jerry's Homemade Inc. in the U.S. Under Exxel's leadership, the number of Freddo ice-cream parlors jumped to 54, from 39. Once again, the expansion strategy backfired: "They lost the differentiating factor that was responsible for their high margins and made them attractive in the first place," says Guillermo D'Andrea, a professor of marketing at the Universidad Austral Business School in Buenos Aires. Exxel recently ceded control of Freddo to its main creditor, Argentina's Banco Galicia. Local papers report that the bank is now trying to sell the company back to one of its original owners for a fraction of what Navarro paid for it.

In the wake of the Freddo debacle, all eyes are trained on two other Exxel upmarket plays: Starbucks-clone coffee and pastry vendor Havanna, and International Brand Group, which holds the local licenses for some top-shelf fashion labels, including Polo Ralph Lauren and Giorgio Armani. Even if the Argentine economy staged a miraculous recovery tomorrow, there's some doubt these investments would ever yield the rich returns of earlier Navarro deals. "With a lot of their assets there's a real question of critical mass," says the local manager of one of Exxel's foreign-owned competitors.

In hindsight, Navarro's biggest mistake may have been putting all his eggs in one basket: Argentina. This self-styled conquistador has often boasted that his next forays would be in neighboring Brazil. But to date, his only investments there have been in a losing soccer club and a now-defunct dot-com. Meanwhile, rivals such as Dallas-based Hicks, Muse, Tate & Furst Inc. have been on a Brazilian shopping spree.

Exxel's founder can still count on a loyal cadre of defenders. While recurring fears of debt default and devaluation have scared most portfolio investors off Argentina, Navarro this year managed to raise $510 million for a new buyout fund. Backers include repeat investors, along with first-timers like BellSouth Corp. Although Navarro had hoped to collect upwards of $1 billion, raising any money at all in such a tough environment is impressive. Hicks, Muse recently scaled back its target for a new Latin American fund to $200 million. "Ten years ago we started with nothing, and now we have a recognized brand, access to global capital, and a proven track record," says Navarro. "There's no doubt we have a future." True, but it may be a future of struggle.

By Joshua Goodman in Buenos Aires

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