Mexico’s Alfa Uses Auto-Parts IPO to Raise Cash Sunk in Oil Bust

Alfa SAB is capitalizing on its status as one of the biggest parts makers in Mexico’s booming auto industry to offset losses in the oil business after crude prices dropped by 46 percent in the past year.

The conglomerate, which also makes petrochemicals and lunch meats, will probably hold an initial public offering for its Nemak parts unit as soon as June, Alfa Chairman Armando Garza said last week in an interview. The IPO for Nemak, which provides cylinder heads and engine blocks to Ford Motor Co. and recently signed contracts to supply BMW and Audi AG, could raise more than $1 billion, he said.

Global automakers have disclosed $22.6 billion of investments in auto and parts plants in Mexico since December 2012, partly to supply a U.S. vehicle market that’s growing for a sixth straight year, the longest streak since at least World War II. According to the Mexican brokerage firm Metanalisis SA, a Nemak IPO would help unlock value in Alfa’s shares, which have plunged 18 percent since Oct. 16, when it boosted its stake in Colombian oil producer Pacific Rubiales Energy Corp. to 19 percent, as crude prices were declining.

“Nemak is part of a sector that has done the most to support Mexico,” said Gerardo Copca of Mexico City-based Metanalisis. “While the oil sector has been hurting, the automotive industry has been compensating for some of their losses.”

Alfa fell 1.3 percent to 32.61 pesos at close in Mexico City, bringing its loss for the year to 1 percent. Its petrochemical unit Alpek SAB rose 0.4 percent.

Automaker Push

Nemak is capitalizing on a push by automakers to build cars in Mexico, whose output climbed 9.8 percent last year to a record 3.22 million units. Ford, Nemak’s biggest customer, disclosed a $2.5 billion investment in two Mexican plants last week, while Toyota Motor Corp. said this month it will spend $1.4 billion to build its first factory in the country.

Alfa plans to sell a stake of at least 15 percent of Nemak, Garza said. He left open the possibility that a sale could come later this year, depending on how markets behave. Ford holds about 7 percent in the company, according to Alfa.

Alfa has said the proceeds from the IPO will be invested in Nemak as well as the Mexican oil industry, which was controlled by the government for more than seven decades until recent laws opened it to private companies.

Shares in Pacific Rubiales have tumbled almost 75 percent since Alfa disclosed it had amassed a stake in the Bogota-based oil producer. The investment was a mistake, Garza told reporters last week. Alfa hasn’t decided whether to liquidate the stake, maintain the stake at its current level or buy the rest of the company, he said.

Oil Collapse

One risk for a successful IPO, according to Monex Casa de Bolsa analyst Fernando Bolanos, is that some investors are wary of Mexican stocks after the past year’s collapse in prices for oil, which provides a third of government revenue.

Vector Casa de Bolsa SA analyst Rafael Escobar values Nemak at $6.3 billion. Once there’s a transparent valuation for the unit through the trading of its shares, Alfa should gain in turn, he said. Nemak had $1.07 billion of sales in the fourth quarter, or 23 percent of Alfa’s total. Customers also include General Motors Co. and Volkswagen AG.

“Investors are going to realize that while it was a failed investment in Pacific Rubiales, or a bad decision, the conglomerate on the whole has divisions that are doing very well,” Jorge Lagunas, who helps oversee $200 million at Interacciones Casa de Bolsa SA, said in a telephone interview.

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