Mondragon struggles to avert Fagor bankruptcy – FT.com

November 5, 2013 12:37 pm

By Miles Johnson in Madrid

The consumer electronics arm of Mondragon – the Basque workers’ co-operative hailed as an alternative model to traditional capitalism – is racing to secure emergency funding from US hedge funds to avert a bankruptcy declaration this week.

The problems at Fagor have triggered a crisis of leadership within the group, Spain’s tenth largest by sales, and raised questions over the viability of its business model, after companies within other divisions of Mondragon refused to support a rescue of the lossmaking unit.

Fagor, which employs 5,600 people across factories in Spain, France and Poland, was forced to approach US funds including Elliott, Cerberus and Fortress for €150m after other Mondragon companies rejected a plan to inject €170m using the co-operative’s own funds and aid from the Spanish and Basque governments, according to senior executives.

A move to invite American hedge funds and private equity groups into the capital of Fagor would mark a radical break with the past for a company where strategic decisions are voted on at general worker assemblies, and the president of the co-operative earns no more than eight times its lowest paid member.

If €150m is not secured by the end of this week, it is likely that Fagor, which ceased all production at its factories three weeks ago, will file for bankruptcy protection in France and Spain, following a similar move in Poland several weeks ago, the executives said.

Fagor executives are concerned that a disorderly bankruptcy of the company could damage confidence in the rest of the co-operative.

The funds approached by Fagor, which is being advised by PwC, have signed non-disclosure agreements, but there is no certainty they will make an investment in the company.

Mondragon – which is based in a small Basque town of the same name and was founded in 1956 by a Catholic priest – has enjoyed similar praise to the UK’s John Lewis Partnership for providing an alternative model of employment during the global financial crisis.

However, the heads of three other large parts of the collective – the supermarket Eroski, the bank Caja Laboral and the lift manufacturer Orona, vetoed a plan to inject more money into Fagor as they do not believe it has a viable future.

“Solidarity has a limit,” said one collective member of Mondragon who is not part of Fagor.

The sharp fall in consumer spending across Europe, which accounts for more than 60 per cent of Fagor’s sales, and the collapse of Spain’s construction bubble, have caused sales at the division to fall from €1.8bn in 2008 to €1.1bn in 2012. It has not reported positive earnings before interest, tax, depreciation and amortisation since 2008.

Fagor has net debts of €850m owned to banks as well as other parts of the Mondragon group, including Caja Laboral, and its own employees.

Fagor has been in refinancing talks with a syndicate of lenders that includes Santander, BBVA, Caixabank and Bankinter, but has not been able to arrive at a refinancing agreement without securing an injection of new capital.

The company’s approach to the US funds is intended to sell part or whole of Fagor’s operations in France and Poland and to use the money to save the remnants of its operations in Spain.

via Mondragon struggles to avert Fagor bankruptcy – FT.com.

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