Teetering topper’s legal woes hit Azteca

Shares fall, stockholder confidence evaporates due to Salinas

MEXICO CITY — What happens when a power-mad tycoon with a laundry list of legal problems runs a successful network?

That’s the million-peso question here and on Wall Street, as investors and analysts have spent the last two weeks watching TV Azteca, Mexico’s second-largest net, get battered like a pinata by the bizarre actions of majority-owner Ricardo Salinas Pliego.

Shares have plummeted, stockholder confidence evaporated, and the only constant appears to be Salinas’ unshakable desire not to loose his grip on the moneymaking broadcasting empire he made — and may unmake.

“The company is good, it has good credit, but its association with Salinas has been a negative, unfortunately, and while the legal battles continue, it will affect the value of its stocks and bonds,” says Juan Cruz, analyst at Miller Tabak Roberts Securities.

The fun started late last month when, with a 16-month probe coming to a close by Mexico’s National Banking and Securities Commission (CNBV) into Salinas’ handling of a 2003 debt deal, the net accused Mexico’s finance secretary Francisco Gil Diaz of attempted program censorship.

Diaz, by the way, is also head of the department that controls the CNBV.

The highly dubious allegation started a landslide of charges, finger-pointing and stock-dumping that left a grisly tally: $2.5 million in fines levied by the CNBV, demands for early payment of debt by holders of bonds in Salinas-controlled companies; insider-trading charges filed against Salinas in Mexico; and an increasingly violent stock market bloodletting.

South of the border, there is growing dissatisfaction over Azteca’s lack of cooperation in the Securities and Exchange Commission’s own fraud investigation. Salinas hit back by unveiling a plan to delist Azteca and two other of his companies from the NYSE.

Despite entering its second year under fraud investigation in the refinancing of debt held by telco Unefon that netted Salinas and a partner $218 million in unreported profits, Azteca opened the year at a relatively strong $10.05.

On May 4, after Salinas announced his all-but-unstoppable plan to delist Azteca, telco Iusacell and retailer Elektra from the NYSE, Azteca share price hit $7.46, a painful 26% decline that, in terms of market capitalization, dwarfs any fines Azteca could possibly face in the SEC and CNBV probes.

The decline is a bitter pill for stockholders, forced to watch a highly profitable media company — first-quarter results for the year showed record sales and a 6% earnings increase to $18 million — disintegrate on the whims of Salinas, who holds a massive voting majority in Azteca and the other companies he owns.

The irony of Azteca taking the hit for a debt deal that involved a series of telcos only linked to the net by Salinas was not lost on anyone.

Analysts says that leaving the NYSE is designed to keep Salinas atop Azteca even if convicted by the SEC, which would force him to stand down. But it would decrease stock value more, translating into reduced cash reserves for the company, slackened dividends and, almost certainly, downgraded credit. That’s a terrible blow in an industry with high operating profits and the constant need for capital investment.

It’s also tough on corporate morale at a company that already has an inferiority complex about its second place behind local giant Grupo Televisa.

Already, rumors are circulating about Azteca talent attempting to break their contracts and seek work at the rival net.

For the moment, the best stockholders can hope for is silence from the magnate, who only seems to hurt the company by opening his mouth.

His civil fraud trial in U.S. District Court is expected to begin next month and could drag on for a year or more; meanwhile, he will sooner or later face a criminal trial for insider trading in Mexico, which could net him up to seven years behind bars.

Hanging in the balance is a network that controls a third of Mexican viewers and encompasses Azteca America, the third-largest Spanish-language net in the U.S.

Some, however, argue that anyone willing to invest in a Salinas company knew what they were getting into, since this is not the first time he’s stirred up the pot.

“Salinas is a successful businessman,” says Ana Gabriela Ocejo, analyst at Scotiabank Inverlat, “but he’s very controversial.”