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As Avianca Weighs Bids, Hedge Fund Plays Unusual Role: Diplomat | ASHARQ AL-AWSAT English Archive 2005 -2017
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Germán Efromovich, right, the largest investor in Avianca Holdings, watched as the airline’s stock began trading on the New York Stock Exchange in 2013. Credit Richard Drew/Associated Press

Trouble was brewing this summer at Avianca Holdings, Latin America’s second-biggest airline.

Tight on cash, the airline needed to raise money. For many on the board, one option was selling part of the company.

The company’s largest investor — a swashbuckling, Bolivian-born entrepreneur, Germán Efromovich — had other ideas. The airline was the thread holding together the remnants of his once-powerful empire spanning oil and gas businesses, shipyards, hotels and airlines. He was not about to let it go without a fight.

A number of suitors, including Delta Air Lines, United Airlines and Copa Airlines of Panama, indicated interest in buying a stake — including buying out Mr. Efromovich and his brother, José — but the two made it known that they were not ready to relinquish control, people with knowledge of the negotiations said. Mr. Efromovich was often at odds with Avianca’s second-biggest shareholder, Roberto Kriete.

Tensions in the boardroom were so high in recent months that there were shouting matches in some meetings.

But there was a struggle on another front that would soon bring the parties together. Mr. Efromovich, after making big bets on the energy industry before oil prices plummeted, was on the brink of default on hundreds of millions of dollars in loans. The lender was Paul E. Singer and his hedge fund, Elliott Management, best known for its decade-long battle with Argentina over its defaulted debt. And some of the collateral was Mr. Efromovich’s stake in Avianca.

That has brought Elliott’s executives to the negotiating table in recent months, meeting with Avianca’s suitors, participating in board meetings and keeping an eye on their borrower.

Late last week, Delta, United and Copa submitted bids to partner with Avianca. Elliott received copies of at least some of the offers

United offered a $500 million loan to Avianca and potentially one of its investors. Copa pursued a merger that would value Avianca at more than $2 billion, or a 150 percent premium to its share price last week. Delta offered more than $1 billion in cash, a majority of which would go to buy out most of the Synergy Group, Mr. Efromovich’s investment arm, with the rest going to Avianca. The Delta bid implied a $1.9 billion valuation.

On Tuesday, a special committee of Avianca’s board are expected to meet to decide whether to accept a bid or proceed with a new round of bids.

If a deal comes together, Elliott would have helped broker one of the biggest deals in the airline industry this year.

Details of these discussions are based on interviews with people who have direct knowledge of the company and negotiations but who were not authorized to speak publicly.

Despite its recent troubles, Avianca, which is based in Bogotá, Colombia, and second in the region only to the Chile-based Latam Airlines, is an attractive asset. Latin America is expected to be the largest growth market for travel in and out of the United States over the next two decades, according to a report by the Federal Aviation Administration.

American Airlines is the only United States airline with a substantial presence in the region.

“These players have no footprint,” said Stephen Trent, an analyst who covers Latin American aerospace and transportation for Citigroup, in reference to the three bidders’ exposure to Avianca’s routes.

Delta and United declined to comment on the deal. Copa did not respond to a request for comment.

Avianca also declined to comment. But in the company’s most recent earnings call in November, the chief executive, Hernán Rincón Lema, emphasized that Avianca’s financial situation was stronger than when it began the bidding process.

“From the very beginning, when we’ve set to find a strategic long-term partner, it has never been about money,” he added in a call with analysts. “It has been about the strategy, future, service, the world.”

While Mr. Efromovich and his brother hold seats on the Avianca board, there is some question over whether they still own their shares. In an interview, Mr. Efromovich said that while his Synergy Group had a majority stake in Avianca, he was no longer a majority owner of Synergy. “That has changed over time,” he said.

“I don’t have to share my relationship with Elliott, not only with Elliott but with a lot of funds. And this is my business,” said Mr. Efromovich, acknowledging a relationship with Elliott. “It’s my problem.”

In September, Mr. Efromovich told Valor Econômico, a business daily in Brazil, that he had given up his shares in Avianca Holdings.

“In Avianca Holdings, I don’t have a single share,” he said. “The Synergy Group gave as collateral part of its shares” in Avianca Holdings “in order to finance airplanes and other things.”

Asked if he still held a stake in Synergy, he said, “Not today.”

Better known as a combatant than a diplomat, Elliott has emerged at Avianca as a result of a two-decade-long relationship with Mr. Efromovich that executives first disclosed to Avianca’s board members this summer.

Elliott has long specialized in taking positions in complicated loan arrangements, most notably its investment in defaulted Argentine debt, and over the years Elliott has helped to bankroll the expansion of Mr. Efromovich’s Synergy Group. Most recently, Elliott helped to finance Mr. Efromovich’s foray into Brazilian shipyards through a series of loans that were secured to other assets in the empire, including Avianca.

Business associates describe Mr. Efromovich as like a wildcatter, given his diverse investments that span not just South America but also a variety of industries, including energy, shipbuilding and telecommunications. He created Synergy Group, with his brother, José, to serve as the investment vehicle for his many ventures.

Decades ago, Avianca suffered some major safety setbacks. The Medellín drug cartel blew up one plane over Bogotá in 1989, and the next year a plane crashed en route to New York. Combined, almost 200 people were killed.

That led Avianca to economic ruin, and in 2004 Mr. Efromovich spotted an opportunity to swoop in. He agreed to buy 75 percent of the company out of bankruptcy for a mere $64 million. (Today Synergy’s publicly disclosed 52 percent stake is worth about $460 million.) Five years later, Avianca agreed to merge with Grupo Taca, combining two of the oldest airlines in Latin America.

Taca had been controlled by the Kriete family since the 1960s, growing into one of the largest airlines in the region. Through civil wars and political unrest over the next few decades, the family held on to the business and founded an aircraft maintenance facility that services many of the world’s major airlines.

Mr. Kriete, a Salvadoran who has a master of business administration from Boston College, took control from his grandfather in the 1980s. He currently is a director of Avianca and the second-largest investor in the company after Mr. Efromovich.

The combination of Mr. Efromovich’s and Mr. Kriete’s companies was amicable at the beginning.

When asked about their relationship, Mr. Efromovich called Mr. Kriete a good partner and “an experienced man in the industry,” adding that his contribution to the board was “very positive.”

The two large shareholders agreed to take their combined company public in 2013, with shares listed on both the New York Stock Exchange and the Colombian Stock Exchange, at about a $2 billion valuation. Today, the company is worth half that.

Not long after the public offering, the ties between the Efromoviches and Mr. Kriete began to fray. Mr. Efromovich brought Avianca into deals with some of his other business interests, known as related-party transactions. These arrangements are legal, so long as they are conducted in the best interest of the company and its shareholders.

But some shareholders found the transactions to be wasteful and accused Mr. Efromovich of propping up some of his other businesses.

There was Empresariales, a bus company and affiliate of Synergy that provided ground transportation to the company’s pilots and flight attendants. Avianca paid for services that Empresariales had not completed, according to people familiar with an internal review.

There was also Synergy’s aircraft leasing company, which delivered two A330 aircraft late. The delay and cost of changes to the aircraft to meet Avianca’s standards cost $7.5 million, the people said.

“To me, a related-party transaction has to be at arm’s length,” Mr. Kriete said by phone. “When the company does things with Germán that they wouldn’t do with anybody else, that’s a contaminated related-party transaction.”

Both Mr. Kriete and Mr. Efromovich have threatened lawsuits against each other, but nothing has been filed.

The New York Times