Mini Case Study – Gabinetes Sicilia Assignment Questions & Analysis

 

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Gabinetes Sicilia (“Sicilia”) is a group of seven privately-held companies in the wood products and pre-fabricated cabinet business in Argentina. The company’s operations range from sawmills, to veneer & plywood production, to the manufacturing of various cabinet lines as well as other wood products such as pallets and cable reels. Although the group as a whole possesses many traits of a holding company, it has no such legal structure. Sicilia is held together by a different bond: family.

 

Shareholding in each of the companies is nearly identical, with minority positions held by the founder and each of his five adult children. Each company holds the assets of a single production facility or set of nearby facilities; except for the entity that operates the wholesale and retail distribution network for the entire group. There are no material shareholders other than these family members. The family has no current intention of opening up shareholding to non-family members (including employees), preferring to finance all future growth through borrowing, and to incentivise non-family managers through other mechanisms.

 

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The managing directors of each of the companies are brothers who grew up in the business founded by their father. Sicilia’s regularly scheduled “management team meetings” function something like a holding company board. Meetings rotate among the plant locations. Each meeting includes Sicilia’s immigrant founder, Carmelo Lavadera (when he is in the country; he lives in Palermo six months out of the year), and his four sons (Virgilio, Girolamo, Giuseppe and Domenico), plus the General Manager of the local plant, the Finance Manager of the group and any other necessary employees and/or advisors. The sons are all engaged in the day-to-day operations of the company’s plants. Each one lives in a separate city and takes primary responsibility for overseeing the operations of Sicilia’s facilities there. The eldest son, Virgilio, who takes overall responsibility for financial matters, has an accounting degree. The other sons studied business administration. The founder and his wife also have a daughter, Josefina, who has never worked in the family business, is unmarried, and presently studies painting and sculpture in Buenos Aires and Rome.

The management team meetings in Sicilia are similar to board of directors meetings in other companies. Management team meetings prepare agendas, record minutes, review quarterly and annual reports, and consul external auditors. When the team members cannot achieve consensus, they decide matters by majority vote.

Historically, there have been some cases where the brothers did not unanimously agree on a course of action, but in such instances decisions were made by majority vote, with the minority accepting the outcome.

As separate legal entities, each company in the group has a separate charter and maintains its own set of accounts. Each company has a chief accountant, and all chief accountants report to a group-wide chief accountant, who, in turn, reports to the Finance Manager for the group. The Finance Manager in practice reports to Virgilio.

 

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The group has an independent external auditor, a local firm affiliated with one of the second-tier international accounting firms. The lead partner who performs the work for the group tends to focus on tax issues, and he also serves as the tax, social security and pension accountant for all the companies. The group’s internal controls and accounting systems were designed largely along the lines recommended by the external auditor over the course of the years he has worked with Sicilia. The external auditor reports to the Finance Manager in practice.

 

The founder is the Sole Administrator of each of the companies (i.e., he serves as a one-person board of directors – which is permitted under local law). The companies hold an annual meeting of shareholders where, as a legal matter, the Sole Administrator presents the audited annual financial statements and the business plan prepared by Virgilio and his brothers. The meeting is largely a formality, since it involves only the founder and his five children, who routinely approve all agenda items unanimously. (The sons are currently in their 30s, and with their spouses have so far produced 11 children, the oldest of whom is age 15.)

 

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Despite the uncertain economic situation in Argentina, the Company has managed to achieve rapid growth over the last few years in response to the increasing demand for its products, mainly pre-fab kitchen and commercial cabinets and plywood products. Such growth has been financed through a combination of equity injections by the shareholders, retained earnings and domestic short and medium term debts.

 

However, these sources are no longer sufficient for the Company to meet the continuing growth in demand for its products, and thus the Company has approached an investment corporation for an investment in an expansion project.

 

The Project is a 5-year (2008-2013) US$50 million expansion and program comprising:

 

• the installation of new machinery and equipment to increase the production capacities of the two cabinet plants in Buenos Aires and Cordoba;
• the establishment of a veneer & plywood production plant at Tucuman;
• the construction of new facilities for truck flooring productions and veneer overlayment at Mendoza;
• the opening of 4 new retail stores in parts of the country not already served; and
• the environmental upgrade of its production facilities.

 

The origin of Gabinetes Sicilia dates back to the 1960s when Carmelo Lavadera, originally from Italy, set up a lumberyard in Tucuman. Over the years, the Company expanded into various wood-based operations, including the production of cabinets, veneer & plywood, and other industrial wooden products such as pallets, and the operations of sawmills. Today, Sicilia is the largest pre-fabricated cabinet supplier in the country with combined annual sales of over US$75 million, of which about 30% is derived from exports (mainly to Brazil, and to a lesser extent Peru). In 2008, the Company had consolidated revenue of US$78 million, with total assets of almost US$80 million and equity of over US$55 million.

 

The Company is still 100% owned by the Lavadera family. With the gradual retirement of Carmelo Lavadera, the ownership of the Company is now divided among him and his several children:

Roles:

 

Investment officer

 

Founder,                    Carmelo Lavadera (Sole Administrator, part owner)

 

Eldest Son,                           Virgilio Lavadera (part owner; has overall leadership role in the business; has accounting degree)

 

Other Sons,               Girolamo Lavadera, Giuseppe Lavadera and Domenico Lavadera (part owners; involved in business; have business degrees)

 

Daughter,                  Josefina Lavadera (part owner; not involved in the business)

 

Question one

You are the investment officer. You wish to invest in the company but want to tie the investment to a requirement that the family making a commitment to corporate governance changes.

What corporate governance change should the company make?

 

Question two

How do you think the family would react to your recommendation of a corporate governance change?

 

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