ALFA's Q1 2024 earnings transcript paints a picture of two contrasting symphonies. Alpek, the petrochemical arm, plays a somber tune, grappling with industry headwinds, implementing cost-cutting measures, and halting dividends to bolster its balance sheet. Meanwhile, Sigma, the food processing division, bursts forth with a vibrant crescendo, reporting record EBITDA and the lowest net leverage ratio in a decade. But beneath this harmonious facade, a more intriguing melody plays out - a subtle power shift within the ALFA conglomerate, orchestrated by the financially robust Sigma. [ALFA Q1 2024 Transcript] (https://seekingalpha.com/symbol/ALFFF)

ALFA has been vocal about its intention to separate Alpek, leaving Sigma as the sole conductor under the ALFA banner. The recent transcript reveals a fascinating wrinkle in this strategy: the onus of debt reduction necessary for the spin-off appears to have quietly shifted onto Sigma's capable shoulders.

"Eduardo Escalante, ALFA's CFO, states, "To implement the planned separation of Alpek, we must also reduce a significant amount of debt at the remaining entities." He further clarifies that the aggregate net debt outside of Alpek, currently at $3.3 billion, needs to approach $2.5 billion "to ensure a healthy leverage post separation.""

Reference: [ALFA Q1 2024 Transcript] (https://seekingalpha.com/symbol/ALFFF)

While asset monetization plans are mentioned, the focus appears to be on leveraging Sigma's financial strength. Escalante highlights Sigma's "outstanding EBITDA generation" and record trailing 12-month EBITDA of $965 million as "a key pillar" in this final phase. [ALFA Q1 2024 Transcript] (https://seekingalpha.com/symbol/ALFFF)

Consider the following: Sigma's 2024 EBITDA guidance is $920 million. A net debt of $2.5 billion against this figure yields a net leverage ratio of 2.7x, comfortably within ALFA's desired range.

Here's the intriguing hypothesis: Sigma, flush with record cash flow and low leverage, may be positioned to absorb a significant portion of ALFA's debt, enabling the Alpek spin-off without requiring extensive asset sales. This would leave Sigma as the dominant force within the newly restructured ALFA, a scenario not explicitly outlined in the transcript, but subtly hinted at.

Adding further intrigue, Sigma is aggressively extending its debt maturity profile. They recently settled €600 million in senior notes due in 2024 using long-term bank loans and placed nearly $600 million in local notes, extending their average debt maturity to 4.6 years. Roberto Olivares, Sigma's CFO, mentions further local note issuances in Q2 2024, specifically to refinance existing debt. This focus on long-term debt suggests a deliberate preparation for a potentially larger debt burden. [ALFA Q1 2024 Transcript] (https://seekingalpha.com/symbol/ALFFF)

The transcript doesn't explicitly state that Sigma will be directly absorbing ALFA's debt. However, the emphasis on Sigma's robust EBITDA generation, the specific net debt target of $2.5 billion (aligning perfectly with Sigma's projected leverage), and the strategic debt maturity extension all point towards a scenario where Sigma assumes the financial heavy lifting for the Alpek separation.

Debt and EBITDA Projections

The following chart illustrates the projected debt and EBITDA for ALFA and Sigma, assuming Sigma absorbs a portion of ALFA's debt. [ALFA Q1 2024 Transcript] (https://seekingalpha.com/symbol/ALFFF)

While analysts are focused on ALFA's asset monetization plans, this silent symphony playing out between ALFA and Sigma, with the latter potentially taking the lead role in debt management, may be the real strategic maestro worth watching.

"Fun Fact: ALFA's history is intertwined with the growth of Monterrey, Mexico. Their headquarters, a potential asset for monetization, is a landmark in the city, symbolizing ALFA's influence in the region's economic development. Will this landmark also mark a pivotal shift in power within the conglomerate itself? Only time will tell."

Reference: ALFA Corporate Website