Ternium Shareholders Seen Losing Two Decades in Brazilian Steel: Real M&A

Owning steel in Brazil has never been so expensive.

The Techint Group, through its Ternium SA and Tenaris (TS) SA units, last week agreed to pay 5.03 billion reais ($2.7 billion) for a 27.7 percent voting stake in Usinas Siderurgicas de Minas Gerais SA (USIM3), Brazil’s second-largest producer of the metal. The offer of 36 reais a share was 58 percent more than Usiminas’ average price in the previous 20 days, the biggest premium for a steel deal in Latin America and the second-highest ever globally, according to data compiled by Bloomberg.

Ternium, the second-largest steelmaker in Latin America, and Tenaris, the world’s biggest maker of seamless pipes, are spending a record premium to thwart a takeover attempt by Cia. Siderurgica Nacional SA. While the deal gives Techint a foothold in Brazil for flat steel used in cars and appliances, it is paying almost six times the average price that steelmakers command versus their sales as Europe’s sovereign debt crisis and slowing Chinese demand drive down global prices for the metal.

“The logic is difficult to understand,” Eric Conrads, who manages $1.2 billion in Latin American stocks at ING Groep NV in New York, said in a telephone interview. “They became stubborn about Brazil. When you see where you are on the global scenario, it’s not like you are in the best moment to start making acquisitions. You really have to take a 20-year look to see the synergies and they don’t even specify what synergies.”

Common shares of Usiminas climbed 4.3 percent to 19.28 reais as of 2:40 p.m. in Sao Paulo. American depositary receipts for Ternium (TX) rose 5.3 percent in New York, while those of Tenaris gained 2.5 percent.

‘Strategic Opportunity’

The press office at Belo Horizonte, Brazil-based Usiminas didn’t address a request for comment on the price that Techint paid for its stake.

Gustavo Pernalete, a spokesman at Ternium in San Nicolas, Argentina, declined to comment on its purchase of Usiminas stock. Stefania Argento, a Milan-based spokeswoman for Tenaris, said in an e-mail joining the controlling Usiminas group is a “strategic opportunity” for its unit Confab Industrial SA, the Sao Caetano do Sul, Brazil-based maker of steel tubing. Usiminas is Confab’s main supplier of steel, she said.

Techint is controlled by the Rocca family through Luxembourg-based San Faustin SA. Techint was founded by Italian engineer Agostino Rocca in the 1940s and began operating in Argentina a few years later, when Rocca emigrated to the South American country, according to the company’s website.

Acquisition Detail

Techint will buy 139.7 million ordinary shares of Usiminas from Camargo Correa SA, Grupo Votorantim and Usiminas’ workers pension, Ternium said in a Nov. 27 statement. Techint will own 27.7 percent of Usiminas’ voting shares and join a controlling group that includes Nippon Steel Corp. and the employees’ pension fund. The group will have 63.9 percent of voting rights.

ADRs for Ternium, which is buying most of the stock, slid 17 percent after the announcement.

At 36 reais a share, the price that Techint agreed to pay is the highest premium for any billion-dollar steel deal, apart from the 87 percent premium that Rotterdam-based Mittal Steel Co. offered in its $36 billion takeover of Luxembourg-based Arcelor SA in 2006, according to data compiled by Bloomberg.

The agreement with Techint also values Usiminas at 2.9 times its per-share revenue in the past 12 months, almost twice as high as any other steel producer in the world and more than the industry average of 0.5 times sales, the data show.

Analysts estimate that net income at Usiminas will plunge 92 percent this year as raw material costs increased and demand for flat steel weakened.

Relative Value

While earnings are anticipated to rebound in the next three years, Usiminas’ profit in 2014 will still be less than the 1.57 billion reais it earned last year, data compiled by Bloomberg show. In 2005, net income reached a record 3.9 billion reais.

Net income at Porto Alegre, Brazil-based Gerdau SA, the nation’s biggest steel producer, will decline 13 percent in 2011, while earnings at CSN, as Sao Paulo-based Cia. Siderurgica Nacional is known, will increase by 18 percent, according to analysts’ estimates compiled by Bloomberg.

“It seems like they paid a premium, which may be exaggerated, to be able to be in the Brazilian market,” Eduardo Favrin, who oversees about $3.2 billion as head of equities at HSBC Global Asset Management’s Brazil unit in Sao Paulo, said in a telephone interview. “It seems to have been quite above the reasonable price. There are other companies with better fundamentals than Usiminas.”

Steel Demand

Ternium said the premium it offered was important to beat competing bids, which included one from CSN, Brazil’s third- biggest steelmaker. CSN had been buying shares of Usiminas in the open market since at least January, when the company said it may boost holdings to a level that could change Usiminas’ management or control structure.

CSN said it held 20.14 percent of Usiminas preferred stock and 11.66 percent of common shares as of Nov. 18.

Techint is buying a stake in Usiminas as Europe’s sovereign debt crisis spreads from Greece to Portugal and Italy, slowing a worldwide economic recovery and dampening steel demand.

Global economic growth will slow to 4 percent this year from 5.1 percent in 2010, according to a forecast from the International Monetary Fund. China, the world’s largest user of steel, grew 9.1 percent last quarter, the slowest pace since 2009, the nation’s statistics bureau said.

Since reaching a two-year high in February, hot-rolled steel coil, a benchmark for steel products, has fallen 15 percent in China to 4,227 yuan ($665) per metric ton, data compiled by Bloomberg show.

Deal Rationale

In Brazil, steel consumption fell in October for the eighth consecutive month, according to a Nov. 23 report by Jonathan Brandt, an analyst at HSBC Holdings Plc.

Demand for steel in Brazil has weakened as a central bank survey last month showed that its economy will expand by 3.1 percent this year, less than half the 7.5 percent rate in 2010.

“Brazil used to be a good place to make steel, now it’s not as interesting,” Greg Lesko, managing director of Deltec Asset Management LLC, said in a telephone interview from New York. Therefore, “why would somebody come in with a premium bid for a steel company?” he said.

Christian Reos, an analyst at Buenos Aires-based brokerage firm Allaria Ledesma & Cia. Soc. de Bolsa, says the Usiminas investment should lower costs at Ternium and Tenaris and give them increased bargaining power for raw-material purchases.

The purchase also gives the companies greater access to Latin America’s largest steel market, he said.

Tagging Along

Brazil overtook the U.K. to become the world’s sixth- biggest economy this year and will surpass France by 2015, a forecast from Washington-based IMF showed. Construction projects for the 2014 World Cup and 2016 Summer Olympics may also drive demand for locally produced steel.

“Ternium had been looking to enter the Brazilian market for a long time, and this was its opportunity,” Reos said in a telephone interview. “There were various groups interested in Usiminas and that really means you have to pay a premium. Ternium not only achieves entry into Brazil via the biggest flat steel producer, but it also prevents other Latin American competitors from growing.”

The cost of Techint’s investment in Usiminas may balloon if it is forced to pay minority shareholders that have so-called tag-along rights. Under Brazilian securities rules, owners of voting stock are entitled to receive at least 80 percent of the price paid to controlling stakeholders if the company is bought.

While Usiminas Chief Executive Officer Wilson Brumer said on Nov. 28 that the rule doesn’t apply because the Techint transaction doesn’t change the composition of the controlling group, Caixa de Previdencia dos Funcionarios do Banco do Brasil, Brazil’s largest pension fund, said in a Dec. 1 statement that it is analyzing the deal.

“It does seem to me they are paying way too much,” Deltec Asset’s Lesko said. “There aren’t any obvious synergies. Brazil is a place you would want to have exposure, so I understand that, but why overpay, I don’t know.”

To contact the reporters on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net; Laura Price in Buenos Aires at lprice3@bloomberg.net.

To contact the editor responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Dale Crofts at dcrofts@bloomberg.net.

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