Billionaire Roccas Lose 76% After Usiminas Bet: Corporate Brazil

Ternium and Tenaris Chairman Paolo Rocca
Paolo Rocca is chairman of Ternium and Tenaris. Photographer: Seokyong Lee/Bloomberg

Usiminas Siderurgicas de Minas Gerais SA, Brazil’s second-biggest steelmaker, is an investment that keeps on losing for Italy’s billionaire Rocca family.

The Rocca’s Techint Group has lost 76 percent on its 5.03 billion-real ($2.49 billion) purchase since November, when it agreed to pay 36 reais per voting share for a 27.7 percent stake in Usiminas, as the company is known. The stock slumped to 8.70 reais on June 8 in Sao Paulo as investors anticipate Brazil’s No. 2 steelmaker by output will struggle to increase profits.

Usiminas, based in Belo Horizonte, has underperformed Gerdau SA and Cia. Siderurgica Nacional SA since the Roccas paid a 58 percent premium over the 20-day moving average to join Japan’s Nippon Steel Corp. in its controlling group. The stock has dropped on fading prospects of other companies seeking to enter the control group, according to Barclays Plc., while a global steel glut and lower demand has curbed profitability.

“Techint is trying to find a way to revert this situation as soon as possible but the options they have are limited,” Rafael Weber, who helps manage about 7 billion reais at Geracao Futuro Corretora in Porto Alegre, Brazil, said in a telephone interview. “I don’t see any clear recovery this year.”

Techint, through its Ternium SA and Tenaris SA units, bought the stake to gain greater access to the Brazilian market for flat steel used in cars and home appliances and to iron-ore assets in the southeastern Brazilian state of Minas Gerais.

First Quarter Loss

Usiminas posted a first-quarter net loss of 70.8 million reais on April 23, its worst in three years and its second loss in five quarters as sales fell and a weaker real boosted the company’s financial expenses. Crude-steel output declined for a sixth consecutive quarter, to 1.67 million metric tons, as the Brazilian government’s efforts to spur economic growth failed to stem a plunge in car sales.

Techint is controlled by the Roccas through Luxembourg-based holding company San Faustin SA. Paolo Rocca is chairman of Ternium and Tenaris and brother Gianfelice chairs San Faustin. They had a net worth of 8.5 billion euros ($10.6 billion) as of August 2011, according to Milan-based newspaper Milano Finanza, which listed them as first in its list of Italy’s largest publicly traded fortunes.

Usiminas’s profit margins averaged 4 percent at its steel unit during the first quarter, similar to those in 2011 and lower than the 16 percent posted in 2010. Gerdau’s gross profit margins in Brazil averaged 13 percent in the first quarter while CSN has profit margins of 19 percent at its steel business.

‘Complex Situation’

“Usiminas is in a very difficult and complex situation, and this is reflected in the figures,” Chief Executive Officer Julian Eguren said on an April 24 conference call with analysts.

An Usiminas official in Belo Horizonte who asked not to be named because of corporate policy declined to comment. The Techint Group also declined to comment.

Brazil new vehicle sales sank 9.7 percent in May from a year earlier and were 4.8 percent lower in the first five months of the year, according to the country’s car dealership association, or Fenabrave, even as the Central Bank cut interest rates and lowered taxes on consumer loans to revive growth in the world’s biggest emerging market after China.

The Brazilian economy grew 0.2 percent in the first quarter, less than half the pace analysts predicted in a Bloomberg survey and slower than Japan’s 1 percent expansion. Brazil expanded at a 0.8 percent rate in annual terms from January through March, less than the 2 percent growth registered by the U.S. and almost a sixth of the 4.6 percent growth of Mexico, Latin America’s second largest economy.

‘Lot of Optimism’

“There has been an awful lot of optimism in Brazil of a rebound in the second half, we are very close to that and things don’t seem to be getting better”, Jonathan Brandt, an equity analyst at HSBC Holdings Plc, said by telephone from New York. “If anything, they seem to be getting a little bit worse.”

Brandt lowered his recommendation on Usiminas’ preferred shares to the equivalent of sell on Feb. 7, citing “high operating costs, low utilization rates, and lack of integration.”

Usiminas’ preferred shares rose 4.7 percent to 8.05 reais as of 2:33 p.m. in Sao Paulo, while the voting shares rose 4 percent to 9.05 reais.

Moody’s Cut

Moody’s Investors Service lowered Usiminas’s credit rating two levels to Ba2 on May 10, making it the first Brazilian company to lose its investment grade this year. The downgrade reflects the “continued deterioration” in the company’s operating results, Moody’s said in a statement at the time.

“We again exercise caution on the pace of recovery and believe a more meaningful improvement is years away,” Barclays analysts led by Leonardo Correa in Sao Paulo said in a May 23 research note to clients.

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