Twilight Of A Latin Mogul?

How Benjamin Steinbruch's Brazilian empire came apart

Benjamin Steinbruch does not look like a man on his way down in the world. Nevertheless, that's how analysts and the press describe him, now that his grand plan to build a Brazilian conglomerate spanning mining, steel, and logistics is unraveling. But in an interview at his offices in Sao Paulo, the 47-year-old chairman of Companhia Siderurgica Nacional (CSN) was jovial, even upbeat. At one point, he confessed that basketball, not business, had been his first calling. A broken foot and family pressure, however, put an end to that dream.

Now, Steinbruch's hopes of creating a world-class business empire are fading, too. Weighed down by $800 million in debts, he is being forced to cash out of Companhia Vale do Rio Doce (CVRD), the world's largest producer of iron ore. Steinbruch's stake in Light, the Rio de Janeiro electric utility, may also have to go. That's quite a reversal of fortune for one of Brazil's master dealmakers.

Steinbruch burst onto the scene in 1993, when a consortium headed by Vicunha, the textiles group controlled by the Steinbruch and Rabinovich families, picked up Brazil's biggest steelmaker for $800 million at the time of privatization. CSN was widely regarded as overstaffed and inefficient--in other words, a bad bet. But Steinbruch installed new management, slashed staff by nearly 30%, and pumped up production. Profits soared, to a cumulative $1.3 billion from 1993 to 1999, compared with a loss of $6.5 billion for 1979 to 1992. "He was the only one who had the vision to see that CSN's potential had been completely underestimated," says Raphael Biderman, a steel analyst at Fleming Graphus in Sao Paulo.

"GOOD SENSE." A bigger coup followed in 1997, when CSN, along with three partners--NationsBank in Charlotte, N.C., Brazilian asset manager Opportunity, and Brazilian pension fund Previ--paid $3.1 billion for control of state-owned CVRD. "Bringing CSN and CVRD together made very good sense," Steinbruch says. "Both have mining interests, both have steel, both have logistics. It gave us the chance to bring together three sectors in which Brazil is very competitive."

To hear Steinbruch tell it, Brazil's steel industry was due for consolidation--and he was the man to lead that charge. "Our vision of what was best for Brazil was that the restructuring should be led by Brazilian companies," he says. Unfortunately, foreign groups such as Usinor of France spoiled his plan by buying into Brazil.

The French weren't Steinbruch's only problem. Last year, he and his partners at CSN began a debilitating quarrel over management of the steelmaker. Under their original agreement, Previ and Bradesco, Brazil's largest private bank, would get veto power over Steinbruch's decisions in the event that he failed to meet performance targets. But insiders say the targets were fuzzy, allowing Steinbruch to wriggle out of the deal.

The dispute festered until mid-May, when Steinbruch and his partners finally cut a deal. Steinbruch will keep CSN, while his partners will buy out his stake in CVRD. Steinbruch had one big incentive to cash out: He borrowed heavily in dollars to finance his acquisitions. The devaluation of Brazil's currency last year made servicing that debt ruinously expensive.

Now, Steinbruch rules a much reduced fiefdom. CSN is still Latin America's biggest steelmaker and boasts the world's lowest production costs. Yet its return on equity is lower than that of local rivals such as Usiminas. Analysts say CSN would be better off without its nonsteel assets--including railroads, port facilities, and power generation--which tie up capital and produce no return.

Steinbruch says his priority now is to expand CSN in Brazil and seek out partnerships in the U.S. A merger with another Brazilian mill is "perfectly possible" down the road, he says. The empire builder is humbled. But don't write him off yet.

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