One day after securing a $4.22 billion (U.S.) deal to acquire Texas-based Chaparral Steel, Mario Longhi makes it clear this won't be the last consolidation move for Gerdau Ameristeel.
The company's president and CEO considers consolidation an inherent part of the business.
"We are a consolidator ... it's an unquestionable pillar of our strategy," Longhi said yesterday.
The acquisition, announced late Tuesday, was the latest consolidation move to hit the steel industry and will make Gerdau Ameristeel the fourth-largest steel producer in North America.
Longhi's statements came after Gerdau Ameristeel agreed to acquire Chaparral at $86 per share in cash. For Chaparral, the move means a 13.6 per cent bump in share prices.
Shares in Gerdau Ameristeel, created in 2002 from a merger of international companies with Canada's Co-Steel Inc., lost $1.20 (Canadian), or 7.3 per cent, to close at $15.27 in trading yesterday on the Toronto Stock Exchange.
Longhi called Chaparral a "perfect fit" for his company.
"It is a premium asset in the non-residential construction industry with good diversification of products," he said.
Still, analysts appeared to be divided on the acquisition.
Analyst Michael Willemse of CIBC World Markets said the transaction appears overvalued. Gerdau Ameristeel overpaid by about $500 million (U.S.), he said.
"They just perhaps wanted to maintain a position as a large player in the steel industry in North America. Perhaps there is long-term reward to being more diverse in your product line, but we will have to wait and see," Willemse said. "But in the short term, investors will be disappointed with how much they had to pay."
Analyst Mark Parr from KeyBanc Capital Markets doesn't agree.
"It's an excellent strategic combination," said Parr, who recommended an aggressive buy.
The deal represents the coming together of two strong players in the steel industry. Chaparral is the second-largest producer of structural steel beams and Gerdau Ameristeel the second-largest mini-mill steel producer in North America.
But the Chaparral acquisition wasn't a done deal by any means.
"It was a very competitive process and there were a number of other players in the process," said Barbara R. Smith, incoming chief financial officer of Gerdau Ameristeel.
Meanwhile, Moody's Investors Service said yesterday it would be placing Gerdau SA and U.S. subsidiary Gerdau Ameristeel Corp's credit ratings under review for a possible downgrade.
New York-based Moody's may downgrade the ratings from Ba1, one level below investment grade. About $800 million of debt is affected, Moody's said.
Chaparral Steel reported a record net income of $80.2 million, or $1.65 per diluted share for its 2007 fourth quarter.
"This was our strongest quarter ever and was a great finish to the best year in the company's history," president and chief executive Tommy Valenta said in a statement.
Gerdau Ameristeel is based in Toronto with offices in Tampa, Fla. It's 67 per cent owned by Brazilian steel maker Gerdau SA, which supports the deal and has agreed to subscribe to any equity issue to keep its current level of ownership.
The deal still needs the approval of Chaparral's shareholders.
source:thestar.com
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