By Andrew Willis
Steel maker Gerdau (GGB) is going to have to dig deeper to buy out minority shareholders in TSX-listed subsidiary Gerdau Ameristeel (GNA), if the first reaction to the Brazilian parent’s $1.7 billion (U.S.) takeover offer proves correct.
Gerdau is attempting to clean up its corporate structure by taking out the 33.7% stake public stake in its North American unit - emulating moves by a series of foreign companies over the past decade.
As in other buyouts, there’s likely to be a fight over price. Minority shareholders know they enjoy a fair degree of leverage, and activist institutions such as Jarislowsky, Fraser have made a good living out of trying to squeeze every penny from buyers.
Gerdau has started a conversation by offering $11 (U.S.) per share. That’s a rich 53% premium to where this stock was trading, prior to the deal. But these offers are never rich enough to silence those investors who see no downside in asking for more. The speculation on the trading desks Wednesday is that when the dust settles, Gerdau Ameristeel will fetch $12.
The starting point for making this argument is the fairness opinion on the deal that Gerdau Ameristeel’s special committee obtained from RBC Dominion Securities. It pegged the value of the subsidiary at between $11 and $13 a share. J.P. Morgan is advising the Brazilian parent on the offer.
“Gerdau can put in an extra dollar and still be within the valuation range, and given the traditional strength of minority shareholders in these situations,” said one trader who focuses on merger situations. He predicted the Brazilian parent will end up paying $12.
However, expectations on this deal should be tempered, as Scotia Capital pointed out that Gerdau enjoys a number of advantages as it makes its pitch. Trading desk analyst Catharine Sterritt described the offer as “effectively "pre-packaged" in that the Gerdau Ameristeel special committee has unanimously agreed to recommend the proposed buy-out, subject to documentation, despite the bid being at the low end of the $11 - $13 independent valuation range.”
Ms. Sterritt, who focuses on takeover and spin out as what’s known as event driven/catalyst strategist for Scotia, also pointed out:
- overall weak market conditions may make shareholders less willing to risk the premium to market being offered.
- $11 is in our view "fair" at approximately 7.2 times consensus 2011 EBITDA and a 20% premium to consensus 1- year target price of $9.15.
- the deal is structured as a “plan of arrangement” rather than a tender offer, which “dramatically shortens the period for “dissidents” to accumulate a position of influence. Shares acquired after the June 18 record date are effectively disenfranchised.”
Gerdau Ameristeel has traded below $10 for the past two years. Major shareholders include mutual fund managers Goodmans & Co. and IG Investment Management.