GGB's Full Stake in Ameristeel - Analyst Blog

The low-cost steel producer in Brazil, Gerdau S.A. (GGB) in order to acquire the remaining 33.7% stake in its North American unit, Gerdau Ameristeel, offered $1.7 billion or $11 per share, a 53% premium to Ameristeel’s closing price on June 1.

In the North American market, the company operates through its subsidiary, Gerdau Ameristeel. Its North American facilities are based in both the U.S. and Canada. Gerdau's business strategy is focused on the decentralized production of long steel with electric arc furnace (EAF) mini-mills employing continuous casting technology.

At present Ameristeel was operating under its capacity level. Thus, in order to increase its efficiency level it is beneficial to bring that unit to the home country, where the demand for long steel has increased. Steel demand in emerging markets like Brazil is linked to infrastructure investments, a derivative of government expenditures.

Investments in this area are growing continuously, despite the more challenging economic environment worldwide. Full ownership of Ameristeel helps Gerdau to consolidate control of its steel assets and positions it to meet the expected surge in demand.

On the announcement, Gerdau’s and Ameristeel’s stock price rose a respective 4.5% and 55%. However, the steel industry is highly cyclical, and the demand for steel products and the financial condition of companies in the steel industry are generally affected by macroeconomic factors.

The economies of steel-producing countries, including trends in the automotive, construction, home appliances and packaging & distribution industries, will also significantly affect Gerdau. Thus, we maintain our Neutral recommendation.

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