Ternium Usiminas Buy Prompts Questions

Ternium’s agreement to acquire a BRL5.03bn ($2.7bn) stake in Brazil’s Usinas Siderurgicas de Minas Gerais (Usiminas) has left analysts scratching their heads. The global steelmaker will pay BRL36.00 per share for 139.7m common shares, or 27.7%, in a transaction seen as expensive. The price compares to a BRL19.70 previous closing price, and represents an enterprise value of 25x 2012 Ebitda. “Typically, Ternium has paid reasonable multiples of 6x in previous M&A transactions,” Luis Fornari, analyst at Barclays, tells LatinFinance. Usiminas’ stock trades at roughly a 50% premium to similar companies at an EV/2012 Ebitda of 10x. At these new levels, Fornari says, many investors are trying to understand Ternium’s reasoning. Ternium officials told analysts that access to the Brazilian market was a key motivation as well as the possibility of joint iron ore investments with Usiminas. Ternium’s interest in slab production in Brazil may also be misguided. Exporting slabs from Brazil is not profitable, says Fornari, and the domestic market is already well supplied. In the deal, Ternium acquires 84.7m common shares, its Siderar unit acquires 30m and its TenarisConfab unit acquires 25m. The three are buying the shares from Grupo Votorantim and Camargo Correa – both of which had been seeking an exit – and from the Caixa dos Empregados Usiminas, the company’s pension fund. Ternium and Siderar will finance their BRL4.1bn portion through cash on hand and debt, Ternium says, without offering further details. Officials at Ternium and Usiminas could not be immediately reached for comment regarding financing details or advisors on the deal. The deal brings Ternium into the controlling block, it says, of which Japan’s Nippon Steel holds 46.1%, Ternium 43.3% and the employee pension fund 10.6%. Nippon Steel has also raised its stake in the company by purchasing 8.5m common shares from the employees’ pension fund, Ternium says. Usiminas shares have climbed of late as Brazil’s Companhia