Usiminas shares rally on Techint deal; CSN gains

Wilson Brumer, CEO of Brazil's steelmaker Usiminas, gestures as he speaks during the Reuters Latam Summit in Sao Paulo March 29, 2011.

SAO PAULO (Reuters) - Shares of Brazil's Usiminas surged Monday after Techint Group bought a 27.7 percent voting stake in the troubled steelmaker for $2.7 billion, igniting hopes among minority shareholders for a bid for the company.

Three subsidiaries of Techint, an Italian-Argentine group specializing in steel and pipe production, bought the stake from Brazilian groups Camargo Correa and Grupo Votorantim and Usiminas' employee pension fund.

The deal aims to integrate long-time partners Usiminas and Techint at a time the former faces mounting competitive and cost pressures and an unsolicited bid from arch-rival CSN (CSNA3.SA). Techint joins Nippon Steel Corp (5401.T) in the group that controls Brazil's biggest producer of steel products for the auto industry.

Usiminas Chief Executive Wilson Brumer said the deal with Techint does not imply a change of control in the company -- signaling that minority shareholders will not receive an offer for their shares.

Common shares (USIM3.SA) of the Belo Horizonte, Brazil-based Usiminas rose as much as 5.3 percent, their first gain in six sessions. But the shares lost most of those gains following Brumer's comments and were up just 0.8 percent at 19.87 reais in early-afternoon trading in Sao Paulo.

However, Usiminas preferred shares (USIM5.SA) jumped as much as 6.6 percent to 11.30 reais.

"We stated previously that if a bid for Usiminas shares were to materialize, we did not believe it would necessitate a mandatory takeout offer for minority holders" of common shares, Jonathan Brandt, an analyst with HSBC Securities in New York, wrote in a note to clients.

Techint's steel unit, Ternium (TX.N), which acquired the bigger chunk of Usiminas stock in the deal, might be using the transaction as a way to buy footprint in Brazil, one of the most protected steel markets in the Americas.

Analysts voiced concerns about the price paid for the Usiminas stake by the three Techint units -- Ternium, sister company Tenaris, a maker of seamless pipes, and Argentina's Siderar.

According to a statement by Ternium late on Sunday, Techint and its units will pay 41 percent more than the average price for the shares over the past six months.

"The move comes against market expectations as investors were largely of the opinion that the management was likely to be more disciplined in terms of valuations," said Rodolfo de Angele, an analyst with JPMorgan Securities in Sao Paulo.

FOOTPRINT IN BRAZIL

Ties between Usiminas and Techint go back more than 10 years. Usiminas sold a 14 percent stake in Ternium earlier this year and participated in the privatization of Siderar more than a decade ago.

Tenaris and Ternium want to enter Brazil to tap a market where consumption of steel products could rise sharply over the next five years, despite a local glut of slabs, plates, and rolled steel products.

Apart from an expected surge in purchases of steel products following a $1.1 trillion, four-year government-sponsored infrastructure investment plan, mills could benefit from additional demand to build sport venues for the 2014 soccer World Cup and the 2016 Olympics.

Tenaris (TS.N) could also gain access to the sub-salt plan, the world's biggest investment program for deep-sea drilling, which is expected to help Brazil more than double oil output by the end of the decade.

The local car industry, strong compared with that in other parts of the world, has also helped keep demand for flat steel high in Brazil. Usiminas' main customer is Brazil's auto industry.

Apart from battling for share in the local flat steel market with ArcelorMittal (ISPA.AS), the world's biggest steelmaker, Ternium will face CSN and local giant Gerdau (GGBR4.SA), the world's second-biggest producer of long steel.

Analysts see no strong rationale for Techint's purchase of a split-controlling stake in Usiminas, currently struggling with soaring raw materials costs, poor access to energy sources, competition from imports and weak pricing power.

Ternium is trying to cut its dependence on third-party supply of slabs, but Usiminas does not offer a solution for that. Usiminas is busy seeking energy and iron ore self-sufficiency and canceled its Santana do Paraiso slab project last year due to expected low returns.

Brumer said plans to ramp up capacity in slabs is "not under discussion at the moment." He noted that Brazil is not competitive in slabs, a market facing a glut around the world.

Shares of Ternium, which soared as much as 8 percent earlier, were up just 0.4 percent in early trading in New York. Tenaris jumped 7.4 percent.

Tenaris-Confab CNFB4.SA, a Brazilian subsidiary of Tenaris, tumbled 11 percent after Techint said the Usiminas stake purchase would be financed with cash and debt.

The Techint-Usiminas deal leaves CSN out of the controlling group and with little chance of winning a board seat in its rival. CSN had offered 40 reais a share to Votorantim and Camargo for their Usiminas stake, according to recent media reports.

Shares of CSN (CSNA3.SA) jumped 3.6 percent to 14.79 reais, their biggest daily intraday gain since November 11.

According to Citigroup analyst Alex Hacking, Ternium could buy CSN's 20 percent preferred stake in Usiminas to "average down Ternium's acquisition cost and increase economic leverage to any Usiminas turnaround."

(Reporting by Guillermo Parra-Bernal; editing by John Wallace)