CSN to Acquire Spanish Assets - Analyst Blog

Brazil-based Companhia Siderúrgica Nacional (SID), or CSN, aims at strengthening its portfolio by acquiring steel and cement assets in Spain. The steelmaker entered into talks with Grupo Alfonso Gallardo, S.L.U. (AG Group) to acquire the latter's interest in Cementos Balboa S.A. (Balboa), Corrugados Azpeitia, S.L. (Azpeitia) and Corrugados Lasao, S.L.U. (Lasao).

As per the memorandum of understating (MOU) signed, the transaction is valued at approximately €352 million with an additional €30 million for working capital. The valuation is subject to revisions as a result of due diligence. Negotiations are expected to consummate in the first quarter of 2011.

The transaction will increase Companhia Siderúrgica's exposure to the cement and long steel sectors. Balboa, a cement and clinker producer has an installed production capacity of 1.4 million tonnes of cement and 1.1 million tonnes of clinker annually.

Azpeitia, a long steel producer, specializes in the production of rebars with an annual installed production capacity of 1.1 million tones, while Lasao produces electro-welded meshand has an installed production capacity of 200,000 tonnes per year.

We believe the growth prospect of Companhia Siderurgica is encouraging considering the various projects that are being carried out by the company. Its entrance into the cement business seems to be an added advantage.

According to the World Steel Association, global steel demand in 2010 is likely to increase by 13.1% in 2010 and 5.3% in 2011. This enhancement is based on recovering economics, increasing private and public capital spending, falling unemployment levels and growth of the emerging economies, especially China and Brazil. Further, Brazil will host the 2014 World Cup soccer championships and the 2016 Rio de Janeiro Olympics.

Despite these positives, the growth momentum gets restricted because of the possibilities of weak results in the quarters ahead, while mounting debt level, high cyclicality, growing competition in the industry and rising manufacturing cost remain the prime causes of concern.

Based on all these factors and anticipating a lack of any positive share price driver, we maintain an Underperform recommendation on the stock.