Gerdau to Merge Villares & Prontofer - Analyst Blog

Brazilian steel producer Gerdau S.A. (GGB) intends to merge Acos Villares S.A. (“Villares”) and Prontofer Serviços de Construção Ltda. (“Prontofer”) in order to integrate the activities of the three companies. Pursuant to the completion of the merger, both Prontofer and Villares will lose their individual identities with their assets, rights, properties, obligations and responsibilities transferred to Gerdau.

Gerdau has received a favorable response for the proposed merger from its Audit Committee. Further, on December 30, 2010, Extraordinary General Meetings of Gerdau and Villares have been called to resolve on the merger of the two companies while on the same day a resolution on Prontofer's merger will also be taken.

Prontofer's share capital is jointly held by Gerdau BG Participações S.A. and Grupo Gerdau Empreendimentos Ltda. while Villares is one of Gerdau's controlled companies. The merger of the three companies is expected to generate economies of scale, reduction in ineffectual costs along with better corporate structure for Grupo Gerdau and allocation of Gerdau's shares to Prontofer and Villares.

According to the proposal, Prontofer's partners will receive one common or preferred share of Gerdau for every 22.247601 shares of Prontofer held by them while Villares' shareholders will receive one preferred share of Gerdau for every 24 common shares held by them.

Gerdau's interest in Villares will be cancelled on the date of the merger and will be appropriated as an investment replacement. The company does not hold any interest in Prontofer. Net equities of both Prontofer and Villares are expected to be merged into Gerdau by their book at values audited on November 30, 2010.

Gerdau will issue approximately 9.0 million new common shares and 50.5 million new preferred shares to Prontofer's partners and roughly 25.9 million new preferred shares to Villares' shareholders. The new issuance related to Prontofer and Villares will increase Gerdau's share capital by R$1.3 billion and R$144.5 million, respectively. It is the company's anticipation that costs and expenses related to the merger, to be entirely borne by Gerdau, would amount to approximately R$1.7 million.

Gerdau S.A. is one of the leading Brazilian steel makers, which stands at an advantageous position to leverage from the growing world steel market. Global steel demand is projected to increase by 13% in 2010 and 5% in 2011, according to the World Steel Association. The Brazilian steel industry is also expected to get a boost as steel demand from the manufacturing and construction industries grows.

We currently maintain an Outperform recommendation on the stock.