Why do steel producers in the so-called Bric countries (Brazil, Russia, India and China) seem to go crazy when shopping abroad?
Gerdau, a Brazilian steel maker, joins Tata and Hindalco of India, and Russia’s Evraz, in forking over big bucks for a developed-world rival. It is paying $4.22 billion (Rs17,049 crore) in cash to acquire Chaparral Steel.
The strategy looks sensible enough. With Chaparral, Gerdau becomes the second-largest maker of structural steel products and No. 4 American steel player. That confers more than bragging rights. Gerdau hopes to squeeze $55 million of costs from the Midlothian, Texas, based Chaparral. Unfortunately for Gerdau shareholders, the transaction’s finances don’t stack up.
Consider the value of those synergies today to shareholders of Gerdau Ameristeel, the US-listed subsidiary that’s making the purchase. After taxes—and once discounted back to reflect the fact they don’t arrive until 2008—they’re probably worth about $350 million to shareholders. The trouble is that Gerdau is paying about $1.04 billion more than Chaparral was worth before it put itself up for sale in April.
Subtract from that figure the implied worth of the promised cost cuts and it looks like Ameristeel has overpaid to the tune of $700 million. The company’s investors, however, have not punished Gerdau so viciously. They marked down Ameristeel’s market capitalization by just under $400 million.
That’s Brazilian for benefit of the doubt.