Commercial Metals to buy U.S. assets from Brazil's Gerdau for $600 million
By Bob Tita
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 3, 2018).
Texas-based Commercial Metals Co. said it plans to acquire assets from a Brazilian rival that would double its share of a key construction material.
The company plans to pay $600 million in cash for the U.S. steel-reinforcing-bar assets of Brazil's Gerdau SA, adding four mills and 33 fabrication plants.
Gerdau's exit from the U.S. rebar market would leave Commercial Metals and North Carolina-based Nucor Corp. as the two dominant domestic suppliers of rebar, which is used to strengthen concrete used for commercial buildings, bridges and road projects.
Analysts on Tuesday said the move could further reduce pricing pressure, much of it coming from foreign steel companies. Rebar imports were on pace to drop 17% in 2017, according to the Commerce Department. Tariffs and higher prices for the scrap steel used to make it discourage foreign producers from selling rebar in the U.S. at discounted prices.
The proposed deal would increase Commercial Metals' steelmaking capacity by about 60% to 7.2 million tons a year. Its share of rebar consumed in the U.S. would rise to about 40% from about 21%, analysts at Jefferies estimated.
"This acquisition represents a unique opportunity to acquire quality assets," Commercial Metals Chief Executive Barbara Smith said during a call with analysts. "Having the larger footprint and a larger geographic presence gives us all sorts of options."
Commercial Metals shares rose 6.8% on Tuesday to $22.77.
Domestic rebar producers are aiming to add production closer to where rebar is used, to reduce transportation and warehousing expenses.
Commercial Metals, based in the Dallas suburb of Irving, is counting on an improving rebar market to support its investment in the Gerdau plants.
The company and Nucor are both building new mills in anticipation of rising demand for rebar from expanding construction activity in the U.S. this year. Analysts said the rebar market would further benefit from a comprehensive U.S. infrastructure program being discussed by the Trump administration.
Profits have been lackluster in recent years as a rising volumes of low-cost foreign rebar drove down prices in the U.S. Ms. Smith said Gerdau's plants have been operating well below their maximum production rate. "Margins have been quite compressed," she said.
The sale will reduce Gerdau's steel-making capacity in North America by about 23%. It will continue to operate mills that produce other long-length steel products, such as bars and beams, used in manufacturing and construction.
The company is undergoing a major structural transformation in Brazil where steel companies have struggled in recent years amid the country's poor economy. Gerdau faces added stress from a criminal investigation in Brazil and a management shake-up. The company's founding family last year relinquished management duties after more than a century. A new chief executive this week took over for André Gerdau Johannpeter.
Mr. Johannpeter, who is vice-chairman, said the sale to Commercial Metals will allow the company to be more profitable by focusing on "better return opportunities in the markets where we operate."
Brazilian prosecutors filed charges last year against a tax director at Gerdau and several other consultants and lawyers linked to the company, accusing the men of agreeing to bribe officials as part of a nationwide tax-evasion scheme. Gerdau denied the charges and has said the management changes were not prompted by the alleged wrongdoing.
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