Zacks_Analysts' Blog : GGB Offers Up Shares - Analyst Blog

Brazilian steel producer Gerdau S.A. (GGB) recenty announced plans to raise funds from the global market through issuance of common and preferred shares.  It is anticipated that the offering, to be conducted in two phases, would raise roughly R$3.8-R$4.2 billion and be utilized to fund the company's future capital investment plans.

The primary offering will consist of issuance of roughly 68 million common shares and 203.8 million of preferred shares globally. Preferences will be given to existing shareholders residing in Brazil. Metalurgica Gerdau S.A., a prime shareholder, is very likely to invest in common shares so as to maintain its interest after the proposed capital increase.

The second offering will consist of issuance of preferred shares owned by the shareholders of Metalúrgica Gerdau S.A. and Gerdau BG Participações S.A. Investors will have the option to receive their preferred shares in the form of American Depository Shares (ADS).

Gerdau S.A. is the second largest steel producer in the world and the largest in the Americas. Exiting the fiscal year 2010, the company’s equity amounted to R$20.1 billion, with share capital accounting for 78% of the total.

We believe the company is in an advantageous position to leverage from the growing world steel market, with the Brazilian market emerging stronger with demand emanating from the manufacturing and construction industry. Moreover, the company’s continuous investment in mineral resources is an encouraging attribute.

However, risks arising from volatile raw material prices, foreign currency fluctuation, cyclicality of the industry and increasing competitive threat create a challenging business environment for Gerdau. The company faces stiff competition from peers like Companhia Siderurgica Nacional (SID) and privately-held Arcelor Mittal (MT).

We currently maintain an Underperform recommendation on the stock.