Gerdau S.A. is one of the biggest steelmakers in the Americas specializing primarily in long steel products such as reinforcing steel and servicing the civil construction, automotive, agricultural machinery and mining sectors. Chaired by Jorge Gerdau Johannpeter, great-grandson of the company’s founder, the steelmaker has its roots in the Brazilian state of Rio Grande do Sul in southern Brazil when German immigrant Johann Heinrich Kaspar Gerdau arrived there in his 20s back in the late 1800s and decided to engage himself in heavy industry manufacturing after buying a nail factory in Porto Alegre. From these humble beginnings the company has grown enormously with sales expected to exceed $ 10 billion this year. In fact, with an installed capacity to produce 25 million metric tons of steel a year and presence in 14 countries across the entire American continent while currently employing around 50,000 workers, the entity is a massive and vertically integrated steel operation containing a network of 58 steel mills, 21 downstream operations, 94 fabricated reinforcing steel facilities, 4 flat steel service centers, 80 retail locations, 32 scrap metal recycling facilities, 4 iron ore mines and 2 private seaport terminals. As a result, Gerdau is by far the biggest long steel producer in the continent and likewise the biggest recycler of scrap metal in the Western Hemisphere. Overall, with presence here in America through ownership of a wholly-owned subsidiary known as Gerdau Long Steel North America Corporation, the company contains a vast web of mini-mills, downstream operations and the biggest scrap metal recycling operation in North America after buying several steelmakers in the subcontinent including Ameristeel Corporation. Accordingly, producing 10 million metric tons of finished long steel products annually, the company trades as an ADR on the NYSE, under the ticker symbol (GGB), as well as on the BM&F Bovespa and the BME in overseas Europe.
Moreover, although Gerdau is fairly priced as a stock, its controlling holding company trading in Brazil and known as Metalúrgica Gerdau S.A. is underpriced. As a consequence, we have a scenario involving a typical holding company arbitrage being possible as we speak. In fact, Gerdau currently fetches a little more than $ 10 billion in market value and thus trading at a fairly 13 times earnings while its controlling holding company trades at nearly $ 3 billion of market value and consequently, fetching a sizable discount to NAV because if I’m not mistaken, the only asset of Metalúrgica Gerdau is its 51% shareholding in Gerdau corresponding to a NAV of $ 5 billion while trading for only $ 3 billion as I said before. Accordingly, the arbitrage that should be implemented is shorting Gerdau and using the proceeds to go long with Metalúrgica Gerdau because sooner or later spread convergence will start gaining ground and consequently, a lucrative stock market arbitrage is feasible right now.
To conclude, Gerdau is a massive and vertically integrated steel operation like I said before while its controlling holding company trades at a discount to NAV making an arbitrage of spread convergence possible. In addition, the steelmaker has solid finances with fairly indebtedness of roughly $ 8 billion while containing assets of some $ 24 billion across the vast lineup of PPE including $ 1 billion in cash on hand. The arbitrage in question is safe and it will certainly payoff beautifully to whoever decides to act on it.