Latin American Equity Research. Alfa Agrees to Sell Hylsamex and Sidor Stakes to Techint

Transcription

1 Latin American Equity Research Mexico, May 19, 2005 ALFA Flashnote Mexico Conglomerates STRONG BUY Alfa Agrees to Sell Hylsamex and Sidor Stakes to Techint Luis Miranda, CFA (5255) (05/18/2005) CURRENT PRICE: US$5.62/M$61.78 TARGET PRICE: US$6.15/M$73.00 News Alfa announced that it had accepted an offer from Techint to purchase Alfa 42.5% stake in Hylsamex. The offer will be extended to all of Hylsamex s shareholders and will consist of a US$2,253 million offer (approximately US$3.71 per share) and a US$143 million extraordinary dividend (approximately US$0.24 per share). Company Statistics Bloomberg ALFAA MM 52-Week Range (US$) US$3.12-US$ E P/E Rel to IPC (x) E P/E Rel to Congs. (x) 1.7 IPC (US$) 1,162 3-Yr CAGR (04-07E) 28.2% Market Capitalization (US$ Mn) US$3,278 Float (%) 35% 3-Mth Avg Daily Vol (US$000) 8,230 Shares Outst (ADR NA) 581 Net Debt/Equity (x) 0.5 Book Value per Share (US$) 3.99 Estimates and Valuation Ratios E 2006E Net Earn (M$ bn)) 979 4,350 2,006 1,622 Current EPS Net Earn (US$ mn) Current EPADR P/E (x) P/Sales (x) P/CE (x) FV/EBITDA (x) FV/Sales (x) FCF Yield (%) 18% 31% 14% 7% Div per ADR (US$) Div Yield (%) 4.0% 2.0% 1.4% 1.4% Sources: Bloomberg, Company Reports and Santander Investment estimates. News/Analysis: On May 18, Alfa announced it had accepted an offer from Grupo Techint to purchase its 42.5% stake in Hylsamex. Pursuant to the agreement with Techint, the offer will be extended to all of Hylsamex s series B and L shareholders, conditioned on acceptance by the holders of a majority of all of Hylsamex s outstanding shares. The board of directors of Hylsamex approved the US$2,253 million offer, which is for 100% of the shares (approximately US$3.71 per share, or M$40.80 at M$11.00/US$, which is 5.7% higher than current levels). This would be a public tender offer for Hylsamex shares in an amount equal to US$2,110 million (US$3.47 per share, or M$30.17 per share), with an extraordinary dividend to all shareholders in the amount of US$143 million (M$2.59 per share). Techint also agreed to buy Alfa s 4.5% stake in Sidor for approximately US$107 million. The offers will be made in U.S. dollars and paid in pesos at the exchange rate prevailing on the date of the closing of the transaction. The estimated time for the process is 90 days. Net/Net: We regard this news as very positive for Alfa s stock, believe its effects are not priced in, and reiterate our Strong Buy rating. Due to the limited upside potential for Hylsamex s shares from current levels, we believe that Alfa is the way to play the upside potential in this operation, and thus we recommend a switch from Hylsamex to Alfa. If the transaction is approved, Alfa would receive close to US$1,065 million: US$897 million from the tender offer, US$US$61 million from the dividend, and US$107 million from its stake in Sidor. This represents 86% of Alfa s net debt as of March 2005 and would be used to reduce debt and consider dividend payments and future share buy-back programs. Considering the cash effect of the proceeds, we estimate that Alfa s FV/EBITDA valuation would improve from 7.4x in 2005 to 5.1x, a 31% improvement and a 7% discount to its 5.5x five-year average and a 15% discount to its peers. In terms of NAV, we believe Alfa s discount could widen from 14% to approximately 32%. Valuation and Risks to Investment Thesis: Our year-end 2005 target price of US$6.15 for Alfa is based on an FV/EBITDA multiple of 6.1x, in line with Alfa s average in the period (prior to its highleverage and weak results period). We also used our NAV model as a cross reference The main risks to our investment thesis: (1) higher-thanexpected margin pressure on Alpek and Sigma due to higher cost of raw materials; (2) high exposure to U.S. OEMs; and (3) lower-than-expected economic growth in the U.S. and Mexico. 1

2 Alfa: Agrees to Sell Hylsamex and Sidor Stakes to Techint. ALFA S VALUATION The sale of Alfa s 42.5% stake in Hylsamex, the proportional cash from the dividend, and the US$107 million from Sidor, represent US$ million, or 89% of Alfa s consolidated net debt as of March We believe this is one of the most attractive attributes of the potential transaction: it would be a plain-vanilla, all-cash deal. Management stated in the company s the press release that proceeds would be used to: reduce debt, in order to achieve a capital structure that provides greater flexibility to pursue attractive investment opportunities, as well as to consider dividends for shareholders or a future share repurchase program. No specific amount or distribution was disclosed, but all three options would be accretive for shareholders. Considering the first and full impact of the operations, we estimate that our 2005 EV/EBITDA estimate for Alfa of 7.4 times would improve to 5.1 times, if all the cash were to be used to pay down debt. This would take Alfa to attractive valuation levels, in our view, allowing it to trade at only a 7% discount to its five-year average and only 15% discount to its peers (considering 2005 FV/EBITDA). The following graph shows Alfa s forward-looking FV/EBITDA, with its five-year average and plus and minus one and two standard deviations as a reference. Figure 1. Alfa Forward FV/EBITDA with Five-Year Average and +/- 1 Std. Deviation) A lfa's new 2005 FV /EBITDA multiple w ith 100% of cash used to pay dow n debt. J-00 M-00 J-00 S-00 D-00 M-01 J-01 S-01 N-01 F-02 M-02 A-02 O-02 J-03 A-03 J-03 S-03 D-03 M-04 J-04 A-04 N-04 F-05 M-05 Sources: Company reports and Santander Investment Securities estimates. BASIC SCENARIOS However, we do not believe that Alfa would use all the cash to pay down debt, as Alfa already has a solid financial structure, with interest coverage of 8.4 times and net debt/2005e EBITDA of 1.7 times (as of 1Q05). We believe that once the deal is over and Alfa receives the cash, there be a distribution of resources among the three different options, with the share buy-back program, in our opinion, being the least probable in the medium term. Figure 2 shows three basic scenarios that we believe indicate what the impact would be of the different uses of the proceeds (US$1,65 million): paying down debt, distributing a dividend, or buying back shares. Figure 2. Alfa Basic Scenarios for Uses of Proceeds from Hylsamex s Divestiture Debt Reduction 100% 60% 40% Net Debt (US$ Million) US$170 US$596 US$809 FV/EBITDA 2005E Dividend (% of Proceeds)t 0% 40% 30% US$/Share Yield - 13% 10% Buyback 0% 0% 30% % Share Outstanding % Source: Santander Investment Estimates. 2

3 KEY MILESTONES Alfa s management believes the process could take approximately 90 days to be finalized (by the second half of August). The main milestones would be: - Approval from the Antitrust Commission. - Approval from stock exchange authority (CNBV) for the tender offer. - Tender offer for 100% of Hylsamex B and L shares. - Approval of the offer by Hylsamex s stockholders. - Extraordinary shareholder meeting to approve Hylsamex s US$143 million dividend for shareholders.. - Payment of dividends. - Settlement of tender offer. CONSORCIO SIDERURGIA AMAZONIA LTD. Consorcio Siderurgia Amazonia (Amazonia), owns 59.7% of the integrated Venezuelan steel company Sidor, with the other 40.3% owned by the Venezuelan government. The shareholders of Amazonia are Techint (25.0%), Tenaris (21.2%), Usiminas (16.6%), Siderar (14.4%), Hylsamex (12.0%), Alfa (7.5%), and Sivensa (3.4%). Teching agreed to buy Alfa s effective 4.5% stake in Sidor for approximately US$107 million. Alfa invested directly in Amazonia US$97 million (US$82 million in 1999 and US$15 million in 2003). Tenaris would exchange is share in Sidor for a stake in a new company that would hold the Techint stakes in Siderar, Hylsamex and Sidor. SOME KEY POINTS THAT STILL NEED TO BE CLEARED UP Alfa. How will the cash be used? We believe the main driver will be management s objective for Alfa s long-term financial structure relative to its net debt to EBITDA and interest coverage. Alfa. When the cash is received, will this speed up the Sigma s expansion program? If so, will management focus more on the U.S. effort or on Central America? Alfa. Have all the due-diligence process been completed? Is there more time needed for due diligence and would that affect the amount to be paid by Techint. And, are there another factors that could affect the amount? Techint. Will the shares of NEWCO, holder of Techint s stake in Siderar, Sidor,and Hylsamex be listed in Mexico in the medium term and in other markets, as well. Could this be the way for some investors to hold a regional steel play. Patrick Conrad, our Steel and Mining analyst in Brazil, believes that is important to clarify the following points. First, what happens to the 9.9% participation (16.6% of Consorcio Amazonia, which owns 59.7% stake at Sidor) that Usiminas holds in Sidor and its 5.3% participation at Siderar? Usiminas stated in its 1Q05 results conference call this week that it intends to hold on to its participation in Sidor and Siderar and had no intention of selling its positions or adding to them. We wonder if at some point Tenaris would also be offered a stake in the NEWCO in exchange for Usiminas's participation in Sidor and Siderar. Second, the market was speculating that Gerdau was a potential buyer for Hylsamex s long-steel division. Would a sale of Hylsamex to Techint be negative for Gerdau? In our view, Hylsamex was a possible way for Gerdau to supply long-steel products to the West Coast of the U.S.; however the concerns about Gerdau overpaying for an acquisition at the peak of the cycle (or close to it) also existed. With the sale to Techint, the latter is no longer a concern. However, we will have to follow up on Gerdau s strategy in the U.S. market. 3

4 Alfa: Agrees to Sell Hylsamex and Sidor Stakes to Techint IMPORTANT DISCLOSURES Alfa Three-Year Stock Performance (U.S. Dollars) Dropped Coverage 1/3/ M-02 J-02 S-02 D-02 M-03 J-03 S-03 D-03 M-04 J-04 S-04 D-04 M-05 Alfa (L Axis) B $3.70 1/13/04* B $4.05 1/20/04 B $4.20 3/31/04 IPC (R Axis) SB $6.15 3/10/05 SB $4.30 9/24/04 1,300 1,200 1,100 1, Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review Source: Santander Investment. 4

5 Key to Investment Codes Rating IMPORTANT DISCLOSURES (DISCONTINUED) Definition % of Companies Covered with This Rating % of Companies Provided Investment Banking Services in the Past 12 Months Strong Buy Expected to outperform the local market more than 15% % 73.33% Buy Expected to outperform the local market 5%-15%. Hold Expected to perform within a range of 5% above or below the local market % 13.33% Underperform Expected to underperform the local market 5%-15% % -- Sell Expected to underperform the local market more than 15%. Under Review 10.43% 13.33% The numbers above reflect our Latin American universe. For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2005 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53 rd Street, 17 th Floor (Attn: Research Disclosures), New York, NY USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for establishing Argentina recommendations is our forecast of the year-end Argentina IFCI index. For the Andean countries, our benchmark is the simple average of the country risk of each country plus the 10 year U.S. T-Bond yield plus 5.5% of equity risk premium. For additional information about our rating methodology, please call (212) This report has been prepared by Santander Investment Securities Inc. ( SIS ) (a subsidiary of Santander Investment S.A., which is wholly owned by Banco Santander Central Hispano, S.A. ("Santander"), on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (SCH Bolsa), and in the United Kingdom by Santander Central Hispano S.A., London Branch (Santander London), which is regulated by the Financial Services Authority in the conduct of investment business in the UK. This report is not being issued to private customers. SCHI, Santander London, and SCH Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Luis Miranda. Grupo Santander receives non-investment banking revenue from the subject company. The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date of this report and are subject to change without notice. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States by Santander Investment Securities Inc. All Rights Reserved. 2005