Steel Stocks Jump on Gerdau Takeout

TAMPA (TheStreet) -- The Brazilian steel giant Gerdau S.A. announced Wednesday that it will take out the rest of Gerdau Ameristeel(GNA), its U.S. affiliate, which makes steel products used largely in the construction industry.

Gerdau already owns more than two-thirds of the Tampa-based steelmaker. For the remaining 33.7%, Gerdau will pay between $1.6 billion and $1.7 billion, or $11 to $11.50 a share, the company said in a press release before Wednesday's opening bell.

Investors promptly bid up Gerdau Ameristeel stock by 54.5% to $11.07 in morning trading. Volume was extreme at 27 million shares, more than 10 times the daily average.

Interpretations of the deal have focused on its meaning not just for the steel industry, but the economy at large. That Gerdau's Brazilian bosses have decided to subsume the rest of Ameristeel probably means that they see a rebound developing in the beleaguered U.S. construction business.

Gerdau's price for the U.S. company was viewed favorably by many observers. Despite being about 40% less than the high of more than $19 that Ameristeel stock had reached at the peak of the boom in June 2008, the $11 to $11.50 price tag is still well above the "normalized" multiple of 4.5 to 6.5 times forward EBITDA, wrote Mark Parr, steel-stock analyst at KeyBanc Capital Markets.

According to Parr, Gerdau's price represents a multiple of 9.5 times his 2011 target for earnings before interest, taxes, depreciation and amortization.

Steel stocks in general rode an equities rally Wednesday as other economic data pointed to an improving U.S. housing market. The bullish shift comes after a volatile period for steel and metals stocks across the board, as investors worried about moves in China to ease its fast-growing economy, not to mention fears that the debt crisis in Europe could spread beyond the continent.

Concerns also emerged recently surrounding the possibility of a steel oversupply caused by manufacturers ramping up capacity too soon in the recovery.