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Icahn's January Plays Could Ruin His 2012 Plans

Institutional shareholders like Vanguard, State Street, Dimensional Funds and Blackrock all built their 3%-plus stakes in Commercial Metals in 2010, and at much higher prices than Icahn. Those holdings reflect quarterly filings with the SEC, which may have changed . It means that while the economics of an immediate tender would favor Icahn, it may not be the case for others, who might taking a longer-term view on housing and a recovery in Commercial Metals steel rebar business for construction in coming years.

And that's where the Boy Scout issue comes in.

Icahn is pressing his case against management, which in October, announced a winding down and sale of a large steel mill in Croatia as it consolidates some complicated and unprofitable international operations. About management's new strategy and its confidence that a recovery is just beginning for Commercial Metals and the housing industry, Icahn wrote in a Jan. 4 letter, "This is not the Boy Scouts," meaning that the road for second chances has ended.

Some favor Icahn over Commercial Metals' management in the near term, while also forecasting significant value in shares over the next few years. "We continue to believe Icahn has a good chance of receiving strong shareholder support since the tender offer represents a "free" option." writes Kuni Chen of CRT Capital in a January note. Chen downgraded his rating on the company to "Fair Value," reflecting that Icahn's catalyst to share prices of $15 had ended. "Our sum-of-the-parts valuation suggests Commercial Metals could be worth up to $25 a share. Longer term, we also view Commercial Metals as a beneficiary of increased infrastructure spending and a recovery in construction," adds Chen, who says that it the tender fails, Commercial Metals shares could fall to $10.

"Though we see the potential for meaningful upside to the shares longer term when recovery occurs in CMC's key construction market, we believe this is still some time away and we expect near term earnings to disappoint expectations and model earnings below consensus for this year and next," writes Luke Folta of Jefferies in a January research note, even as he cut the company's price target to $14 a share and recommends a "hold." Ultimately, Commercial Metals shareholders have to quickly decide whether they want out of the company at $15 a share - or if they're willing to take a longer term view.

Analysts polled by Bloomberg expect that Commercial Metals will return to profitability in 2012, earning $141 million in profit after reporting two successive years of $100 million-plus losses. Meanwhile, revenue is expected to grow over 6% to $8.4 billion in 2012.

Will shareholders give management another chance, even after Icahn's boy scout call?

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