Smart shopper: Brazilian steel giant Gerdau, a family business at heart, is growing fast abroad

Latin Trade, July, 2005 by Michael Kepp, Andres F. Velazquez

In Brazil, where companies have in recent years been gobbled up by foreign multinationals, steel company Gerdau is the exceedingly rare domestic group that has itself become a multinational by taking over foreign firms. And its appetite for acquisitions has extended across the Americas.

Gerdau's 26 mills make so-called "long" products--concrete-reinforcing bars (known as rebar), girders and wire rod for civil construction. It has become a global giant mainly through foreign acquisitions, beginning with the 1980 purchase of Uruguayan steel maker Laisa. In the following two decades, it bought Aza in Chile, Sipsa and Sipar in Argentina, Courtice Steel and MBM Steel in Canada, and finally Ameristeel in the United States in 1999, for US$262 million.

That purchase pushed Gerdau to No. 25 from No. 50 among the world's steel makers (it's No. 13 today) and gave it control of the second-largest U.S. rebar producer. Subsequent takeovers of small U.S. and Canadian steel makers gave Gerdau mills in Florida, North Carolina, Tennessee, New Jersey, Georgia, and Canada. Gerdau recently consolidated North American operations with a September 2004 agreement to acquire what it did not already own of long-steel mills in Texas, Iowa, Kentucky and Minnesota from North Star Steel, part of Minnesotan conglomerate Cargill, for $266 million.

Gerdau also expanded its presence into a fifth South American country by agreeing in December 2004 to pay $77 million in debt and equity for control of two Colombian steel makers, Diaco and Siderurgica del Pacifico from their major shareholders, The Latin American Enterprise Steel Holding, a Miami venture capital fund, and Grupo Mayaguez in Cali, Colombia.

At the center of the growth strategy is 68-year-old CEO Jorge Gerdau Johannpeter who, along with his three brothers, has run the company from headquarters in Porto Alegre in southern Rio Grande do Sul state since 1983, holding just over 50% of the company stock. Johannpeter and two of his brothers have adjoining offices in a former nail factory, one that their great-grandfather, Joao Gerdau, opened in 1901 after emigrating front Germany. That plant evolved into the modern steel-making giant through the acquisition of Brazilian steel plants since the 1940s.

The fourth brother's office is in Rio de Janeiro, at Gerdau's distribution center. "We're not just any family business, but a fourth-generation family business, which adds up to lots of experience," says Johannpeter.

Gerdau made most of its foreign acquisitions as it approached a 50% share of the long-products market in Brazil and had little available to buy domestically. To grow abroad, Gerdau decided to buy mills in the geographic vicinity of potential foreign clients.

Johannpeter, a stocky, forceful-looking man who keeps a low profile, cultivates an image of cautiousness. But he's a savvy and ambitious businessman with a keen sense of timing--as well as an accomplished equestrian and owner of thoroughbred horses that compete in world-class steeplechase events. "Knowing the right moment to make an acquisition is like knowing exactly when to command your horse to jump an obstacle in a steeplechase course," he says. "If your timing is just a bit oft, it can mean the difference between success and failure."

Driving the company's foreign acquisitions is the fact that long-steel products are logistically costly to export. "To increase your network of foreign clients you must produce the steel in their geographic regions," Johannpeter says. "We bought North Star Steel because it has operations throughout the central United States, not where Ameristeel has them, in the eastern and southeastern part of the country. So, with the acquisition, we can supply clients all across the central and eastern half of the United States."

Gerdau's North American operations, which accounted for 45% of its $7.38 billion in sales in 2004, have made it the fourth-largest steel maker in the United States after U.S. Steel, Nucor and International Steel group. Acquiring North Star in late 2004 has added almost 2 million tons of annual capacity to the close to 13 million tons Gerdau produced before the deal. As such, the group's North American operations will in 2005 account for close to 50% of its sales, says Johannpeter. Gerdau's Brazilian operations last year accounted for 55% of the group's sales.

Gerdau's operations in South America outside Brazil accounted for just 4% of the group's sales in 2004. Behind the group's recent purchase of the Colombian mills, however, is the same logistics strategy that fueled Gerdau's other foreign purchases: Buy mills in many different regions to bring products closer to potential clients, reducing logistic difficulties and freight costs. "We bought the two Colombian mills not just for logistics reasons but because they have a leading 45% stake in Colombia's long-steel market, and because Colombian steel consumption is growing at a rate of 6% to 7% a year, twice the rate of the economy, South America's third-largest," says Carlos Petry, Gerdau Group's senior vice president.