Vale scraps controlling bloc, merges shares in major transparency move

© Reuters. Vale scraps controlling bloc, merges shares in major transparency move

By Guillermo Parra-Bernal

SAO PAULO (Reuters) - Vale SA (N:VALE) plans to become a company with no defined controlling shareholder as soon as possible, in a landmark step aimed at enhancing transparency and equal rights for all shareholders in the world's largest iron ore producer.

In a Monday statement, Vale said controlling shareholders grouped under holding company Valepar SA agreed to renew an accord that keeps them together for three and a half years. The controlling shareholders will have to soon present a proposal to merge the company's several classes of stock into a single, common one by November.

The existing 20-year accord governing Valepar, which expires in May, will be extended through November to guarantee a transition to Vale's new structure. Holders of Vale's Class A preferred shares (SA:VALE5) will receive 0.9342 common share (SA:VALE3) based on the 30-day average through last Friday, as part of the process.

After that step is completed, Vale would pay owners of Valepar a 10 percent premium for their shares. That step, which should dilute minority shareholders by 3 percent, is a pre-condition to the rest of the process, the statement said.

The change represents a milestone in a country long hobbled by corporate governance abuses and reorganizations that hampered minority investors in most cases. Reuters reported on Jan. 19 the planned to make Vale a company with dispersed share ownership and the listing of a single type of stock.

"The transaction seems to be a win-win for both controlling and minority shareholders," said Rodolfo de Angele, a senior basic materials analyst with JPMorgan (NYSE:JPM) Securities.

People familiar with the matter told Reuters at the time that Bradespar SA (SA:BRAP4) and pension fund Previ Caixa de Previdência [PREVI.UL] sought the plan to boost Vale's appeal among investors. Once the accord expires, no shareholder could own more than 25 percent of Vale or else will have to buy out other shareholders.

The partners in Valepar include Previ - currently Vale's largest shareholder, - Bradespar, Japan's Mitsui & Co (T:8031), an arm of state development bank BNDES, and pension funds Petros Fundação [PETROS.UL], Funcef [FUNCEF.UL] and Fundação Cesp.

"BRUTAL CHANGE"

Vale's management plans to discuss the accord with investors at a conference call later on Monday.

The transitional agreement needs backing from the equivalent of 20 percent of Vale's voting shares, guaranteeing the necessary governance to implement the diluted ownership plan, the statement said.

The 3.073 billion-real (£795.5 million) goodwill generated by Vale's incorporation of Valepar will be split equally among all shareholders, the statement said.

The plan will also help limit government meddling in Vale - an aspect that weighed down the company's stock during President Dilma Rousseff's five years in office. Improved governance stemming from the move could help Vale's stock cut the valuation gap relative to its global mining peers.

Currently, Vale's American depositary receipts (N:VALE) trade at the equivalent of 10.5 times estimated earnings for this year, below Rio Tinto Plc's (L:RIO) 10.7 times and BHP Billiton Plc's (L:BLT) 15.9 times, according to Thomson Reuters data.

The implications of Monday's announcement on investor perception about Vale's governance should translate into a faster convergence of Vale and Rio Tinto share prices, Banco BTG (LON:BTG) Pactual's trading desk said in a client note, adding that the move could help unleash 21 percent more value for Vale shareholders.

"It's a brutal change of governance for the company," the note said.