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Vale to scrap controlling bloc, merge shares in major governance move

By Guillermo Parra-Bernal and Marta Nogueira

SAO PAULO/RIO DE JANEIRO (Reuters) - Vale SA (VALE.N) (VALE5.SA) 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.

Controlling shareholders grouped under holding company Valepar SA agreed to stay together for up to 3-1/2 more years. Under those terms, they will present a proposal soon by which Vale will incorporate Valepar and proceed to merge the company's several classes of stock into a single, common one by November.

The existing 20-year accord governing Valepar that expires in May will be extended through November to guarantee the transition. Holders of Vale's Class A preferred shares (VALE5.SA) who join the share conversion voluntarily will receive 0.9342 common stock (VALE3.SA), as part of the process.

To ensure completion of the plan, Vale would pay owners of Valepar a 10 percent premium for their shares, implying a 3 percent dilution for all shareholders. The former Valepar owners can sell the equivalent of up to 22 percent of Vale's common shares after a six-month lockup period starting in August expires, provided they keep a 20 percent stake by November 2020.

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

The announcement sparked a surge in common shares of Rio de Janeiro-based Vale, which touched their highest level in more than four years. Preferred shares, Vale's most widely traded class of stock, also hit their highest level since January 2013.

Vale shares were up 7.1 percent at 36.48 reais in afternoon trading in Brazil.

"This is a historical opportunity for Vale and an invitation from the controlling bloc to investors to join a company with strict governance standards," Chief Executive Officer Murilo Ferreira said on a conference call to discuss the Valepar proposal.

At least 54 percent of holders of Vale's preferred shares are needed to approve the conversion, which is also linked to the passage of the entire proposal. Vale may convene a shareholder assembly to vote on the entire plan around June, he said.

The 3.073 billion-real (£795 million) goodwill generated by Vale's incorporation of Valepar will be shared equally among all shareholders, Chief Financial Officer Luciano Siani said on the same call.

"There are multiple angles of value creation here: re-rating of shares, lower discount rates, higher liquidity, reduced perception of government interference, removal of an overhang," said Leonardo Correa, an analyst with Banco BTG Pactual.


BUYOUT

People familiar with the matter told Reuters in January that Valepar members Bradespar SA (BRAP4.SA) and pension fund Previ Caixa de Previdência [PREVI.UL] wanted a dispersed share ownership in Vale as a way to attract more investors.

Once the final accord expires in November 2020, a shareholder who owns more than 25 percent of Vale will be forced to launch a buyout offering.

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

The plan could give some of those cash-strapped pension funds the possibility to cash out from Vale, whose two classes of shares have risen almost four-fold over the past 12 months.

Shares of Bradespar, which is controlled by Banco Bradesco SA (BBDC4.SA), posted their biggest intraday jump ever, soaring as much as 20 percent. Analysts said the accord increases the value of Bradespar's net assets while freeing it from having to make a large cash payment to Previ for renewing the accord.


'GOLDEN SHARE'

A simpler shareholder structure in which Vale's board, and not Valepar, will decide strategy, and higher liquidity stemming from the end of the Valepar lockup period could spark a gain of 15 percent in Vale's valuation, analyst Thiago Lofiego of Bradesco BBI said.

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

Monday's announcement will help improve investor perceptions of the company, translating into a faster convergence of Vale and Rio Tinto share prices and a decline in Vale's cost of capital, BTG Pactual's Correa said.

The plan will also help limit government interference 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 global mining peers.

Still, the Brazilian government will keep a so-called golden share, a legal mechanism that allows it to fend off hostile takeover attempts and shape strategic decisions, Ferreira said.

The strategy replicates the move that helped release planemaker Embraer SA (ERJ.N) from government control in 2006. Embraer's share conversion was tied to the scrapping of a shareholder accord and the government keeping a golden share.


(Additional reporting by Paula Arend Laier, Roberto Samora, Tatiana Bautzer and Brad Haynes in São Paulo; Editing by James Dalgleish and Matthew Lewis)