Vale (VALE) has a new CEO–that’s an important and immediate change. It will take longer to end the control of Vale by a small group of banks and Brazilian state pension funds–until 2020–but that may actually be more important in the long run.
The two issues–CEO and shareholder structure–are interrelated.
Vale is controlled by Brazilian bank Bradesco, Japan’s Mitsui, and a group of Brazilian state pension funds. That has led to a history of government interference in management at Vale with the company being ordered pursue this business or that as the winds of political power shift in Brazil. Those directives haven’t always been guided by the calculations of return on investment and the appointment of each new CEO has raised the spectra of political interference, cronyism, and self-dealing in Brazil’s corruption-ridden political/economic system.
The choice of Fabio Schvartsman as the new CEO came as a relief then. Schvartsman, since 2011 the CEO of Klabin, Brazil’s largest paper and cardboard producer, seems a reasonable choice and the process has been, to the the public eye at least, transparent.
Schvartsman comes on board after his predecessor Mutilo Ferreira negotiated the gradual end of Vale’s current system of control by big outside shareholders, including the Brazilian government. Gradually from now until 2020 the different classes of Vale stock owned by this group of corporate shareholders, known as Valepar, will be converted to common shares. At the same time owners of preferred shares held by non-Valepar investors will be converted into common shares. At the end of the process, the company will have just one class of common stock with all shareholders having the same voting rights.
Negotiating this agreement required giving the current controlling shareholders a major sweetener. Their stock will convert to common shares with a significant 10% premium awarded to them in the form of additional common shares.
Which means, of course, that existing common shareholders are looking at 10% dilution in exchange for achieving the new more transparent structure. Shareholders in Vale can also expect increased volatility as the Valepar shareholders sell part of their current stakes in Vale. The increased ability to sell shares was indeed one of the major inducements that led Valepar shareholders to accept this deal.
After the agreement has been approved by 54% of shareholders, which I think is pretty much guaranteed, Vale will move to the Novo Mercado section of the Sao Paulo market that is reserved by that exchange for companies with high standards of corporate transparency.
In the short run there’s a good chance that Vale will give shareholders a wilder ride than they might like. In the long run this move should allow the world’s lowest cost iron ore miner to focus on creating value for its shareholders.
Vale is a member of my long-term 50 Stocks portfolio. The volatile shares of this commodity producer are up 5.91% since I added them to the portfolio on December 30, 2008.