Vale shareholders prepare for decisive meeting

Vale and its investors are in a countdown to the shareholders’ special general meeting on the 27th, considered the most important since the mining company was privatized in 1997. The meeting is expected to have record attendance and there is optimism that it will be possible to get support from shareholders to approve the conversion of preferred into common shares, the change of the company’s bylaws and the merger of Valepar, holding company that controls the mining giant, into Vale.

The presence of investors in the SGM is expected to top historical marks, sources said. Credit Suisse recently released a report showing that the latest general shareholders’ meeting of Vale, in April, had attendance representing 71% of the equity, the highest of the last ten years. The SGM is expected to be as big or bigger.

Vale will need the support of 50% plus one vote of shareholders to approve the items on the agenda, which depend on each other. Valepar and BNDESPar, investment arm of the Brazilian Development Bank, will abstain from voting at the SGM, with exception of the item regarding amendment of bylaws. Altogether, Vale has 255,000 shareholders and a capital of 5.1 billion shares, excluding shares held in treasury.

If the majority is secured in the meeting, a second step of the operation will begin. There will be a 45-day period, until the week of August 11, for preferred shareholders to decide whether they swap their shares for common shares in the mining company. Valepar set a floor of 54.09% of participation of preferred shareholders. It means that if the participation is smaller, the operation will not go ahead. This percentage was defined considering math according to which the controlling shareholders, once the floor is reached, will hold less than 50% in the company.

If there is conversion of 100% of the preferred (PN) shares, the current controlling shareholders gathered at Valepar (Bradesco, BNDESPar, Mitsui and pension funds of state companies, led by Previ, in addition to Electron, an Opportunity fund) will hold 41% of Vale. They are also forced to maintain 20% of that for three years, being cleared after that period to sell everything. It is known that part of the controlling shareholders, especially the pension funds, wants to give liquidity to their shares in Vale.

In case of approval of the proposals and achievement of the minimum number of shares for conversion, the following step, still in August, is likely to be the merger of Valepar into Vale, for which the controlling shareholders will get a 10% premium, estimated by the market at about R$4.5 billion. To migrate to the Novo Mercado special listing segment of B3 (former BM&FBovespa), Vale needs to secure the participation of 100% of the preferred shareholders. But this is not likely to be obtained in the near term, and the company set a three-year period, until 2020, for a possible migration.

Despite the optimism, there are risks for the operation. One is what the participation of individual investors will be. Vale doesn’t inform how much of its equity is held by individual investors, but Credit Suisse estimated in its report that individuals in Brazil hold 15.91% of the preferred shares in the mining company. The so-called passive funds, managed by banks, will also have a relevant role in the operation. Vale will make an online institutional campaign to inform small investors of the operation’s advantage, from its viewpoint.

Another point of concern is the position that Capital Group, largest holder of preferred shares in Vale, with about 20% of those shares, will take. Since Vale announced the transaction, in February, Capital privately expressed concern about the conversion ratio of preferred and common shares, which includes a discount of about 6% to PN holders. Valor has learned that some Capital funds manifested they will vote against the first item of the agenda, the voluntary conversion of preferred shares into common ones at the ratio of 0.9342 PN to one ON. Capital participates in Vale through three big groups of funds: Capital Research, Capital International and Capital World. Capital didn’t respond to a Valor email requesting comment.

People familiar with the matter say Capital’s vote against the conversion would be to mark a position, because later, in the 45-day window that will be opened after the SGM for conversion of stock, the trend would be for these funds against the conversion ending up joining the operation because of the risk of being left holding a share with little liquidity. Even though the proposed discount in the swap of PN for ON is 6%, there are estimates that, once the conversion period ends, this difference may increase to 15% or 20%, given the little liquidity expected for preferred shares.

Source: Valor Econômico