October 6, 2016 / 1:17 PM / 2 years ago

REFILE-UPDATE 1-Austria's RHI to buy Brazilian rival Magnesita for $500 million

(Amends spelling of refractory in second paragraph)

* New entity to be listed in London

* Businesses complement each other

* RHI shares drop more than 13 percent

* Analysts point to high debt burden

VIENNA Oct 5 (Reuters) - Austrian fireproof industrial materials maker RHI said it has agreed with key shareholders of rival Magnesita to take over the Brazilian company in a $500 million deal to create a global player.

Both companies supply the steel, cement and glass industry with fireproof refractory materials, but RHI derives 40 percent of its sales from slow-growing developed economies like Western Europe, while Magnesita is focused on North and South America.

The deal, however, will involve RHI taking on more debt, a source of concern for investors who sent the company’s shares skidding 13 percent after it was announced.

Vienna-based RHI said in a first step it will acquire at least 46 percent but no more than 50 percent plus one share in Magnesita in cash and shares. The transaction will be financed by additional debt and the issuance of 4.6 million new shares.

A new company called RHI Magnesita will be listed in London with RHI ceasing its listing in Vienna.

RHI’s Chief Executive Wolfgang Ruttenstorfer said the new company would be headquartered in the Netherlands not Britain, with Britain’s decision to leave the EU a factor in its decision.

“Had there been no Brexit, I suppose that the ... holding company would have been established in London,” Ruttenstorfer told a conference call. “Because there is Brexit, however, and the European merger directive is perhaps no longer applicable in London at the close (of the deal) in 18 months, it was the task to find a place other than London.”

In a second step the new company plans a mandatory tender offer for the remaining Magnesita shares and to delist Magnesita from the Brazilian stock exchange as well.

The complete deal will cost RHI around 450 million euros ($503 million), Chief Financial Officer Barbara Potisk-Eibensteiner said.

“The rationale of the deal is to create the world’s leading refractory company with an enhanced growth profile; namely in focusing on growth regions in North and South America and in complementing our product portfolio,” Ruttenstorfer said.

While the new company will be based in the Netherlands, it will be operationally managed from Vienna. No decisions about the new management have been made yet, Ruttenstorfer said.

“But you can assume that the current top management of RHI and Magnesita will be represented in the future management team,” he said.

RHI’s shares, which have outperformed the Austrian blue-chip index ATX by around a third since the beginning of the year, dropped as much as 13.4 percent to 20.75 euros, their lowest in nearly two months.

Kepler Cheuvreux analyst Thomas Neuhold, who has a “buy” rating on the RHI stock, said the debt burden will increase significantly and the leverage of the combined entity will soar to four times net debt/EBITDA in the short term.

Such a high ratio is often seen as an indication that it may be difficult for a company to be able to handle the debt and take on additional debt if needed.

In anticipation of expected synergies, RHI raised its medium-term targets. It now aims to achieve consolidated annual sales of up to 2.8 billion euros by 2020, instead of up to 2.2 billion and an operating EBIT margin of more than 12 percent, up from a previous goal of more than 10 percent. ($1 = 0.8941 euros) (Editing by Susan Fenton)

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