Tatas trump Brazilian steel rival CSN with $12bn Corus deal;

MUMBAI: He’s done it. Ratan Tata, 69-year-old chairman of the country’s largest business house, snatched victory from the jaws of uncertainty. He outbid Brazilian steel rival Compagnia Siderurgica Nacional (CSN) for Corus Group plc in a nine-round, rapid-fire auction that ended just before Tuesday midnight, London time.

Paying a hefty price of 608 pence for each Corus share, 34 per cent more than what he had offered last October, Tata will now be coughing up £6.2 billion (Rs53,500 crore) to become the world’s fifth largest steelmaker with a 24-million-tonne global capacity.

Palpitations are in order, but the big-sticker price underlines a simple message: India Inc has arrived on the global scene. From acquisitions costing millions, India has graduated to billions of dollars. Ratan Tata said as much. “I believe this will be the first step in ensuring that Indian industry can step outside the shores of India in an international market and acquit itself as a global player.”

Britain’s Takeover Panel issued a statement on Wednesday morning announcing Tata’s win after the bidding went into the ninth round before Tata could secure the deal. The whole process was controlled by the panel, which insisted it should be a closed-door affair and that no details, except the final price, should be made public. One insider described the atmosphere during the auction as tense.

The board of Corus also met in the morning to consider the final offers and unanimously recommended the Tata bid for endorsement by shareholders.

The deal got the thumbs-up from Finance Minister P Chidambaram. Promising all help in terms of regulatory approvals at the Indian end, he observed: “It is a good example of aggressive, forward-looking Indian businesses... We could have never expected such bids a few years ago.”

British industry has welcomed the trend and sees it as an example of India emerging as an important international player. “We regard the deal as positive and a reflection of the internationalisation of both the Indian and UK economies,” said Andy Scott, director, Confederation of British Industry.

The only ones unimpressed by it all were the stock markets, which fretted over the high cost of the bid and what it might do to Tata Steel’s balance sheet.   

The company’s share fell by Rs55 on Wednesday, closing 10.66 per cent down at Rs463.95, and wiping off Rs3,215 crore in investor wealth at one go. The credit rating agencies have already put Tata Steel’s debt on a rating watch with negative implications.

Are we missing something here, then? Did success come at an unaffordable price? Why did the Tatas pay a third more than what they had planned to in October? What are the risks that remain unstated even now? What happens if steel prices start falling, making it tough to repay the debt raised for the bid? The biggest question of them all: can a new player still outbid Tata at this stage?

First, the price. Compared to what Lakshmi Mittal paid for Arcelor, the Tatas certainly do seem to have overbid - roughly twice as much for every pound of profits made. Mittal paid 4.46 times Arcelor’s net profits (before interest, depreciation, and tax). Tata paid nine times Corus’s net profits. Ratan Tata defended the price, saying it had to relate to what the market wanted: “If you want a company, you have to pay the going price of the company. The final price has been higher (than initially planned) due to circumstances… However, as a prudent management, we could go only up to a point. We did not reach that point; otherwise we would have walked away.”

What’s good for the long term may be bad for shareholders with shorter-term horizons. Tarun Sisodia, head of research at Anand Rathi Securities, said: “Anything beyond 550 pence a share is expensive and negative for Tata Steel’s earnings per share (EPS).” Bloomberg quoted UP Bhat, fund manager at Canbank Investment Management, as saying that “there’s nothing for shareholders in the short term”.

What did Tata, the biggest shareholder in Tata Steel with a 33 per cent stake, see in Corus that other shareholders didn’t? B Muthuraman, managing director of Tata Steel, answered that clearly: “The strategic fit between Corus and Tata Steel is very high. At the price of 608 pence, Corus’s enterprise value is pegged at US $710 per tonne (of steel capacity). Today, if we want to create new capacity to mirror Corus’s downstream capacity, such expansion would cost us $1,200-1,300 per tonne.”

But there are two other strategic reasons why the Tatas were willing to bid higher than CSN. One was driven by the global trend towards size and scale. The other by the Tata Group’s own internal need to ring-fence its flagship company from a potential takeover threat.

The mega-trend in the global steel industry is not just about consolidation and scale but a geographical shift of plant locations to where the raw material is or where customers are. Latin America, India, and Australia are the world’s biggest sources of iron ore, and most big players are heading to these places to secure their ore supplies. With global majors like POSCO of South Korea and Arcelor-Mittal Steel eyeing huge operations in India, the Tatas with a puny five million tonne capacity would have become irrelevant to the world steel industry if they had not scaled up. And fast. Not only that, the big boys of global steel would have nullified Tata’s cost advantage by leasing mines in India. Corus was one of the last big players with strong customers in the developed world (Ford, Volvo) still available for takeover. The stakes for Tata were clearly high.

The second reason has to do with the Tata Group’s internal need to raise holdings in group companies to ward off future takeover threats. The Tatas currently own 33.6 per cent in the steel company (including warrants that will be converted to shares soon). To make it takeover-proof, they would have to raise their holdings to at least 51 per cent, which at current market prices would cost them at least Rs6,000 crore. That’s more than a billion dollars. On the other hand, a cent per cent takeover of Corus, even at a higher price, will at some future date pay off, once the debt burden is repaid and the Tatas can consider a merger with Tata Steel, which will automatically raise their stake to 51 per cent or more. Even in the near future, the drop in Tata Steel’s share price following the Corus takeover will afford the group ample opportunities to pick up its own shares at lower prices.

Either way, the Corus bid benefits the Tata Group’s efforts to raise a fence against takeovers. The only thing that can spoil the party is another spoiler bid. During the next six weeks, as the Tata-Corus bid wends it ways towards shareholder and court approval, it is still possible for someone who thinks 608 pence a share is still not too much for Corus to make a bid. Then it’s back to the Takeover Panel.

“But the general sentiment in the market is that this is a pretty full price and it doesn’t make sense for anyone to come in even higher. There has been plenty of time for other competitors to have stepped in,” said Roy Montague-Jones, solicitor with Reed Smith Richards Butler in London.

Additional reporting by Sajeda Momin, Satish John & Sanat Vallikappen