News: Hope vs reality - Tatas may be losing the plot on Corus

(DNA 11/12/2006) London/Mumbai/Kolkata - Masterstroke or mess-up? Tata Steel’s decision to raise its bid for Anglo-Dutch steelmaker Corus Group to 500 pence a share just hours before being outbid again by Brazil’s Companhia Siderurgica Nacional (CSN) at 515 pence has raised eyebrows all around.

Why didn’t the Tatas wait for the CSN bid before announcing their own offer worth $ 9.16 billion (Rs 40,972 crore)? What did they gain by bidding first and getting the Corus management to back it when the board would anyway have had to reconsider a higher bid from CSN, valued at $9.6 billion?

As a matter of fact, Jim Leng, Corus chairman, who had backed the Tatas’ Sunday night offer, approved the CSN bid, too, on Monday morning. “This offer is both higher than the initial proposal by CSN as well as the revised Tata offer of 500 pence a share. It is consistent with our strategic objective of securing access to raw material, low cost-production and growth markets,” said Leng. “The combination of the two businesses will create a strong platform from which to compete and grow in an increasingly global market,” he added.

If that is not a wet blanket for Tata hopes, one wonders what is. But some observers did see elements of strategic thinking behind the Tata bid.

Says Harish HV, head, mergers & acquisitions, at Grant Thornton India: “It was a well-thought-out ploy. It wouldn’t have made sense to bring an offer which is lower after CSN had made a higher bid.”

“It was clearly a pre-emptive move by the Tatas to ensure that the CSN bid is rich enough and that the Brazilian steelmaker is financially stretched”, says Sanjeev Krishan, executive director at PricewaterhouseCoopers (PwC).

If that was the objective, it may well have been achieved, but that’s not the same as saying that Tata will win. Some astute observers of the steel scene believe that the Tatas will probably call it quits now since the price target is moving too high.

“The price of 515 pence a share is more on the upside and the next offer has to be 530 pence, which is unlikely to happen. It is quite possible that Tata will take a step backwards and pull out,” says Raju Deswani, steel analyst and global publisher of Metal Bulletin.

CSN clearly is digging in for a fight. CSN chairman and chief executive Benjamin Steinbruch said on Monday: “The strategic impetus for this combination (Corus plus CSN) is growth - in Brazil, in Europe and for our combined workforces”.

Against this backdrop, Tata hopes now centre around one of three points. One, the pension trustees will back its own bid over CSN. Two, the shareholders’ meeting convened on December 20 will give it the thumbs up. And three, it can raise the bid once again to top CSN’s. On Monday, the Tatas declined to comment on the CSN bid beyond saying it was “considering the position after the latest development.”

Observers in London rule out the possibility of Corus shareholders settling for anything less than the CSN bid just out of love for the Tatas. Nish Kotecha, founder of Sphere Partners, a financial advisory firm, said there was no question of the Corus management rooting for Tata. “There is no inside edge. This is about shareholders and price. They will want the best for their employees, shareholders and pension funds and if the management doesn’t want to work with a particular company then they can leave,” said Kotecha.

A tiny sliver of hope revolves around what the Corus pension trustees will do. Tata Steel had earlier said it would fill the £123m deficit in the Corus pension scheme immediately and increase contributions to the British Steel scheme from 10% to 12%, which is in surplus.

But sources in the merchant banking business pointed out that CSN has offered an equally good option, by paying £138m immediately into the Corus pension scheme and increasing the contribution rate to the company’s larger British Steel pension scheme from 10% to 12% until March, 2009.

The only real chance for the Tatas, then, lies in making a higher bid. “The current bid can at best be a semi-final,” Krishan of PwC says.

He believes there is more to come before Corus shareholders head for their December 20 meeting.

But the consensus among analysts is that the Tatas, if at all they had planned to surprise CSN, have not quite succeeded. The Brazilians returned the salvo in hours, promising an engrossing auction battle in the coming days.

Why is Corus so precious?

Whoever buys Corus will become the fifth largest steelmaker in the world. Both Tata and CSN want to buy Corus to add mills in Europe that supply automakers Ford and Volvo. Surging demand has spurred $78 billion of mergers in the industry this year. Tata wants Corus as an entry-point to end-customers. CSN wants Corus as an outlet for its iron-ore production, says Tom Muller, an analyst with Theodoor Gilissen Bankiers in Amsterdam.

Why did Tatas bid before CSN?

Some analysts say it wouldn’t have made sense for the Tatas to bid lower than CSN after the latter had made its offer known. Moreover, the Tatas may have thought
that if the Corus management backs them, even a lower bid might work. Another school of thought is that the Tatas bid first to make sure that CSN will have to bid higher, stretching its resources further.

Are bidders paying too much?

Investors said Tata Steel and CSN may be paying too much for Corus. Lakshmi Mittal’s offer for Arcelor was 4.56 times the Luxembourg-based company’s earnings before interest, taxes, depreciation and amortisation, or Ebitda.

CSN’s bid is 5.73 times Corus’s Ebitda, based on the UK steelmaker’s earnings in the 12 months to June 30. Tata’s offer is 5.03 times Ebitda. Whoever wins will use Corus’ cash flows to repay the loans taken for the bid.

How is the battle shaping up?

As things stand now, only the pension fund trustees stand between Corus and CSN. If they back CSN, it is highly unlikely that Corus shareholders will accept a lower Tata bid at the forthcoming December 20 meeting. The Corus management has already shifted allegiance from Tata to CSN after the latter’s 515 pence a share bid. The only way for the Tatas to get back into the game is to bid higher. The betting is that the Tatas will call it quits now.