News: Tata-Corus deal - Aggressive price by any yardstick

(BL 01/02/2007) Tata Steel appears to have pulled out all stops in its effort to seal the deal with Anglo-Dutch steel giant Corus. Tata Steel has scaled up its last offer made in December at 500 pence all the way to 608 pence in an hotly contested nine-round auction with Brazil's CSN. It had made the first bid at 455 pence on October 20, 2006.

Caught in a bidding war with CSN for the only major European steel producer available for acquisition, this deal may prove to be expensive one for the Tata group with a much longer payback period vis-à-vis its first bid. This is also evident from some of the conventional metrics used to evaluate such deals.

Final value

The final deal for Corus at an enterprise value of over $13 billion works out to multiple of approximately 7 times EBITDA (earnings before interest, tax, depreciation and amortisation) for the year ended December 31, 2005 and 9 times for the 12 months to September 30, 2006. This is much higher than 5.5-6 times paid by Mittal for Arcelor.

On an EV/tonne basis also, the deal works out to $ 710 per tonne, higher than the Arcelor Mittal deal, though in line with some of the standalone deals in this space.

The final offer price of 608 pence works out to a 50-per cent premium to Corus' price on October 4, the day prior to the preliminary announcement by Tata Steel deal for Corus. Call it a kneejerk reaction, but the markets had pulled down the Tata Steel stock by 10 per cent during the day's trading.

In our view, such aggressive bidding by the Tatas is based on three key factors:

Access to low-cost slabs: The steel makers in India enjoy a 20 per cent cost advantage in slab making over its European peers. The ability to export surplus slabs either from Tata Steel's facilities or through acquisitions in low-cost regions over the next few years will be the key driver of this deal.

Restructuring of Corus' existing units: It is likely that over the next few years, Tata Steel will put through an extensive restructuring of its underperforming units at Port Talbot and Scunthorpe in the UK, though it has ruled out any job cuts. It may also prune down high-cost slab facility at Teesside.

Potential synergies: For the first time since this deal surfaced, Tata Steel has quantified that it will benefit to the tune of $ 300-350 million every year. However, the benefits from the deal may be lower than this amount spelt out in the first two years and attain this level from the third year onwards.