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Tata may revise Corus takeover offer

Tata Steel is set to raise its bid for Anglo-Dutch steel & aluminum maker Corus by about 10%, reports Yassir A Pitalwalla.

india Updated: Jan 14, 2007 21:22 IST

Trying to stay ahead in a global bidding war to create the world's fifth-largest steel producer, Tata Steel is set to raise its bid for Anglo-Dutch steel and aluminum maker Corus by about 10%.

Investment banking sources close to the company, which is the flagship of the $22 billion Tata Group, said the offer, which could come as early as this week and well ahead of a January 30 deadline, would up the previous Tata bid of 500 pence per Corus share by around 10% to about 550 pence a share.

The new offer will be an attempt to fend off a rival offer of 515 pence a share, or GBP5.9 billion, from Brazilian steel maker Companhia Siderurgica Nacional (CSN).

Both companies have been upping their bids since Tata first offered 455 pence a share last October, which was trumped by a 475 pence share from CSN. Another round of offers followed but meanwhile investors have pushed up Corus shares to a Friday close of 540 pence a share on the London Stock Exchange in anticipation of a new offer from Tata.

The competiting offers had prompted the United Kingdom 's Panel on Takeovers and Mergers to set a Jan. 30 deadline for Tata to make a revised offer.

The attempt to buy Corus remains a high stakes attempt by Tata Steel , India' s largest private steel company, as the purchase price dwarfs its current market capitalisation of around $6.13 billion. The revised offer is expected to value Corus at over $10 billion.

Tata Steel's stock price, which was Rs 523.35 per share on October 4 when rumours of its possible bid first surfaced, have since dipped to Rs 467.4 on the Bombay Stock Exchange, a 10.7% drop. During the same period, the Bombay Stock Exchange's benchmark index Sensex has risen 15.2%.

Asked to comment on the impending revised offer, a Tata group spokesperson would only say that "We are studying the position" and declined to elaborate.
It is unclear if the revised offer will mean that Tata will have to bring more bankers into its fold.

When raising the bid from 455 pence a share to 500 pence a share, the Tatas' had brought in Standard Chartered Bank group as additional financiers for the bid.

In addition ABN Amro Bank, Deutsche Bank and Credit Suisse are providing acquisition finance to the Tata Group. CSN is being advised by European investment bank Lazard, Goldman Sachs and UBS. Corus is represented by Credit Suisse, HSBC and JP Morgan Cazenove.

While the stock market has been pushing down shares of Tata Steel since its interest in Corus emerged, some analysts are starting to say that the stock is looking cheap relative to the company's operating margins, currently around 40%.

Macquarie Securities, for one, estimates that the Corus deal would be neutral to Tata Steel shareholders at 540 pence a share even after excluding any benefits from the combination of both companies.

Macquarie estimates a Rs15 per share earnings accretion to Tata Steel in the current financial year if Corus is purchased at an enterprise value of $10 billion and a Rs3 per share earnings accretion if Tata Steel bought Corus at an enterprise value of $12 billion.

Tata Steel's management has said that they expect substantial synergies in areas such as purchasing and logistics, among others.

Global credit rating agency Standard & Poor's (S&P), which rates all three parties involved in the bidding war, wrote that "integration with low-cost operations of either of the bidders might benefit Corus' weak business profile.

Both bidders have referred to non-recourse debt as a part of the respective financial structures. It is not yet clear how feasibly such debt could be served from the cash flows of Corus."

In a recent report, S&P went on to say: "Upside potential (on the Corus credit ratings) remains if the Tata Steel bid is successful: Because Tata Steel is an entity with higher stand-alone creditworthiness.

"The ratings on Corus reflect its high cost position in the UK carbon steel market, the company's below ?average profitability and cash flow generation in an industry that is characterized by high cyclicality, capital intensity, and strong competition.

"Corus' ability to generate positive free operating cash flows is highly cyclical. These cash flows are only likely to be a source of financing in the current favorable pricing environment," said S&P.

Tata Steel has a strong position in construction grade steel and now wants to cement its position in the higher value added automobile steel segment an area where Corus is particularly strong. The Indian steel major also plans to emerge as a global player in the steel wire business.

Tata Steel has been scouting for acquisitions globally to ensure that it does not remain a small regional player in an industry where 25% of global production is traded across borders.

Tata Steel which is amongst the lowest cost producers of steel in the world and one of the few steel companies which earns an economic return over its cost of capital (Economic Value added positive) has been adopting a dual strategy--of greenfield expansion in India and acquisitions overseas.

Within India, Tata Steel's expansion strategy is to advantage of the plentiful supply of globally scarce raw materials such as iron ore while in the international arena, their aim is to secure a foothold in markets of significant size or potential.

 Tata Steel, which currently has the capacity to manufacture five million tones per annum of steel, has acquired Singapore headquartered NatSteel Asia (2 mtpa capacity) and Millennium Steel Thailand ( 1.7 mtpa capacity), thus upping its effective capacity by 74%.

Tata Steel is also expected to complete the expansion of its domestic steel making facility at Jamshedpur to seven mtpa by 2008. Further the company has reaffirmed that it intends to continue pursuing development of a new six mtpa steel plant on Orissa and a five mtpa plant in Chattisgarh.

Since going after Corus, however, it has said it will revise its plans downward in Jharkand to about six mtpa from the original 12 mtpa. Assuming all these come online, Tata Steel would have an effective steel making capacity of 27.7 million tones per annum.

Email Yassir A Pitalwalla: yassir.pitalwala@hindustantimes