The board switch itself is not critical—the decision rests with Corus’ shareholders who haven’t taken a decision yet—but in detailing the "compelling industrial logic" for Corus to go with CSN, a critical message was sent to financiers and bankers that their money was likely to bring bigger and quicker returns through the alliance with CSN. And since both Tata and CSN plan to service the bulk of debt raised for the acquisition through Corus’ operations itself, this view from the board will count, even if it is not decisive.
"It means the financiers for the CSN bid have been given long-term confidence," an advisor with a leading international pensions fund told Outlook. And even as Tata was grappling with the choice of hiking his second bid, appropriate noises from the CSN camp followed, of the likes of a ‘leak’, no doubt, that CSN was prepared now to go into the 700s to outbid Tata Steel. As matters stand now, feel many analysts, Tata is unwilling to hike his second bid beyond 540-550 pence; it may actually be in the 520-530 pence range.
The Corus board backing is tilting perceptions in favour of CSN, and in this business perceptions mean a lot. Financiers are also looking at the facts that led to the board switch away from Tata. One, the iron ore resources that CSN has, and has advertised so well through the negotiations. These would keep CSN and Corus supplied in-house, if they are together, for a long time to come. Here India’s policy might have let down Tata. India exports iron ore and Tata has been arguing that the ore should feed Indian steel instead.
Less measurable, but just as potent perhaps, is the personality of CSN boss Benjamin Steinbruch, the Laxmi Mittal of sorts of Brazilian steel. He has turned the loss-making CSN into a buzzing business, and cannot wait to become a global player. And banks love ambition from a CEO with that kind of record. Tata too showed ambition and his group is strong, but Steinbruch has won over both money and management.
Tata does look less inclined to gamble with a third bid at the moment. "It does seem the prices being offered are about where it should be valued," says steel analyst Mike Mytton. The Ebidta factor for the Corus bid is on the high side—broadly, Ebidta means operating profits without including tax, interest and depreciation. "Mittal valued Arcelor at 4.5-5 times the operating profits," said Mytton. "If you look at Corus, CSN has valued Corus at considerably more."
On the simpler measure of cost paid per tonne of steel produced, the bids for Corus stand lower than Mittal’s. But as with most market matters, undermining all the impressive punditry is the wide disagreement among the pundits. Nobody, and unfortunately for them, not even the bidders really can say for sure just what might be too much to pay for Corus. "People pay a price because they like something," industrialist Swraj Paul told Outlook. "This really has become like an auction. There is no natural limit that lies in the age-old saying, beauty lies in the eyes of the beholder."
But in the face of a predicted decline or at least a plateau position for steel prices in the new year, and perhaps the greater danger of oversupply of steel from China, there will come a price where nothing looks beautiful. "But the auction is today," said Paul. "In anything you buy, there is always a possibility that the prices can crash, and on the other hand, prices can go up also. The limit comes when a person says I don’t want to go higher than this."
The points of temptation with Corus lie in its technology and distribution network that will give the new partner access to the European market. But should the bidders pay a much higher price for them? "Technology is easily transferable these days," Andrzej Kotas, chief executive of the steel consultancy steelonthenet.com, told Outlook. And distribution can follow if buyers can be tracked and attracted by tempting prices. Considering Corus spends much more to produce steel than either CSN or Tata, the loser in this bidding game does not have to be the loser in the steel game.
In fact, if the bidding goes on much higher, both bidders will lose. And in the face of indications pointing Corus the CSN way, Tata could be better off with a Plan B that could turn out to be better than CSN’s Plan A. Considering Tata Steel’s scrip has crashed over 10 per cent since its first bid was accepted by Corus, a strategic withdrawal from the Corus race is a possibility. Some analysts feel a higher bid will stretch Tata Steel’s balance-sheet, especially since the potential synergies with Corus will only materialise after some time. Credit rating agencies agree that since Tata Steel will finance the difference between its first and second bids through additional debt, it may have a downward pressure on its ratings.
Thus, it’s not surprising that sources close to Tata are hinting at pursuing other options. One of them may turn out to be the joker in the pack, although it’s being talked about in investment banking circles at the moment. What if under this consolidation fever all three companies—Corus, Tata Steel and CSN—were to merge! "I think a threesome would make good sense," says Patrick Flockhart, MD of the steel think tank Steel Business Briefing. "Both CSN and Tata are of a similar size, they are good quality and low cost producers in developing countries, and together would make a force that would be quite strong." Swraj Paul thinks the threesome is "both desirable and possible".
What a politically sweet story it would be. The giants of the developing world together taking on the developed, the former flagship of the British industrial fleet. The world of business is not known to sink billions or to erase egos for the sake of symbolism. But this might also make business sense—if the two bidders are prepared to see it.
