The Hindu Business Line : Tata-Corus: Debating the options

In its bid for Corus, Tata Steel appears to be in a stronger position than CSN of Brazil, which has made a counter offer. But how things will pan out will only become clearer over the coming week.

Will it or won't it? The suspense will be over this week as the Tata Steel-Corus takeover deal enters the home stretch. After the crucial board meeting to take stock of the situation arising out of Brazil's CSN entering the fray, Tata Steel is, as can be expected, playing its cards close to the chest. CSN's bid may have caught Tata Steel unawares — Mr Ratan Tata has been quoted as saying that Corus did not tell him that this was likely to happen — but it appears to be in a stronger position vis-à-vis the CSN bid at this point in time. And this is why:

Theoretically, it may be enough for Tata Steel to just match the CSN bid price of 475 pence a share as it has the support of the Corus board, which has already recommended to its shareholders that the Tata offer be accepted. On the other hand, CSN has now to win similar recommendation from the board.

The important assumption here, though, is that CSN will not start a bidding match if and when Tata Steel matches its 475-pence bid. A bidding match would completely change the deal's dynamics.

Tata Steel may not have revealed its hand fully when it made the 455-pence bid. Analysts then felt that the bid was under-valued but it could be that the company has saved up firepower to let loose if another bidder entered the fray with a higher price.

This is exactly what is is happening now. Tata Steel can, if it so decides, afford to push up its bid price to match CSN and the best part is that it may have already factored the increase in its calculations.

CSN, by some reports, is not exactly well placed financially to mount such a large bid or to start a bidding war. The company is apparently tightly leveraged even now and borrowing on the scale required to buy out Corus may not go down well with its stakeholders.

Tata Steel has already gone through the procedural due diligence and also tied up the funds for the buyout transparently.

Importantly, though mainly financed by borrowings, all the debt contracted is without recourse to Tata Steel. In other words, the balance-sheet of Tata Steel has been protected.

History may work to Tata Steel's advantage as back in 2002 there was an attempted marriage between CSN and Corus that failed at the altar and CSN was blamed for that.

New strategy

Though all of the above may be true, Tata Steel still has reasons to worry and think out a different strategy now. And this is why:

The Corus board will have to take a call on CSN once the company finishes its due diligence and makes a formal bid to the Corus shareholders by the coming weekend. Notwithstanding the solid reasoning it advanced for the proposed marriage with Tata Steel, the Corus board will have to think from the shareholder's perspective and the pressure it will face to consider and recommend the higher of the two financial bids. It can still decide to stick to the Tata bid but chances are that shareholders will reject its advice and vote for CSN's bid.

Two of the investment banks advising CSN — UBS and Goldman Sachs — announced on Thursday that they have acquired shares amounting to 11 per cent of Corus's equity capital. Assuming that the two are acting in concert with CSN for the Corus takeover — though there has been no news to that effect till now — the bidding group will have close to 16 per cent equity in Corus. While this may not amount to much, it is enough to send Tata Steel back to the drawing board and rework its plans.

There has been no information on whether Tata Steel's advisors too have been accumulating Corus shares but chances are that they have not, as any acquirer buying in excess of 1 per cent of the equity will have to disclose its interest to the stock exchange and the company.

A couple of institutional shareholders of Corus voiced their disappointment with the Tata valuation even before CSN's bid came up and after that they have been quoted as saying that they are not surprised at the higher bid from CSN. This is a broad hint on where their votes will go if Tata Steel does not up its price.

CSN has made no secret of its desperation to gain control over Corus and its Chairman and CEO, Benjamin Steinbruch, has clearly said he is prepared to up his bid if need be. Given that the Brazilian company controls more iron ore reserves than Tata Steel, it may be tempting for Corus shareholders to vote for a marriage with CSN.

Going by the offer document it put out, Tata Steel and its special purpose vehicles seem to have already contracted the debt required to buy out Corus. It is not known what will be the liability on the Indian company if the bid fails and borrowings are cancelled. Will there be commitment fees to pay the lenders for the amount sanctioned by them? If so, how much and who will bear it?

Invaluable experience

The next episode in this story will unfold this week when CSN completes its due diligence and makes a formal bid. The focus will be on the Corus board after that and, once its response is known, the focus will shift to Tata Steel for its reaction. Without the help of a hint from Tata Steel we would only be speculating at this point in time as to whether it will join the battle or let CSN walk away with the bride.

However, one thing is clear, irrespective of how the drama plays out: the Tata group would have gained invaluable insight into the world of cross-border M&As from this experience — something that will stand it in good stead the next time it mounts a similar bid.