Everything about the biggest bid by an Indian firm

How it helps Tata Steel
The merger gives a foothold in Europe, access to valuable Corus customers in Europe such as automobile firms who buy high-grade steel.

Corus has production capacities much larger than Tata Steel. This automatically takes Tata Steel to a higher orbit in the world steel order.

The deal, if it comes through, permits the combined entity to do acquisitions that Tata Steel couldn’t have done on its own.

A purchase of Corus propels Tata to sixth from 56th in world rankings, giving the new company a combined capacity of 23 million tonnes a year.

The steel industry continues to be fragmented. Given the consolidation, the deal is a positive, say analysts.

What it gives Corus: Tatas’ easy access to raw materials should help Corus bring down its cost of production.

One clear attraction for anyone looking at the Indian market is the availability of cheap iron ore. India has the world’s fifth-largest deposit of iron-ore, the main steelmaking ingredient, according to McKinsey & Co

Where global steel consumption is concerned the future growth will be the most in China and India. In fact, growth per annum will be faster in India than in China. So, it makes sense for Corus to align with the Tatas

The offer price: First of a few?: Since Corus’ shares are diversely held — 90% of its shareholders are institutions and the rest private individuals —  it may be hard for Tata Steel to convince shareholders to sell below market price. Corus shares closed at 477 pence on Tuesday, down 2.5% following Tata Steel’s 455 pence/share offer.

Remember, Lakshmi Mittal had to fork out 40% more than what he had offered for Arcelor shares initially. On January 27, 2006, Mittal Steel offered $23.3 billion for Arcelor. On May 19, 2006, this was upped by 38.7% to $32.4 billion, or $47.34 per share. On June 25, 2006 Arcelor, the offer was further sweetened to $50.68 to buy the company.

Mittal’s offer for Arcelor was 4.56 times the Luxembourg-based company’s earnings before interest, taxes, depreciation  and amortisation, or Ebitda. Tata’s offer is 4.84 times Corus’s Ebitda, based on the UK steelmaker’s earnings in the 12 months through June 30.

Tata Steel is unlikely to settle for anything less than a majority ownership or at least management control. The $10 billion enterprise valuation is not cheap. But remember, such assets are hard to find. So due-diligence done by the Tatas must have ground out the initial numbers. 

Also, there may be other rivals waiting in the wings such as Severstal of Russia and Cia Siderurgica Nacional of Brazil, which owns the world’s largest iron ore maker, Cia Vale do Rio Doce, to buy Corus.

All M&A deals go through the same process of haggling that the common man does when buying stuff for his home.

So, in other words, this could very well be first of the few offers that Tata Steel will make for Corus

What it does to Tata Steel finances

In the short-term there may be earnings dilution but in the longer-term the deal clearly bodes well because demand for steel in India is set to expand five times in the next few years.  The Tatas are underleveraged and can borrow bigger sums, say analysts, because cash is fungible.

Tata Sons, the main holding company of the group, like before, could step in to aid the takeover. It has done it several times before, from giving a helping hand to Tata Tea to acquire Tetley, which more than two times the size of Tata Tea. Similarly, Tata Coffee bought US-based Eight ‘O’ Clock Coffee in June for $220 million.

Tata Sons, holds over 80% of TCS, the jewel in the crown. The market capitalization of Tata Consultancy Services alone is Rs 109,000 crore which makes Tata Sons holding worth Rs 92,600 crore. Even a 15% dilution of TCS stake would fetch Tata Sons $3 billion. Tata Sons may consider doing it, but is not in a desperate hurry.

Any regulatory issues with the deal?
There are none known, so the deal, if and whenver it is clinched, should have smooth passage

Workers wary: Corus is of “vital strategic importance” to the UK economy, and “we believe that this is a matter on which the UK government should have a view as part of their economic strategy for the country,” Michael Leahy, general secretary of London-based Community, the UK’s main steel union, said in a e-mailed statement on Tuesday.

“We would also expect there to be guarantees on the terms and conditions of employment for Corus’s UK employees, particularly on pay and pensions.”