Tatas forced to rustle up Plan B for Corus

MUMBAI: It’s unthinkable that Tata Steel did not have a Plan B when it bid for UK’s Corus Group Plc, but The Times, London, says that’s the precise story.

Ratan Tata, chairman of the group, was in the office of the Times on Friday afternoon when news of the CSN counterbid was broken to him.

The Tata Group had no contingency plan for a counter-offer, a composed Tata told the Times. “Because Corus told us that this probably was not going to happen.”

But now that it has happened, what next?

To stay in the race, Tata Steel will have to simply garner more cash. A lot, lot more, and counter the counter-bid.

Ratan Tata has rushed back to Mumbai on Saturday to corral forces.

Trying to take over Corus at a higher price makes sense because the global steel industry has been forced to consolidate after the Lakshmi Mittal-owned Mittal Steel and Luxembourg-based Arcelor SA merged to create a monster, game-changing, enterprise.

With that, size became imperative to survival.

“All the major steel companies are looking at each other because consolidation just makes so much sense,” Monica Bonar, a fixed-income analyst at Fitch Inc in New York, told Bloomberg. “If you globally have more moving parts you can make more money.”

The consolidation fever is already on. Arcelor’s once-white knight, OAO Severstal of Russia, is combining forces with indigenous iron-ore makers ZAO Gazmetall and ZAO Metalloinvest, to construct a $20 billion steel monolith that will have the firepower to buy the $8 billion Pittsburgh-based US Steel, the biggest in America. 

For Ratan Tata, raising lots of money would involve diluting group holding company Tata Sons’ stake in heirloom Tata Consultancy Services at a very basic level. He can do that comfortably, since group holding in the software firm is more than 80%.

Sources said on Saturday Tata Steel will boost its 455 pence offer early next week itself, but a company official declined to comment.

The CSN offer is subject to due diligence, which should not take too long considering the company had bid for Corus exactly four years ago.

That CSN is serious was clear on Friday when it rushed to pick up 12 million Corus shares through the open market in London by spending over 50 million pounds. This took its stake to 3.8% from an earlier 2.33%.

The Tata offer was scheduled to be placed before Corus shareholders on December 4 at an extraordinary general meeting.

India’s most diversified conglomerate will have to rework its math much before that date and come out with a number more compelling than its 4.23 billion pounds offer.

One analyst said where sheer industrial logic goes, CSN is a better bet for Corus because the Brazilian firm gives it access to the world’s largest iron ore repository, the Casa de Pedra mines.

But a Tata official says such a link is of no consequence, because Tata Steel can go a step forward and provide Corus with slabs at competitive prices.

“All Corus needs to do is turn this into high-grade steel and not worry about the earlier ore conversion process,” he said.

The Corus board backs Tata because it sees great corporate and interpersonal synergies. And the board is said to be uncomfortable with the idea of CSN, which it had once spurned, though the two companies have a venture going in Portugal.

On December 4, if the Corus shareholder goes for CSN and rebuffs Tata Steel at the gate, Tata will receive a deal-break cheque of about 40 million pounds as consolation prize.

“Hard as it may be to believe a Plan B doesn’t exist, it shouldn’t take the Tatas more than a few days to officially up the CSN bid,” said a Mumbai-based steel analyst.

Talk on the street is, in the end, the price for Corus may go up to as much as 550 pence a share or 21% more than the original Tata offer. That still wouldn’t be much, considering Lakshmi Mittal had to hike by 43% his original offer of 28.21 euros per Arcelor share on January 27 ($23.3 billion total bid worth) this year to 40.4 euros a share on June 25 ($38.3 billion).

The banks and investment bankers on both sides of the war are heavy hitters indeed — ABN Amro, Deutsche Bank and Credit Suisse on the Tata side, and Barclays, Goldman Sachs, BNP Paribas and Lazard on CSN’s.

They are already in a huddle dissecting possible moves and counter moves? Ratan Suddenly, one of the smoothest-possible cross-border M&As in history may turn into one of the most hard fought ones.