To take Corus, only cash will work

Brazilian challenger CSN can offer as much synergy as Tata Steel

With Companhia Siderurgica Nacional (CSN), Brazil’s fourth largest steelmaker, putting in a counter-bid for Corus Group plc, analysts say that the Tatas have no option but to top the bid as early as possible. Reason: operational synergy is no substitute for hard cash, especially since CSN can offer the same cost advantages as Tata Steel.

On Friday, CSN topped the Tatas’ 455-pence-a-share bid for Corus by offering 475 pence, and analysts said they expected the Tatas to dig deeper into their pockets for an additional $ 500 million to match the bid. But, at the same time, the Tatas cannot afford an endless bidding war, what with rating agency Standard & Poor’s putting Tata Steel on a long-term credit watch soon after it formally unveiled the Corus offer at a deal size of $ 8.1 billion.

While much of the additional funding could come from Tata Sons and a Singapore affiliate, Tata Steel will also have to leverage its balance-sheet more with its bankers ABN Amro and Deutsche Bank to bring home the bacon.

While Tata Steel is yet to react officially to the CSN offer, sources close to the management in Jamshedpur said: “A counter-offer should not surprise anyone. Not in the global steel industry, where everybody is in consolidation mode. It is also very unlikely that after working on the Corus due diligence for over a year, Tata Steel will not have a Plan B to take care of anticipated counter-offers.”

The key issue is how high can CSN afford to raise the bidding war? Having offered $ 8.4 billion for Corus, analysts believe that CSN on its own will not bid much higher since it is currently involved in another battle with privately-held steel services company Esmark for Wheeling Pittsburg Corp. Last week, CSN upped its offer for Wheeling Pittsburg by offering $ 50 million in cash.

Against this backdrop, some steel research firms are already mentioning the possibility of CSN roping in Cia Vale do Rio Doce (CVRD), the world’s largest iron ore mining company, to enter the picture in case the bidding war gets hotter. By virtue of its 41.73% stake in CVRD, held through a consortium, the Brazilian steelmaker not only stands to gain financial muscle but could also offer Corus the prospect of cheap ore, a critical factor in making a value-added steel producer like Corus viable. It was with this prospect in mind that Corus had launched a failed bid for CSN in 2002.

But CVRD is in the midst of its own financial stretch, having concluded a $17.1 billion takeover of the Canadian nickel company Inco. It is in the process of integrating its operations. If CVRD enters the picture, it would be a hard act for Tata Steel to follow. The main attraction of Corus is that it has high-end steel facilities and a distribution network in auto grade steel consuming markets like the European Union. Corus would benefit by getting low-cost steel slabs from India.

But CSN plus CVRD would blunt much of the Tata advantage. If the Tatas can offer low-cost slabs, CVRD would be able to offer even lower cost ore. CVRD ships 229 million tonnes of ore to steel producers worldwide.

In comparison, Tata Steel, which produces just around nine million tonnes of ore from its mines at Noamundi, Joda and Kalamandi in Jharkhand, has a limited capacity to export the base raw material.

Besides, its own ore requirements on the completion of its greenfield projects in Orissa, Jharkhand and Chhattisgarh will grow. If Tata Steel is to walk away with the bride, pipping CSN, it will thus have to be on the strength of cash alone.