Merger is an option in Tata Steel-Corus talks
Tata Steel and Corus Group Plc may pen India Inc’s biggest merger story overseas.
According to market sources having access to current thinking in the Bombay House and at Corus’ London headquarters, both the companies are weighing possibility of a pure merger along with a buyout proposal.
"Both the approaches have respective strengths and weaknesses from the point of view of the large number of stakeholders including employees and institutional investors in the European and Indian companies. Discussions are at a fairly advanced stage now before giving final touches to a mutually acceptable methodology, arriving at respective valuation of the two entities and bringing about operational synergies post combination or straight takeover," a global merchant banking source told Business Line from London late Tuesday evening IST.
The merger
It is understood that in case of a merger, Tata Group would be looking at a 20-23 per cent stake in the combined holding, and in a buyout scenario, its valuation of Corus ranges between $8 billion and $8.5 billion. Tata Group is, sources insist, internally prepared for choosing both the options, including organisation of funding.
Sources indicated that Bombay House had been burning the mid-night oil over the Tetley-Tata Tea and Mittal-Arcelor models in the last couple of months. "A final call on the issues would be made by the top brass of Tata Group and Corus Group this week in London," said an insider.
The timing of the agreement coincides the end of the loan note scheme, a legacy issue since the merger of British Steel and Hoogovens to form Corus, and dividend payment of Corus.
Key factors
The key factors currently hogging the negotiation limelight are: comparative assets strength, particularly mining assets; cost competitiveness; cash flows and liabilities.
Corus does not have any significant mining interest or asset since the second half of 2002, when it sold off its minority holding in AvestaPolarit to Outokumpu.
The company currently imports around 25 million tonnes of iron ore a year, principally from Brazil, South Africa, Australia, Canada and Venezuela. On the contrary, sources pointed out that Tata Steel has rich iron, dolomite, chromium and manganese mining, and related assets in India and even abroad. It currently produces over 9 million tonnes of iron ore.
Corus has been struggling even after a five-year rally in steel prices because of the high cost of operation in the UK than in India, China or Russia, the so-called non-Kyoto manufacturers. .
According to the IISI (International Iron and Steel Institute) data, the average hourly rate of pay in the UK steel industry in 2004-05 was 6 times that of Brazil and 10 times that of India. In contrast, it is acknowledged that Tata Steel is the lowest cost producer in the world, a top company source asserted.
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