Corus may join Tata SPV; deal likely on Friday
It’s all stiff upper lip at the moment, but the body language is positive. The Tatas seem to be closing in on Corus, so much so that sources monitoring developments feel that an announcement may be on the cards as early as Friday. The Tata Steel board may also meet on Friday to ratify the deal, but this could not be confirmed.
Tata Steel’s takeover of Corus may involve a scheme of arrangement under which Corus could be merged with a special purpose vehicle (SPV) or holding company 100% owned by the Tata group, persons familiar with the situation told ET. The SPV is likely to be based outside the UK, in order to comply with UK regulatory requirements.
Just ahead of Diwali, this one would really be the loudest bang made by an Indian company on the international firmament; and one that puts even the Mittal-Arcelor deal into the shade, coming as it does out of India.
The scheme of arrangement, if that is the route eventually pursued, is subject to approval by Corus directors and then by shareholders. If approved by the requisite majority of shareholders, Corus will then be merged into the SPV. Shareholders will, however, receive cash at 455 pence per share (or higher, depending upon the final outcome) instead of shares, sources said. The cash to be paid will come from the SPV, which is raising debt and equity worth $8-9 billion.
The exact details are not currently available and are likely to be unveiled in the course of a formal filing by the acquirer (the SPV). There are two ways of taking over a company in the UK — a tender offer or a scheme of arrangement. The latter, people close to the situation say, seems likelier.
For a scheme of arrangement to be successfully executed, the Tata group would have to reach an agreement with the Corus management and subsequently the shareholders. Such an agreement may be announced later this week.
According to most observers, it seems likely that the Corus board may be inclined to recommend the offer, given that its share prices are commanding a premium, given the consistent rumours about a possible merger since summer.
When contacted, a Corus spokesperson said the company could not comment on the status of the discussions at this stage. One reason to opt for a scheme of arrangement is to gain complete control over Corus, sources said. In the other scenario, the Tata group may not be able to persuade all Corus shareholders to sell. Some shareholders could probably hold out, creating undue hassles.
The SPV will be capitalised by the Tata group, largely Tata Steel, to the tune of $2-3 billion, sources said. Tata Steel shares fell 1.3% on Wednesday to Rs 508.7 on BSE. Corus shares rose 8p to 487 p at 11 pm IST.
The Corus board is scheduled to meet later on Wednesday, and may come out with a recommendation soon. The way forward hinges on pricing — the critical issue is if another bidder emerges, and a couple of Russian companies, including Severstal, have not said no, the Tatas might have to plumb their financial reserves a bit more. Metal Bulletin, an industry publication, said Brazilian steel major CSN may put in a counter bid, which was, however, denied by the company.
Sources in the know said Tata and Corus might be culturally more compatible. Both companies have been national icons of their respective countries. Both are seen as having been through difficult cost-cutting and restructuring exercises, yet both value and have learnt to live with their history. And both are seen as ‘process and systems driven’ (read somewhat bureaucratic) in their approach, says one observer. “James Leng (chairman of Corus) and Ratan Tata had great chemistry between them when they met in summer,” says a source close to Tatas. It is at Leng’s initiative that talks have reached so far, which was first started early in summer this year. “It shows that western companies now have to seriously look at Indian companies as competition,” one rather gleeful Indian businessman in the UK told ET.
Also, the UK trade unions, which are inclined to evaluate the Tata offer on its merits, may well be less favourably inclined towards a Russian bidder. According to observers, the Tatas are perceived to be more ‘sensitive’ to softer aspects like jobs than the Russians. “We would expect Tata to commit to further much-needed investment in Corus’ UK operations, as part of the terms of any takeover deal, “ said Michael Leahy, community general secretary of the trade union that represents most Corus employees.
Community officials said, as a trade union, it has never been protectionist in nature and would evaluate Tata’s terms and conditions on merit, and after ensuring that the steel industry’s strategic role in the UK economy is maintained. The union is expected to demand a guarantee on the terms and conditions of employment for Corus’ UK employees, particularly on pay and pensions.
Comparisons with Mittal-Arcelor is both natural and obvious. The difference in this case seems to be that there are no regulatory hurdles — the British government’s attitude is much more welcoming towards Indian companies. And as one commentator told ET, “The Tatas as a group are greatly respected in the West. Ratan Tata commands a lot of respect. It’s seen as professional and well-managed.’’
Corus employs 42,100 employees worldwide, in over 40 countries. Industry observers, however, feel there may be some trauma involved, and the Tatas will have to tread very delicately. “After all, the whole point of a merger is to improve efficiencies and reduce duplication of jobs,” said an analyst.
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