Bidding war: Tatas’ next move still unclear
Finally, after weeks of an expectant hush, the bidding war between the Tatas and the Brazilian CSN for Corus has broken out in real earnest.
In a swift series of moves and countermoves, the two emerging market contenders jockeying for a grip in the European steel industry have pushed the valuation of Corus up to GBP 4.9 bn ($9.6bn), its share price up by 5%, and pumped the FTSE 100 by 4%, along with all European stocks. At the end of 24 hours of frenetic activity, the ball is now squarely back in the Tata court.
CSN has matched the Tatas almost point by point, including an assurance that Corus’ existing operations will not be touched
First, the Tatas, in a move intended to pre-empt CSN’s tabling of its formal bid, upped its previous offer by 10% to 500 pence per share, or a total of GBP 4.7 bn. "We remain convinced of the compelling strategic rationale of this partnership," said Mr Ratan Tata. The Corus board immediately recommended the revised offer to its shareholders, and also gave the Tatas an irrevocable undertaking to vote the directors’ own 1% in the company in favour of the Tatas’ revised offer. "The Corus board are pleased to recommend this… a substantial increase from the previous offer," said Jim Leng, Corus’ chairman.
In just a few hours, the feisty Companhia Siderurgica Nacional trumped the Tata offer by 3%, with a formal bid at a price of 515 pence per share, implying an enterprise value for Corus of approximately GBP5.8 billion. "The strategic impetus for this combination is growth – growth in Brazil, in Europe and for our combined workforces. Our goal is to unlock the value of our iron ore assets through Corus, transforming them into cost effective, high quality steel products using Corus’ advanced engineering capabilities and its excellent European distribution platform." said Benjamin Steinbruch, CSN’s chairman.
The board of Corus promptly recommended this one to its shareholders as well. "This offer is both higher than CSN’s initial proposal as well as the revised Tata offer. It is also consistent with our strategic objective of securing access to raw materials, low cost production and growth market. The combination will create a strong platform from which to compete and grow in an increasingly global market." said Mr Leng, in what sounds like déjà vu.
As CSN put its bid on the table, Corus shareholders could easily be forgiven for going cross-eyed – both bids look almost identical. Replace Brazil for India, replace CSN for Tata, and as British media described it, ‘middling-sized family-owned steel magnate with global ambitions’ could apply to either.
CSN has matched the Tatas almost point by point, including an assurance that Corus’ existing operations will not be touched.
It even won over the pension trustees with a little extra – it has promised to put GBP 138 mn into the deficit IAS 19 deficit on the Corus Engineering Steels Pension Scheme compared to Tatas GBP 123 mn, and raise the contribution to its main fund to 12%. The pension trustees, who are, it is understood, wary of the ever-spiralling debt burden that the bidding war is going to eventually offload onto the merged entity, are known to have been pushing a hard bargain.
The CSN bid is bristling with pre-conditions, clauses and legalese for unexpected ‘relevant events’ all over it, which seem to indicate that both CSN and Corus have tried to provide for all kinds of bumps on the road ahead, including escape clauses.
Separating the almost photocopy versions, there are a few critical points of difference in the bids – first, CSN’s bid is based on a pre-condition that either Corus Shareholders reject the Tata Scheme or the Tata Scheme is otherwise withdrawn by Corus or lapses. And next, despite its commitment to the management of Corus, it seems as if Corus chairman Jim Leng may not have quite as defined a role to play as he would have under the Tata scheme.
Mr Leng, who has built a personal relationship with Mr Tata during the past year, will step down from the board of Corus, and be invited to be a non-executive board member of CSN.
Phillipe Varin stays on as CEO for a further six months, to work on the closely with Mr Steinbruch who becomes chairman of Corus, on the integration.
Neither does Mr Leng’s name figure in the announced convergence committee, to be chaired by Mr B Steinbruch, and will comprise executives drawn from the enlarged Group including Mr Varin, finance director D Lloyd and R Henstra from the Corus side.
This, between the lines, is the first hint that Corus’ management may face a shake-up if the CSN bid goes through.
The acquisition will be made by CSN Acquisitions, a wholly-owned subsidiary of CSN, recently incorporated in England and Wales set up to buy Corus. CSN, like Tatas, are also planning on a scheme of arrangement.
The next move in this takeover battle will have to be played out over the next few days, as Corus comes close to its once- adjourned shareholder meeting date of December 20 th Exactly what the Tatas will do next is not clear. In a holding statement earlier in the day, the Tatas said they were considering their next move. The choices are clear-cut – if Tata wants Corus, it will have to up its bid again. If they’re willing to wait and come back to fight another day, maybe a few years down the line, they won’t. There is today a slight sense of disappointment in the Tata camp.
Both are backed by banking biggies, and seem well-placed to be able to raise even more funds if required. In fact, it would be surprising if both sides have not already tied up financing for further hikes. CSN has already announced plans to monetise its iron ore mines in Brazil to help finance the buy-out, and Tatas sold stake in TCS.
However, the biggest consideration, say observers, is whether a headlong rush up the price range would be worth the amount of debt it would load on the merged entity.
Analysts feel that an unbridled price war, while great for existing corus shareholders, may make the merged entity itself vulnerable to takeover by a third party, or even one of the existing players a few years down the line. At a time when the steel industry is going through hysterical consolidation, that’s a very real fear.
The cost of protecting Corus debt against default in the credit default swap market rose about 10bp on Monday, to a mid-price of about 186bp, meaning it costs Euro 186,000 per year to cover Euro10m of debt for five years.
To counter that is the personal commitment of both Tata chairman Ratan Tata and CSN’s Benjamin Steinbruch – both are known to have serious global ambitions, and they want to realise it now. In this round, chairman Ratan Tata isn’t personally on the battlefront, though CSN’s chairman Benjamin Steinbruch has been camped here for a while.
Takeover battles may be a dime a billion dollars in the UK. But for CSN and Tata, both of which are becoming international symbols of their emerging economies’ the battle for Corus is more than debt and financing. In Mr Tata’s own words, this will be a ‘defining moment’ — for all the players in this game.
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