Arcelor Mittal remains king, but the merger of Indian upstart Tata with larger European rival Corus could win some friends for low-cost production
Tata Steel's friendly $9.5 billion takeover offer for Anglo-Dutch steelmaker Corus Group, made official on Oct. 20, says a lot about how industrial power is shifting away from developed markets toward lower-cost producing centers in the global economy.
Five years ago, an Indian steel company taking over a sizable European rival would have been difficult to imagine. But now it seems almost an obvious move, thanks to the ambitions and improving managerial talent found in companies from India, Russia, Brazil and other fast-growing economies.
Corus Group (CGA), which was created by the merger of the old, long-suffering British Steel and Koninklijke Hoogovens of the Netherlands in 1999, is stuck in the undesirable middle in the high-cost European market. Along with installations in its home countries, Corus has major plants in Germany, France, Norway, and Belgium.
A Whole New Level
The company has been making clear for some time that it is looking for access to lower-cost, higher-growth markets. Evidently Tata, although a much smaller steelmaker, fits the bill. Tata has access to lower-cost inputs, and it also has the financial firepower of the Tata group of companies, which has combined annual revenues of $22 billion, behind it.
Corus is selling itself because CEO Philippe Varin, who will remain at Corus and join the Tata Steel board, thinks the company's future will be bleak without a transforming deal. While Corus is the world's ninth largest steelmaker with annual output for 2005 of 18.2 million metric tons, according to the International Iron and Steel Institute, it suddenly finds itself dwarfed by the new Arcelor Mittal (MT), which is a powerhouse in Corus' European market.
The megasteel company was created this summer by industry leader Mittal Steel's $31 billion merger with Luxembourg-based Arcelor, the No. 2 player, after a protracted battle (see BusinessWeek.com, 6/26/06, "What Price Mittal's Victory?"). Arcelor Mittal's combined output for 2005 was about 110 million metric tons. That huge size, coupled with access to captive iron ore mines around the world, gives Arcelor Mittal enormous firepower compared to smaller players.
The Giant Speaks
Arcelor Mittal managers, for instance, say they will be able to make savings of $1.6 billion through greater purchasing and pricing power and the ability to streamline manufacturing processes thanks to the merger. That figure is almost triple Corus' operating profit for continuing operations of $567 million for the first half of 2006—a 37% year-on-year decline. Revenues were $8.7 billion for the period. EBITDA margins were about 9% compared to the roughly 18% that analysts at London's Cazenove forecast for Arcelor Mittal.
At a recent investor conference in London, Lakshmi Mittal, Arcelor Mittal's main shareholder and president, reckoned that smaller European companies would be under pressure to join the consolidation wave that is sweeping the industry. "Niche players, if they are low-cost producers, will continue to survive, although they can't be competitive with Arcelor Mittal," he said.
Tata Steel was only 56th in the world with 4.4 million tons last year, but it has access to low-cost raw materials in Asia. It is considered one of the lowest-cost producers of steel slabs, an intermediate product, which could conceivably be imported into Corus' system for finishing and sale.
Acquiring Corus would give Tata access to the Western European market and to advanced steel-making technology. One industry executive speculated that Tata's real aim was to radically makeover higher-cost Corus operations, such as those in Britain, without stirring up a firestorm among the company's 47,300 employees by saying as much.
It's not a certainty that Tata will win Corus—although the recommendation of the offer by the Corus board will help deter other bidders. Steel companies are hot—and prices that many analysts think make no economic sense have been paid over the last couple of years. (see BusinessWeek.com, 9/13/06, "Global Steel is Coming Together"). The price Tata is discussing is not out of the range of recent deals.
The price would peg Corus at about $520 per ton of capacity compared to the roughly $1,000 a ton that Arcelor paid for Canadian steelmaker Dofasco earlier this year. The deal looks good on paper, but it may not be smooth sailing for Tata.