Tata Far From Folding in Corus Bid

The cash-rich Indian steelmaker will likely up the ante against rival CSN to buy the Anglo-Dutch company, as Asian demand for the metal grows

Prepare for an emerging market company slugfest. The two-way bidding battle for the Anglo-Dutch steelmaker Corus Group (CGA) is expected to go high-stakes in the coming weeks. That's when India's Tata Steel (TATAFM) likely will raise its bid once again to outmaneuver rival Brazilian rival Companhia Siderurgica Nacional (SID), or CSN, which in mid-December offered $9.8 billion for Corus.

A decade ago the notion that a Tata or CSN would take over a major European industrial concern would have been laughable. But the huge demand for steel in high-speed emerging economies such as India, China, and Brazil has made these two companies cash-rich and in search of global scale.

That's why press reports on Jan. 2 out of India that Tata Steel, India's biggest private integrated steelmaker, likely would go beyond its initial offer of $8.04 billion made last October and move north of $10 billion, is being taken seriously by the markets. (This would be the third bid by Tata, which offered around $9 billion on Dec. 10 before being overtaken by CSN.) For its part, Tata Steel isn't commenting on its intentions.

Global Footprint

"I would be very surprised if they didn't counter-bid," says Lavina Quadros, a Mumbai-based steel analyst with ASK Raymond James & Associates. "Tata Steel is going to become a global player, and if you look at this from a financial perspective they can go much further."

Much is at stake for Tata Steel. Formed in 1907, Tata is Asia's first private-sector steel company, and bagging Corus would make it the fifth largest player globally. Exposure to the European market would also dovetail nicely with its recent acquisitions in Asia to give Tata a truly global footprint. Right now, about 70% of its $4.5 billion or so in sales is derived from India.

Two years ago, Tata acquired Singapore-based NatSteel, which has operations in Singapore, Malaysia, Thailand, and China. And last April, it paid $170 million for a majority stake in Millennium Steel, based in Thailand. The company is deadly serious about expanding further. "Over the next decade, Tata Steel has committed itself to attaining global scale with output exceeding 30 million tons," company Chairman R. N. Tata told shareholders last year.

Over the Top?

On top of that, the global steel industry is experiencing a major buyout binge as players race to lock up scale and steelmaking capacity. Last year, the battle for industry supremacy took a marked turn with the $23 billion takeover of Arcelor, the world's second-largest steel producer, by London-based Mittal Steel (MT). And on Jan. 3 U.S. steelmaker Nucor (NUE) agreed to pay $1.07 billion for Canadian rival Harris Steel Group (see BusinessWeek.com, 1/2/07, "Nucor Boosts its Northern Exposure").

The question for Tata and Brazil's CSN is whether the bidding will get so rich as to defy economic sense. Even Tata's initial bid of $8 billion drew the attention of credit rating agencies such as Standard & Poor's, which placed Tata on its CreditWatch list with "negative implications" back in October. Its share price has fallen 7% from levels right before its initial bid for Corus.

On Dec. 11, after CSN upped the ante again, S&P Singapore analysts Anshukant Taneja and Joey Chew warned: "The size of the acquisition and the potential cash outflow represented by Tata Steel's latest or future offers for Corus could have an adverse impact on its financial risk profile." (S&P, like Businesweek, is a unit of the McGraw Hill Companies.)

Growing Steel Needs

Steel analyst Quadros thinks Tata could easily take the bidding into the $13 billion range if it really wants to acquire Corus. The Indian steelmaker's parent company, the Tata Group, is one of the country's biggest and most powerful diversified conglomerates with interests in everything from IT outsourcing to auto manufacturing and some $36 billion in assets.

Though overpaying for Corus would certainly put enormous debt pressure on Tata Steel short-term, the company does have the advantage of operating in one of the potentially biggest steel markets. India is embarking on a huge drive to upgrade its transportation infrastructure, and the economy is expected to grow around 10% this year, on par with the world's fastest growing economy and No. 1 steel consumer, China.

That's why the betting is that Tata Steel is unlikely to walk away from this acquisition contest anytime soon. Its pockets are deep and the company shows a real desire to break into the major leagues of global steelmaking.

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