INDIA BUSINESS WORLD - OCTOBER 2006
THE MONTH THAT WAS...

TATA STEEL MAKES $8-B CASH OFFER FOR ALL OF CORUS

 TATA Steel took a giant step towards its global ambitions when it formally announced on Tuesday its move to acquire Corus — the world's seventhlargest steel producer and almost six times its size. Tata said it will offer 455 pence per share for 100% stake in Corus. While the cash offer values the deal at about $8 billion, Tata Steel has put the enterprise value of the British steel maker at $10 billion.The offer, if successful, will be independent India's largest ever global acquisition and the global steel industry's third-biggest acquisition behind Mittal Steel's $43.63-billion buyout of Arcelor and Kawasaki Steel's $11.89-billion takeover of NKK Corp.

   It will also catapult Tata Steel into a completely different league, making it the world's fifth-largest steel producer with an overrall capacity of about 26 million tonnes and a turnover of more than $21 billion. The company, set up as a small steel mill in 1917 in Jamshedpur by Jamsetji Nusserwanji Tata, is today on the road to becoming India's second-largest company after state-owned IndianOil Corporation.

      “Following the announcement by Tata Steel on October 5, 2006, the Corus board confirms it has received a proposal from Tata Steel regarding a possible recommended offer for Corus at a value of 455 pence per share in cash and that discussions are taking place between Corus and Tata Steel.” The Indian company, in a statement to BSE, agreed it is in discussion with the Corus management and has made an indicative non-binding offer to acquire 100% equity. “There can be no certainty that an offer will be made and further announcements will be made as appropriate,” the companies added.

   Tata Steel shares outpaced the Sensex and was up 0.85% at Rs 515.7 on the BSE on Tuesday. Corus shares fell 0.5 pence to 479 pence after the announcement as investors were expecting a much higher price of about 580 pence per share. The announcements end weeks of raging speculation about an imminent bid by Tata Steel. The company will now have to follow this up with a final offer.

   Tata Steel is trying to achieve a number of strategic objectives through this bid. One is obviously scale and size. With a turnover of just $3.2 billion and a capacity of about 7 million tonnes, the company was just too small by global standards. Its peers such as South Korea's Posco had emerged as much bigger companies although they began operations much later.

   Also, a certain Lakshmi Niwas Mittal had bought over inefficient steel plants and turned them around by cutting costs and improving productivity. If it was something that Tata Steel knew better than anybody else, it was to cut costs. The company had emerged as the world's lowest cost producer on a per tonne basis after savagely cutting flab at its production facilities in Jamshedpur. The fact that it owned iron ore mines also helped.

   Corus, though big in size, was ripe for an acquisition due to its bloated cost structure. It owned no iron ore mines and had to grapple with high labour and power costs at most of its production facilities. When Tata Steel set off to acquire overseas companies in 2004, it had one clear plan in mind. It would use its low-cost production facilities and access to ready supply of iron ore to feed plants near large markets such as Europe, the US and China.

   AFTER making the ‘recommended offer' of 455 pence per share on Tuesday, Tata Steel will now have to make a firm offer to the Corus shareholders, according to the UK takeover code.

   The Indian company will have 28 days to post the offer document to all shareholders of Corus starting from the date of the final announcement. This is expected to start the bid clock.

   The ball is now in the court of Corus. Its board has to advise the company shareholders of its view on Tata Steel's offer. This is normally done within 14 days from the date of the announcement, says the code. If the Corus Board is satisfied with the offer, the letter sent to the shareholders by Tata Steel will also contain the views.

   Meanwhile, Corus can avail of another 25 days to disclose more information, like profit or dividend forecast, that could influence the shareholders' decision. And during this period, shareholders also have the option to rethink and change their decision.

   One thing to note. The principal factor determining the success or failure of an offer is whether or not Tata Steel obtains the ‘acceptance condition'. The minimum acceptance condition permitted is shares carrying over 50% of the target's voting rights. That is, at least half of Corus shareholders should accept the offer.

   If this level is not achieved within 60 days from posting the offer document to shareholders the offer lapses unless the Takeover Panel agrees otherwise.

   What happens if a Russian or Brazilian company also makes a bid? Experts say Tata Steel can revise the offer, and the shareholders will again have 14 days to respond on it. But this has to be done within the 60-day period.

   Apart from getting the nod from at least half of the shareholders within 60 days, Tata Steel also has to fulfil ‘other conditions', such as regulatory consents. It has 21 days to do this. If done, the offer has got the “wholly unconditional” nod from the shareholders.

   Now comes the payment, which could mount to almost $8 billion, according to the present offer. Tata Steel will get 14 days to make the payment to the Corus shareholders. This done, the Indian steel company would have cleared the 91-day test. The reward - becoming the fifth largest steel company in the world.