Corus deal may prove to be a costly affair

MUMBAI: The stakes for buying Corus are getting too high. After Brazilian steelmaker CSN upped the ante to 515 pence a share in response to Tata Steel’s weekend surprise offer of 500 pence, there is a view gaining ground that the bidding game has become very expensive.

Although there are few doubts that both CSN and Tata Steel have the resources and abilities to raise money to finance the proposed acquisition, the market is worried by the cost of such a buyout.

Consider this: Mittal Steel’s acquisition of Arcelor at $33.2 billion, the biggest acquisition so far and certainly the largest in the steel world, valued Arcelor at 6 times the operating profit. CSN’s current bid of 515 pence and any subsequent bid from the Tatas will value Corus at over 7.5 times the operating profit.

While Mittals paid a hefty $33.2 billion for the world’s second-largest steelmaker, CSN and Tata Steel are offering more than the Mittals to become the world’s fifth largest steelmaker. Tata Steel officials declined to comment.

“The bidding is getting very aggressive,” said HDFC Securities research head Deepak Jasani. “The initial impression is the players seem to be overpaying, but a clear picture will emerge only later. The Tatas have been known to do their homework before they venture on anything... so I’m sure they have their reasons. But in the short term, there could be some pain for Tata Steel investors.”

The Tata Steel share movement in the past few days could also be an indicator. In the past month, the Tata Steel stock has fallen 8.8% at Rs 453.40, one of the worst performers, while the broader index remained flat in the same period. The company’s shares fell the maximum on Monday by Rs 29, while the Sensex fell by 400 points.

“The options before Tata Steel are very few... either to match CSN’s offer or to get out of this bidding war,” said an analyst with a European brokerage. “Having said that, I don’t think the Tatas will leave as they have committed so much time and resources on the venture; but at what cost?” he asked, adding that the situation could get compounded if the steel cycle dipped in the near term.

Although Tata Steel has said it will leverage on Corus’ balance sheet — raise money on the strength of Corus’ earnings — it still has to put up part of the total acquisition cost to meet the European steelmaker’s cash requirements.

For its initial bid of 455 pence, Tata Steel said it will pump $3.5 billion into a special Singapore-based SPV, put a bridge loan of $1.8 billion, while about $5.6 billion will be raised as leveraged finance.

The deal led rating agency Standard & Poor’s to place Tata Steel’s debt rating at ‘BBB’ with negative implications and had also said that a revision in the offer for Corus could have an adverse impact on the company’s funds. Moody’s had also expressed reservations about Tata Steel’s financial position.

Unconfirmed reports said the bankers to Tata Steel — Standard Chartered Bank, Deutsche Bank and ABN Amro Bank — are ready to stretch the bidding war to about 530 pence, or $9.87 billion. At 515 pence, the value of the deal is already at $9.6 billion.

Tata Steel has said that additional funding for its new offer of 500 pence would be provided for by Standard Chartered Bank and Standard Chartered First Bank Korea. But again, at what cost?