Rising bids raise fear of Winner's Curse

The rising heat in the race between Tata Steel and Brazil's CSN to acquire Anglo-Dutch steelmaker Corus has raised the spectre of the Winner's Curse, the financial theory that the winning participant in a frenzied auction will typically pay an overvalued price.

An analyst said CSN offer of 515 pence a share pegged the enterprise value of Corus at $11.6 billion, 7.6 times its 2006 earnings before interest, tax, depreciation and amortisation. Mittal Steel paid about six times the operating profit to acquire Arcelor.

"Tata Steel may not outbid/match CSN as it will stretch their balance sheet considerably and it might take a lot of time before synergies between Tata Steel and Corus materialize," says a report by Emkay Research.

As the two bidders appear to be betting on the rising curve of the commodity cycle, the critical question is: what is the right price for Corus?

On October 20, when Tatas made their firm bid in London, the Corus management had called it the "the right offer from the right partner".

However, following CSN firm bid of 515 pence a share, the Corus management changed its tenor and put its might behind CSN. In the process, the valuation of Corus vaulted from $8.04 billion to $9.6 billion in the course of just three bids.

Hitesh Agrawal of Mumbai-based Angel Broking says any price above 525 pence a share would affect the balance sheet of Tata Steel in the short term.

In this open ascending auction, Tata could have kept making bids, one just a little higher than the other, till the value it attached to Corus was arrived at.

Instead, the Tata brass tried to pre-empt CSN by offering 50 pence per share "" nearly 10 per cent "" more than its first bid of 455 pence a share. Tata Steel must have been hoping that this would be the knock-out punch.

However, CSN, which appears desperate for Corus, having lost in the race for US-based Wheeling-Pittsburgh Corp, turned the tables by pricing its first firm bid at 515 pence a share.

Interestingly, CSN holds 3.8 per cent equity of Corus, that is, 33,856,936 shares. Every increase of 50 pence a share will fetch the Brazilian company an additional £17 million. Significantly, the Tata Steel stock has fallen 13 per cent since October 20, when unveiled its bid for Corus.

An analyst with a foreign brokerage, who did not wish to be named, said there was no dearth of good steel companies available for acquisition in Europe.

"Desperate to get Corus under his clutch, the CSN chairman looks like sweetening his bid if Tata Steel launches a revised offer," he said.