Tata offers $7.6 bn for Corus

In the biggest overseas acquisition attempt by an Indian company, Tata Steel today said it was willing to offer $7.64 billion (around Rs 34,500 crore) in cash for buying Corus, the UK's largest steel company.

The "indicative, non-binding offer" to acquire 100 per cent stake in Corus at 455 pence a share came 12 days after Tata Steel announced its interest in the Anglo-Dutch steel company.

It was learnt that Tata Steel was given access to Corus' books after submitting its proposal to the board. Some other details are expected to be finalised by the end of this week.

The offer, which came through a "recommendary route," put the enterprise value of Corus at $10 billion, Tata Steel said in a notice to stock exchanges.

"Discussions are taking place," Corus said in a statement to the London Stock Exchange. Both Corus and Tata Steel have cautioned that there can be "no certainty that a final offer will be made".

There is no time frame within which an offer has to be made. However, Tata Steel will have to place offer documents within 28 days of making a final offer. In case it does not make an offer, the Corus board can approach the takeover panel to impose a "put up or shut up" deadline, according to sources familiar with British takeover rules.

Corus has a production capacity of 18 million tonnes a year.

Its total debt and cash balance stood at $3.1 billion and $558 million, respectively. Last year, it posted pre-tax profits of nearly $1 billion on a turnover of $18.16 billion. However, lower selling prices and higher costs hit operations in the first half of this year.

If the offer succeeds, Tata Steel may sell off Corus' long products business. German steelmaker Salzgitter and Russian producer Evraz are seen as potential buyers for this business, one of the less profitable parts of Corus, according to sources close to the deal.

Industry sources said Tata Steel might face competition in its attempt to take over Corus from Russian company Severstal, which planned to raise $1.5-5 billion from a stock market listing by the end of the year.

Alexey Mordashov, who owns 90 per cent of Severstal, has made no firm declaration of its intent to buy Corus, but has made it clear that it wants to be the world's number two steelmaker after Mittal Steel.

The sources also said the offer by Tata Steel was lower than the market expectation of 580 pence a share and, therefore, it might be improved by 15 to 20 per cent when the final offer is made.

Shares in Tata Steel were 0.85 per cent higher at Rs 515.70.

Sources added that Tata Sons, the holding firm of the group, would chip in $1.1 billion for the proposed acquisition. Tata Steel has lined up loans worth $6.5 billion from its advisers ABN Amro and Deutsche Bank, as well as from Standard Chartered Plc. 

A look at Tata Group financials

Tata Steel can back its "non-binding" $7.6 billion offer for Corus with Rs 40,000 crore ($8.84 billion) worth of reserves that the group companies have on their books as on March 31, 2006. 

Even if it raises the offer by another 15-20% and the cash outgo goes up to $8.8-$9.1 billion, the group has the financial muscle to handle it as it generates cash flow of over Rs 13,000 crore (close to $3 billion) every year. The collective market capitalisation of the Tata group's listed companies is now over Rs 2,00,000 crore (about $45 billion).

Tata Sons, the holding company of the group alone has reserves of Rs 9,000 crore ($2 billion). It also holds 80% stake in the group's IT flagship TCS, currently valued at Rs 80,000 crore (about $17.7 billion). 

Tata Steel, which is eyeing Corus, has Rs 9,200 crore (over $2 billiion) worth reserves in its accounts. The company also generates cash flow of over Rs 4,000 crore ($900 million) every year.

The other group companies that have high reserves are TCS (Rs 5,560 crore/$1.2 billion), Tata Motors (Rs 5,128 crore/ over $1.1 billion), Tata Power (Rs 4,782 crore/over $1 billion), Tata Chemicals (Rs 1,953 crore/over $400 million), Indian Hotels (Rs 1,658 crore/about $375 million) and Tata Tea (Rs 1,083 crore/ over $220 million).

Market sources said Tata Sons might sell shares in companies in which it had comfortable holdings in the secondary markets. Tata Sons has a cash reserve of Rs 8,000 crore.

The acquisition, once it materialises, will propel Tata Steel to the position of the world's sixth largest steel company, with a 23 million tonne production capacity from its existing ranking of 56. It will also provide Tata Steel a footprint in Europe.

Steel companies across the globe are in the process of increasing influence over clients and suppliers and are taking advantage of growing global demand, after Mittal Steel's acquisition of Arcelor SA in a $38.3 billion takeover that will create a producer three times larger than its nearest rival.
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