Tatas' have edge in Corus race

Backing of Tata Sons and Corus board support seen as advantages.

Despite the bankers and advisors allied to Brazil's Campanhia Siderurgica Nacional (CSN) having scaled up their equity holding in Corus Group to about 20 per cent, Tata Steel may have its nose just a bit ahead in the race to acquire the Anglo-Dutch steelmaker.

Investment bankers say Tata Steel is still ahead not only because it has obtained the support of the Corus board and its pension fund trustees, but also on account of the backing of Tata Sons, which controls a market capitalisation of about $50 billion and revenues of about $22 billion.

In comparison, CSN's controlling shareholder has no other asset. Also, the company is ridden with debt, which stood at $10 billion for the September quarter. This will reflect on the merged entity's balance sheet if CSN were to acquire Corus.

Corus, on its part, is burdened with over $3.1 billion of debt, against a cash balance of $558 million. The Brazilian company's debt burden is one of the reasons why its bid to acquire Wheeling Pittsburgh of the US suffered a setback, point out steel analysts.

"Tata Steel's 455-pence-a-share offer has got the support of the trustees of the pension fund, as well as the Corus board," said a banker associated with the bid.

On the other hand, the CSN offer of 475 pence a share is subject to due diligence, finalisation of funds, and the support of the Corus board.

Tata Steel has received the nod of the trustees of Corus' pension fund by offering upfront the deficit on the Corus Engineering Steels Pension Scheme with $241.22 million and to increase the contribution rate on the British Steel Pension Scheme from 10 to 12 per cent until March 31, 2009.

The Brazilian steelmaker has not yet made a commitment on the pension scheme, which may happen when the company makes a firm bid. It is learnt to have started discussions with the pension trustees, details of which are not known.

The buzz in the investment banking circles is that the wardens of the pension fund may not like the CSN offer if it depends more on debt.

The board of the world's eighth largest steel company will have the last word in recommending a bid. It will recommend only one bid for shareholders' approval.

In making the choice, the trustees of the pension fund will play a crucial role. Corus has three pension schemes with about $19.3 billion of assets, to cover payments for its 47,000-strong workforce and many more retired workers.

Tata Steel's Achilles heel could be raw material, of which Corus has none. In fact, Tata Steel Managing Director B Muthuraman has repeatedly taken the stand that India must stop exporting iron ore.

Of course, Tata Steel has maintained that the synergies extend beyond the raw material advantage. Yet, CSN has claimed to be the better fit on account of its iron ore mines.