Tatas: Tipping point

In terms of valuations, Tatas' offer is good for Corus investors

Will Corus' investors bite the 'billet' for Tata Steel's indicative bid, which is at 5 per cent discount to Wednesday afternoon's market price?

The Corus share has appreciated over 20 per cent since early October after news of Tata Steel's interest in the company, and investors had bid it up to 505.5 pence last week.

In terms of valuations, this offer is good for Corus investors, and if there is no rival bid from Russian and Brazilian candidates, Corus' shareholders may come to terms with Tata's 455 pence bid.

Though not a cheap purchase, Corus will provide Tata Steel the required leg-up to be among the top global players, broad-base its geographies and provide access to value-added steel market.

Corus' financials have been chequered with a small EPS growth in 2005, though there was a marked improvement in the June 2006 quarter with an EPS of 9.1 pence compared with 10.17 pence in CY05. At $10 billion, the enterprise value is about 6.3 times trailing 12-month operating profit, which is slightly higher than what Mittal Steel paid for Arcelor.

Corus had an operating profit margin of 8.5 per cent compared with Tata Steel's consolidated operating margin of 30 per cent in the 12 months ended June 2006. So, Tata Steel will have a task at hand to improve profitability at Corus.

Tata Steel has a decent balance sheet and the group has a track record of innovative financing, though there would be some dilution.

Analysts do not expect the merger to yield quick results for Tata Steel as Corus will become earnings accretive only in FY08, assuming a small upward revision in the price.

No wonder, then that the market's response was lukewarm as the Tata Steel stock declined 1.4 per cent against the Sensex losing 0.2 per cent yesterday.

Glenmark: Right pill

The Glenmark Pharma stock soared 19 per cent per cent to Rs 393 on Wednesday, after its Swiss subsidiary licensed GRC 8200 to Germany-based Merck to develop a diabetes drug.

As part of this deal, Glenmark will get an upfront payment of Euro 25 million (Rs 145 crore) and various milestone payments totalling euro 190 million for the drug.

On commercial launch, Glenmark would also supply the active ingredient to Merck and would receive royalties on sales.

Clearly, this upfront payment is of enormous significance to Glenmark, given that its operating income in the June 2006 quarter amounted to Rs 138.03 crore.

Glenmark has leveraged the partnership model with global players, for new product development and expansion into new markets, to minimise costs.

For instance, in September 2004, Glenmark's Swiss subsidiary had entered into an agreement with the US-based Forest Laboratories to develop, register and commercialise GRC 3886 (medication for treating chronic obstructive pulmonary disorder and asthma.

Glenmark had got an upfront payment of $10 million, in addition, it is entitled to milestone payments and royalties once sales of this product begin. The total potential value of this deal was pegged at $190 million. After this announcement, the stock had appreciated 60 per cent in five trading sessions.

Analysts are waiting for Glenmark to declare its September 2006 quarter results, before making any changes in the company's projected EPS for FY07. The stock trades at 18 times estimated FY07 earnings.