DEAL OF THE WEEK: Indian steel group celebrates while UK employees and pensioners await more details
“A monent of great fulfilment for all of us in India.” That is how Ratan Tata, chairman of Tata Group, described the news on Wednesday that his company had won the auction to acquire the Anglo-Dutch steelmaker Corus.
Tata, 69, who seemed composed despite having been up all night to watch the auction unfold, added: “This is the commencement of Tata Steel’s global strategy. I believe this will be the first step towards ensuring that Indian industry can step outside the shores of India.”
The highly leveraged £6.2 billion transaction is the largest overseas acquisition ever made by an Indian company and puts India firmly on the map as an emerging economic powerhouse.
The deal means Mumbai-based Tata Steel will leapfrog from being the 18th largest steel maker in the world, with an annual production of five million tonnes, to being the fifth-largest with production of around 23 million tonnes. Tata Group, whose activities include IT outsourcing, car making and producing Tetley Tea, is India’s largest listed company.
Tata secured its victory after a nine-round auction that started the previous afternoon. The process was ordered and overseen by the UK’s takeover panel after a four-month bidding war between Tata Steel and its Brazilian rival Companhia Siderurgica Nacional (CSN) failed to produce a clear winner.
In the end, Tata Steel secured the prize by offering Corus shareholders 608p per share compared to CSN’s 603p. Both companies’ offers had earlier received the green light from the European Commission, which reckoned a takeover of Corus by either group would have no bearing on competition within Europe.
That was in marked contrast to the political wrangling that surrounded Mittal’s $38 billion merger with French steel maker Arcelor last year, a mega-merger that created the world’s largest steel maker.
Tata Steel saw value in Corus as it brings finishing mills in Europe that supply car makers including Ford. B Muthuraman, managing director of Tata Steel, said Corus would give Tata “access to mature markets in Europe where quality of the product and service to the customer is more important”.
The jewel in the crown for Tata Steel is Corus’s R&D facility: Tata sees plenty of scope for knowledge transfer from west to east. Muthuraman also stressed that the cultural fit between the two companies is good, claiming that work practices at the two companies are similar. He also said the management of Corus would remain in place even as integration unfolds.
Although Tata Group has made reassuring noises on jobs, there may be longer term job losses in developed markets, including the UK, as Tata shifts some bulk production to lower-wage economies.
Luc Pez, an analyst at SG Securities, believes Tata will shut down Corus’s slab-steel production plant at Port Talbot in Wales as it has already said it intends to source slab steel from plants in lower-wage economies, including India, from 2008. “You could see a closure of Port Talbot happening by 2009 or 2010,” he said.
However, the biggest worry for Corus employees and pensioners and for Tata shareholders is that the Indian company has over-extended itself by offering as much as 608p a share. The company said it would finance the £1.5bn difference between its earlier 500p per share offer and the 608p finally paid through a mixture of additional credit facilities and “a cash contribution by Tata Steel to Tata Steel UK.”
Overall, the company will need to borrow more than $7bn (£3.6bn) to finance the acquisition.
Standard Life Investments sold its entire 7.56 per cent stake in Corus for an estimated £425 million on Wednesday morning. David Cumming, head of UK equities at SLI, said: “Tata has now paid a fair price. We are happy with the outcome.”
Corus became an attractive takeover target as global demand for steel is persuading the world’s steel makers they need to bulk up their operations as a means of exerting more control over rising labour and raw material costs.
But some credit must also go to Corus’s chief executive Philippe Varin, who took over in 2003. He returned what had become a virtual basket case to profit after job cuts and plant closures.
However, fears remain that the takeover will threaten the future of the Corus pension scheme, which has 166,000 UK members. Tata Steel has already said it will inject £126m into the fund at the same time as boosting annual contributions into the British Steel fund.
There is also a risk that any global economic slowdown would cause a slump in demand for steel. In turn this could lead to Tata Steel struggling to repay its debts, and making it harder to honour its commitments to the fund.
Paul Collier, regional officer at trade union Amicus, said: “Amicus has reservations and will be seeking an urgent meeting with Tata to discuss future investment strategy and plans for development.
“Pension arrangements are one of the major issues we wish to discuss, although we are pleased that last year they made a public commitment to contributing 10-per cent [of salaries] into the British Steel pension scheme.”
Corus employs 47,300 people worldwide, including 24,000 in the UK at plants in Port Talbot, Scunthorpe and Rotherham. Corus also employs about 200 people at the Dalziel steel plate mill in Motherwell, Lanarkshire.
NEED TO KNOW
THE FACTS: Tata Steel has acquired UK steel maker Corus, formerly British Steel, in a deal worth around £6.2bn.
BACKGROUND: The deal followed a long-running battle between the Indian steel maker and Brazilian rival CSN. Fears were expressed in some quarters that jobs and pensions would suffer.
This ‘Deal of the week’ article was published in the Sunday Herald on 4 February 2007