Where is the war headed (12 dec 06)

Tata- Corus deal analysis

Analysts are divided. While most say it is the end of the road for Tata Steel as far as Corus is concerned, there are voices saying its not for nothing that India’s largest private sector steel maker invested a year in coming to this point.


WHY TATA SHOULD UP IT AGAIN
“I don’t think Tata’s would let go at this stage after having spent more than a year in negotiating. They can go comfortably up to 530 pence (a share), after which it becomes EPS (earning per share) negative. It can even take a long-term view on steel and go up to 585 pence,” said an analyst.

WHY IT SHOULDN’T
“Unless it becomes an ego issue, I think Tata Steel would pull out of the race. They will have to pay for the cost of the acquisition from the profits of Corus. If interest cost becomes higher than Corus’ profit, it would be a drain on Tata Steel’s balance sheet,” said an analyst. At an average interest cost of 8%, Tata Steel’s first offer of 455 pence would have boosted its bottomline by 17%. Expect this figure to diminish rapidly as the bid figure rises.
Note: At such high levels of M&As do ego issues matter?The matter assumes significance considering that it is the hundredth year of its existence : a milestone achieved by none in India and few in the world.


A PROXY WAR BREWING?
“I don’t think there would be a proxy war. If Tata Steel wanted be in the game, it wouldn’t have upped its first offer (of 455 pence) to 500 (pence) at one go. It would have upped it slowly, matching CSN’s. As far as I think, they come this far and no further,” said a steel analyst.

PULLOUT WON’T BE A WHEREWITHAL THING
It’s not for lack of financial resources that Tata Steel would pull out of the race. “Money is the least of Tata Steel’s worries. It has Tata Sons standing behind it. Worse comes to worst, Corus won’t be a 100% subsidiary of Tata Steel. It could be say 25% held by Tata Sons,” said another analyst.

TATA STEEL STOCK COILED UP?
“The stock has underperformed ever since the Corus bid has announced. I think if Tata Steel withdraws from the bid, the stock would jump by 7-8% before settling lower.

WHY CSN IS A BETTER FIT?
“Operationally, CSN is a better fit for Corus than Tata Steel. Operationally Tata Steel can bring synergies only post 2010-11 when its Greenfield plant comes up since it has no spare slab capacity to feed Corus.
It is only then when it can supply semi finished to Corus. Whereas, CSN has surplus iron ore which it can begin supplying to Corus from day one,” analysts said.

The game has just begun!Wait for the next moves of the goliath.