Tata Steel’s Corus Poker

This article is in response to the latest events unfolding after Tata Steel made an offer for acquisition of UK based Corus Steel with the initial valuation of $8.2bn, costing 455 pence per share. This itself was a mesmerizing piece of event, as the market cap of Tata Steel is $3bn, and in addition to this outrageous offer, the finance used for this acquisition does not come from the kitty of the company but it’s borrowed. So there will be huge debt on the new amalgamation right from the 1^st day of existence. But the lucrativeness of the deal for Tata Steel was that they would be jumping to 9^th spot in the world, capacity wise.

This was never an easy task, but to add to the misery Brazil based Steel giant CSN started showing interest in the company. Speculation was that they were to offer 475 pence per share raising the valuation to $8.56bn. the fact that it was just a speculation and not a formal offer made to the management. The Corus management was happy receiving the offer from Tata Steel, this new involvement was a windfall for the shareholders. This shows the real worth of the company expected in the local market. There was no real hope of the company growing to that extent. Here started the game of poker between Tata Steel and CSN.

With this new speculation in the market Corus postponed their EGM (Extraordinary General Meeting) where the proposal was to be kept in front of the shareholders for consideration and confirmation. But before CSN could make formal offer Tata Steel raised the stakes higher to $9.16bn with 500 pence per share. The game was getting hotter but the fact is that Tatas were showing immaturity and rookie inability to bluff. They just blinked too soon and as a consequence CSN came up with 1^st formal offer of 515 pence and valuation of $9.6bn. CSN comes with firm financial support, so the chances are that they could still raise the stake higher. Now Tatas should be showing sense and calling the game instead of try and call bluff on CSN and go in for more stake.

Tatas are already biting more than they could chew, they should not try and bite more, or else they’re bound to lose their teeth. There are and will be other options available for them to acquire, they should try and find them, as there is apparent need to consolidate by inorganic means, with the way shown by Mittal Steel. Let us hope there will be no more hopeless search for synergy only for the sake of it.