Tata Steel's bid to acquire Corus Group has been challenged by Brazilian rival CSN. What are CSN's chances of success and how far would Tata Steel go in this bidding war?

Finally, Tata Steel has been challenged in its quest to acquire European steel major Corus Group Plc. Nearly a month after reports on Companhia Siderugica Nacional (CSN) as the only other likely bidder for Corus (See: Brazils' CSN the only likely challenger for Tata's Corus bid), the Brazilian steelmaker has announced a rival bid which is higher than the offer from Tata Steel. (See: Brazil's CSN ups Tata offer with $8.1-billion rival bid for Corus)

In fact, advisors to Tata Steel had foreseen this move from CSN and had reportedly advised a joint Tata Steel-Corus hostile bid for CSN. But the Tata Group was not too keen as it would be against the Group's stated policy of not making any hostile acquisitions. (See: Joint Tata - Corus bid for Brazilian steelmaker CSN?)

CSN is offering 475 pence per share of Corus, as against Tata Steel's offer of 455 pence per share. CSN would also match Tata Steel's offer to make upfront cash payment to bridge the shortfall in Corus's pension fund schemes and increase future pension fund contributions to 12 per cent of workers' salary. CSN would finance its bid through internal resources and new credit facilities from Barclays Bank, Goldman Sachs and BNP Paribas.

However, CSN would announce a formal firm bid only after completion of due diligence and on satisfaction of other undisclosed conditions, which CSN may waive at its discretion. CSN chairman Benjamin Steinbruch reportedly met with chairman of Corus yesterday in London and discussed the offer, according to reports in the British media.

Ironically, Tata Group chairman Ratan Tata was meeting the management and reporters of London newspaper The Times to discuss Tata Steel's Corus bid, when the news of CSN's counter-bid was broken to him. The Times said Ratan Tata was 'gentlemanly and courteous' when he learned about the counter-bid and left without disclosing his next moves.

The counter bid
The counter-bid saw Corus shares rallying yesterday and closed at 495.5 pence in London. The stock had gone past 500 pence before Tata Steel made the formal offer, before cooling off to around 465 pence as no counter-bids emerged for many weeks.

But but then some large institutional shareholders like Alliance Bernstein, Jupiter Asset Management and TT International had reduced their stakes in Corus as the possibility of a bidding war was considered to be low. Even Barclays, the second largest Corus shareholder and which is now financing CSN, had reduced its holdings to below 5 per cent from nearly 6.5 per cent.

CSN has been buying Corus shares from the open market and said it currently holds around 3.8 per cent of Corus. The two companies had contemplated a merger in 2002, but talks were called off at an advanced stage. CSN and Corus had also set up a JV in Portugal for galvanised products, but Corus divested its stake to CSN early this year.

Can CSN convince all Corus stakeholders, including employees and pension funds? Workers of Corus are anyway resigned to a future under foreign ownership, so it may not matter much whether the new bosses are Indian or Brazilian. Pension funds may approve the offer as long as CSN is willing to match Tata Steel's liberal offers of upfront cash payment and higher future contributions.

The due diligence by CSN is likely to be a mere formality as Tata Steel has already inspected the books of Corus and is quite happy. For CSN, funding the deal is also not a major headache as it already has the backing of major banks.

Like Tata Steel, CSN is also planning a leveraged buy-out by raising debt on the security of future cash flows from Corus. But unlike Tata Steel's financing arrangements, part of the new credit facilities are with recourse to CSN. It is not clear if CSN shareholders would be comfortable about that exposure.

All eyes are now on the Corus board, which is expected to meet shortly to discuss the offer from CSN. Corus has not made statements so far on the counter-bid, except acknowledging receipt of the offer. CSN is unlikely to make a formal bid without the full support of Corus board, one of the three conditions to its conditional offer reported yeaterday.

Which way will the Corus board turn?
Would the Corus board, which has already recommended the offer from Tata Steel to shareholders, be willing to support the CSN bid? The Corus management has been in discussions with many global steel companies, including CSN, for more than a year before it decided to accept the Tata Steel offer. When recommending the Tata Steel offer, Corus management had stated that it is reasonably certain that no other serious bidders exist. So the move by CSN would have come as a surprise, even for the Corus board.

The Corus management have already proceeded quite far with Tata Steel and have publicly stated that they are very comfortable with Tata Steel taking over the company. But CSN is no stranger either, as both companies have worked together in the past and even discussed a merger.

Strategically, both Tata Steel and CSN are equally good partners for Corus. Both bidders have presence in emerging economies, with access to cheap sources of iron ore, and are among the most efficient producers globally. In terms of access to iron ore, CSN may have an edge because it owns one of the largest iron ore mine in the world. CSN chairman has already cited this as a major advantage over the offer by Tata Steel. CSN also has a stake in Companhia Vale do Rio Doce (CVRD) - the largest global producer and supplier of iron ore and pellets.

But Tata Steel has better global reach with presence in the fastest-growing markets of Asia. It already has successfully acquired and integrated steel companies in overseas locations like Natsteel of Singapore and Millennium Steel of Thailand. Tata Steel also has more professional management and is backed by a strong, asset-rich industrial group. Hence, given a choice, the Corus management may be more comfortable in working with the Tata Group than CSN, in which the Brazilian government has a 24-per cent staike. Tata Steel has also offered to appoint key senior Corus executives on its board after the acquisition is completed.

But it won't be easy for the Corus management to reject the CSN offer outright due to pressure from the large institutional shareholders. Some key shareholders, including the largest shareholder Sun Life, have already stated that the Tata Steel offer 'undervalues the company'. They would force the Corus management to strike a hard bargain with Tata Steel, if they want to stick with the Indian company.

It is almost certain that Tata Steel would have anticipated this counter-bid and seemed quite prepared with its own strategies. The bid price from Tata Steel was seen by many industry analysts only as an initial offer, more like testing the waters to see if any other counter-bids emerge.

There are rumours that Russia's Severstal, too, may throw its hat in the ring as it had done for Arcelor after Mittal Steel's bid. (See: Arcelor snubs Mittal; to merge with Russian company Severstal) Hence, most analysts believe that Tata Steel is prepared to increase its offer and is likely to do so by next week. In fact, early rumours had put the likely offer price above 550 pence per Corus share.

But how far would Tata Steel go, if it develops into a full-fledged  bidding war with the possibility of other companies also entering the ring? Based on future cash flows, even the initial offer by Tata Steel for Corus was higher than Mittal Steel's final offer for Arcelor. Hence, the Tatas are unlikely to go all out and offer any price for Corus.