Should Tata Steel turn its back on Corus?

Rex Mathew
12 December 2006

With the virtually instant counter-offer from CSN to Tata Steel's raised bid, is it time for Bombay House, the HQ of the House of Tata, to turn its back on the deal?

Has Tata Steel lost the plot in its bid for Corus? Is it preparing to bow out of the race? Or does the company still have a chance to acquire Corus, without taking much higher financial risks by raising its offer yet again? Analyst opinions are still divided on the issue, but most believe that it would be very difficult now for Tata Steel to beat CSN.
(See: CSN goes for broke; offers $9.6 billion for Corus)

When CSN first announced its readiness to offer 475 pence per share of Corus, higher than Tata's first offer of 455 pence per share, most analysts expected Tata Steel to wait till CSN announced a formal offer. Tata Steel already had the first mover advantage and the backing of the Corus board. (See: Corus board approves Tatas' offer)

It could have afforded to wait till CSN came out with its firm 475 pence per share bid and then agree to match it. The Corus board would most likely have continued to back Tata Steel's bid, unless CSN offered some other strategic advantage like an assured supply of cheap iron ore.

In this scenario, CSN would have been forced to hike its offer while at the same time trying to pre-empt Tata Steel's next move. It is likely that the Brazilian company would then have made a 'make-or-break' final bid and Tata Steel could have walked away with Corus with a slightly higher bid – the position CSN is enjoying now.

But, instead of this safer approach, Tata Steel decided to risk dissuading CSN from making a firm bid with an even higher bid of its own, which it presumed would be enough to scare the Brazilians away. But CSN, without blinking, seized the initiative by topping Tata Steel's enhanced offer of 500 pence.

Why did Tata Steel opt for such a strategy? Some analysts believe Tata Steel was under the impression that CSN would not be able to gather enough financial resources to go over its 500 pence per share bid. After all, CSN already has some debt in its books and plans for additional debt would have faced some resistance from large institutional shareholders. Did Tata Steel discount the possibility of large international banks, which have more than enough funds at their disposal these days, backing a risky leveraged buy-out.