The competitive process yielded an outcome highly beneficial to Corus shareholders. Tata SteelÆs winning bid is up 33.6% from its original October offer of ú4.55 per share. The share has consistently traded up since the CSN counter-bid in November, rewarding hedge funds and others who built positions in the counter in anticipation of a bidding war.
A banker from Credit Suisse, who led the advisory effort on the sell-side, and - in an unusual twist which we earlier reported on - arranged financing for the buy-side, says: "This deal demonstrates the ability of a global bank, such as ours, to maximise shareholder value and bring considerable resources to play for the benefit of our clients."
The price represents a multiple of 7 times Ebitda for the year ended December 31, 2005 and 9 times Ebitda for the 12 month period to September 30, 2006. Ratan Tata, chairman of Tata Steel says: "We remain convinced of the compelling strategic rationale of this partnership. Tata Steel gains a significant platform to generate additional value." Analysts were broadly in agreement but commented that at the price agreed, Tata Steel will have to work hard to extract financial synergies.
S&P maintained Tata Steel on a BBB rating with negative implications commenting: "The size of the acquisition and the potential cash outflow in Tata Steel's offer for Corus could have an adverse impact on its financial risk profile." Tata Steel shareholders seemed to agree with S&P's assessment and hammered the share on the bourses. It closed down 10.7% in a broader Mumbai market which lost 1.2%.
However, bankers were balanced in their assessment, also commenting that the interest of both Tata Steel and CSN highlights the scarcity value of the target - few assets with the specs Corus offers are available, something which perhaps investors are not dwelling on.
S. Mukherji, managing director of ICICI Securities, based in Mumbai, agrees suggesting: "This deal should be seen in the context of a rapidly consolidating global steel industry. The market is not pricing in the long-term benefits accruing to the combined entity from this deal and is focussed more on the short-term financial risk profile. If the integration is successful, it will potentially improve the business profile of the Tata-Corus combine by giving it access to new product and market segments."
There have been limited prior instances of a competitive situation being resolved through the quickfire auction process which the UKÆs Takeover Panel announced a few days ago as the mechanism to end the impasse. Indeed, the few earlier auctions ran on consecutive days. An advantage of the overnight process adopted this time was that stock markets both in the UK and India were closed while the process was run.
Richard Murley, who led the team at Rothschild, recently completed a three-year secondment to the UK Takeover Panel as director general. He comments that "the overnight process - which had never been used before - worked very smoothly in helping the bid(s) to a satisfactory outcome."
Bidding went the whole nine rounds, the highest possible under the rules, over around an eight hour duration starting at 4:30 London time. The prevailing mood at the office of Herbert Smith, legal advisors to the Tatas, where the team was assembled, was termed ôlivelyö by an observer. Initial bids were submitted by e-mail but it was a nail-biting finale when Tata SteelÆs final bid, submitted in a closed-envelope, exceeded CSNÆs by only 5 pence.
CSN shareholders, who like Tata Steel shareholders were nervous about the bidding war and had been bearish on the scrip over the last few weeks, reacted positively; the share was up 5% in early trading on Wednesday. This is the second time the CEO of CSN, Benjamin Steinbruch, has unsuccessfully made a play for Corus, following a 2002 attempt. Sources close to the deal say CSN may have made a strategic mistake waiting so long to express its interest. Corus had been shopped for a while before Tata Steel made its bid and CSN - which could have exploited significant raw material synergies had it been successful - did not come to the table, perhaps because of pre-occupations with other acquisitions it was pursuing.
Although precise details of the Tata Steel financing package were not revealed, it is expected that the existing consortium will step up to the plate for the additional debt and Tata Sons will provide further equity. The original financing, when the bid was at ú4.55 and represented an equity value of ú4.3 billion, was in the order of ú3.3 billion at the UK SPV level and arranged by a consortium led by Credit Suisse, which was to take 45%, and ABN AMRO and Deutsche Bank equally sharing the remaining 55%. ABN AMRO and Standard Chartered were jointly arranging bridge finance of $1.8 billion at the Tata Steel holding company level in India with Standard Chartered providing an additional ú196 million of subordinated debt.
On December 11, when Tata Steel enhanced its bid to ú5 per share, representing an equity value of ú4.7 billion, it had said the new debt would be picked up by Standard Chartered and Standard Chartered First Bank of Korea. With respect to the additional ú1.5 billion required due to yesterday's higher bid, it is expected that about 40% will be debt from the banks aforementioned.
Jitesh Gadhia who led the team at ABN AMRO in London observes: "The Tatas have a well-established reputation for prudence and conservatism and we are working with them to put in place a stable and sustainable financial structure for the acquisition and the Tata Steel-Corus combine."
Concerns have been expressed in the UK media about manufacturing being moved eastwards and employees being laid off. A source close to the deal commented that Corus stakeholders could not have hoped for a better outcome as Tata Steel is widely known to be a benevolent employer with a well-deserved track record of treating employees fairly.
The list of advisors and financiers to the deal read like a roll call of investment banks. Corus is being advised by Credit Suisse, JPMorgan Cazenove and HSBC. Tata Steel is advised on the acquisition by ABN AMRO, Deutsche Bank and Rothschild. CSN was advised by Lazard, Goldman Sachs and UBS with financing arranged by Barclays Capital, Goldman Sachs and ING Bank.
The Tata first bid itself represented both India's largest cross-border outbound M&A deal and LBO to date. This bid is significantly higher. Probably only a handful of Indian companies are of the size to attempt something of this landmark nature, but Gadhia notes: "This acquisition undoubtedly gives corporate India the confidence to do larger, more ambitious deals. Two years ago, the sweet spot for deals was $100-200 million. This has increased to $500 million-$1 billion."