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Tata Steel's long term profitability to improve: Kampani
January 31, 2007
Indian corporate giant Tata Steel outbid Brazil's CSN for Corus in a nerve-wrecking auction that lasted more than eight hours. The bid which started at 455 pence per share in October, finally ended at 608 pence/share for Corus.
Commenting on the deal, Nimesh Kampani of Morgan Stanley says that the long term profitability of Tata Steel will improve. He feels that a bit of equity financing will help Tata Steel. According to him, short-term investors may be concerned, however long term investors will remain positive.
Excerpts of CNBC-TV18's exclusive interview with Nimesh Kampani:
How are you feeling after this acquisition?
I am happy for Ratan Tata and the complete management team of Tata Steel. They have made India proud, although in this competition, they had to pay a high price; but I think it may be worth it. The Tata Group has substantial financial strength and there was backing of Tata Sons.
So I am sure with innovative financing strategy, the Tata's have always done it and they will consolidate Tata Steel. With the consolidation of Corus' balance sheet with Tata Steel, in the long-term, the profitability of Tata Steel will go up.
It was a huge bet and there will some equity financing over a period of time that Tata Group will do. India will be proud that Tata Steel will now be in one of the five major steel companies in the world.
Will equity finance be the option that Tata Steel management will have to look at? What could be the instrument they might look at - would it be overseas listing or something in the domestic market?
There are all the options because Tata Steel has already passed the resolution from the shareholders to raise money either in the GDR market or ADR market or domestic financing. But since the Corus acquisition was on, they could not do anything.
But now after the acquisition is over, they have a resolution in place and at an appropriate time, they will consider and decide what they would like to do to raise finance because it is important when one makes such an acquisition. A little bit of equity financing will help Tata Steel to stabilise.
If you were a Tata Steel shareholder this morning, what would you be feeling - happy at the acquisition from a strategic perspective or would you have your apprehensions in the near term of how the stock might perform in the light of this deal at this price?
Short-term investors will be a bit concerned but in the long-term if one is a long-term investor, which I am, then I would be happy with this acquisition. But for the short-term, there are always speculators - traders who have taken position in the stocks and the stock could some pressure but a long-term investor would look at it positively.
From an investment banking perspective, how would you look at this journey, which lasted many weeks, and ended in this auction - how aggressively the Tata's finally bid and win it?
I think it was a unique experience for all of us, especially in the Tata House. I think the Indian takeover code needs to look at how the London code is and how the takeover panel works. In India, the takeover code is different, where a takeover code says that when somebody makes an open offer or wants to acquire a company, a counter bid has to come within 21 days and then they have to work parallely.
One-week before the issue closes, they have to give their final bid. But in the London code, you can go on bidding for whatever number of times and anybody can enter at any point of time. There is no restriction on that and then the final round of bidding takes place, as it happened last night.
So from an investment banking perspective, we have got to learn some lessons because in India also ultimately it will be either hostile or acquisition will take place, acquisition financing will come. Because of all these factors, we need to look at our takeover code also and review that. It is a great experience to see how it moved in a transparent manner.
We watched that last night after the market closed at 4:30pm and before the market opens it has to be completed. So the market doesn't get affected and everybody knows what is going on and that is what we have to learn. That is where London comes into place, London has a principle-based regulation whereas we have a rule-based regulation - that is the difference we need to follow and try and bring into India a more principle-based regulation.
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