Corus deal: Tata may not have to outbid CSN offer

After much speculation on whether CSN will put in a counterbid or not, it finally did a 475 pence per share bid against Tata Steel's 455 pence per share offer. This pushes the deal size to $8.4 billion, as compared to Tata Steel's offer of USD 8.1 billion. Rakesh Arora of Macquarie Securities comments on where this story could be headed eventually.

Rakesh Arora believes that Tata Steel may not have to outbid CSN offer. According to him, the cut-off price would be 540 pence per share for Corus. Moreover, Arora feels that a higher bid could impact CSN's balance sheet.

Excerpts from CNBC-TV18's exclusive interview with Rakesh Arora:

What do you make of this counter bid and where do you see the story finally ending?

Basically, everybody was taking this for granted, now that so much time has passed since Tata Steel's last offer and nothing was coming through. But the stock price was not reflecting that Corus was already ruling above the Tata Steel's bid price.

The Tata Steel stock itself has been going down. The market was expecting this - It's only the Corus and Tata Steel management that seems to have got off guard but it doesn't mean that Tata Steel has not prepared for this eventuality.

Earlier, we saw reports of their bankers advising them to make a counter bid for CSN. Now since Tata Steel doesn't have a philosophy of making hostile takeover bids, that didn't go through. So clearly that was on their agenda and they have already adequately made arrangement for excess finances.

I feel that it all depends on the Corus management - how they deal with that because one of the pre-conditions for the CSN's firm bid was that Corus management agrees to its bid. Now, having made all these noises about the good fit with Tata Steel, it could be a step backward for the CSN management.

Secondly, I feel that Tata Steel may not have to overbid, they can match the bid and Corus may decide to go ahead with Tata Steel itself. So this is a bidding war, which has started. It is difficult to say anything at the moment but if some of the other players like SeverStal also join in, then maybe we are in for 15-20 per cent increase from these levels. 

For Tata Steel, till what point does it make financial sense to keep bidding or to up the bid at 475 pence? Does it stop there or do you think for a company like Corus, they can and should go higher?

For Tata Steel, without considering any synergy benefits, the cut-off price would be 540 pence per share for Corus.

So there is still plenty of room to grow without affecting Tata Steel's balance sheet and profit and loss. One must note that all the debt that Tata Steel has raised is non-recourse, so it doesn't come back on Tata Steel's balance sheet, whereas for CSN, it's a recourse. So for them, to bid higher would affect their own balance sheet and profit and loss account quite significantly.

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