Size does not matter for India Inc
Feb 1, 2007 - 3:22:04 PM
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It also demonstrates that size does not matter for acquisitions and global financiers are ready to fund Indian companies that are now seen as having professional managements and the skills to successfully clinch global deals.
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By Arvind Padmanabhan, IANS,
[RxPG] New Delhi, Feb 1 - The deal struck by the Tatas in acquiring Corus for some $12 billion is not only a part of the ongoing consolidation in the global steel business but also an icing on India's emergence as an important player in overseas investment deals. And it is only befitting that the mega deal happened in the 100th year of Tata Steel, a company founded in 1907.
Analysts may debate on the feasibility of the price paid for acquiring Corus. They, nevertheless, do believe that the move will catapult Tatas - India's largest private sector conglomerate with 96 companies in its fold and a collective market capitalisation of $49 billion - from 56th position in global steel production to ninth, giving them the much needed manoeuvering space in securing raw material supplies and delivering finished products.
But is the price really that high, even forcing rating agencies like Standard and Poor's to put the Tats on credit watch for revising the bid price by almost 40 percent? There are several benchmarks. Using the price paid by Lakshmi Niwas Mittal for Arcelor in terms of the steel production capacity of the acquired company as a benchmark, the 608 pence per Corus share does not appear that high. While Mittal paid $720 per tonne, the acquisition price amounts to $620 per tonne for the Tatas.
Critics also argue that the price of $12 billion is also high at nine times the earnings of Corus before interest, taxes, depreciation and amortisation, but the Tatas maintain it would have taken years for them to build a greenfield steel project in Europe from scratch, while in Corus they have a company that not only has the right capacity but with similar management style.
More importantly, the acquisition gives the Tatas to emerge as a major player globally as the top 15 producers account for a third of global production estimated at 1.2 billion tones.
The challenge ahead will be to integrate the operations of the two steel producers, which may be long and arduous, even though the fact Corus executives approached the Tatas for the takeover will assist matters. Even though Tata Steel is itself a low-cost producer of steel, it will also have a lot to learn from Corus - its plant in The Netherlands is among the lowest-cost producers of the commodity in Europe, the market the Tatas are targeting with the acquisition. The Tatas will have to contend with the highly cyclical operations of Corus that has seen it reap robust profits for a few years only to be driven to the verge of bankruptcy few years later.
The integration will mean that together with Corus, the Tatas would account for some 25 million tonnes or two percent of the global steel output. The Arcelor-Mittal combine entity with 115 million tonnes has a 10 percent market share. The Tatas also feel that integrated operations in terms of raw material procurement, production and distribution will help the combined entity save some $300 million annually.
The Tatas also will not sit idle post-Corus deal. Having acquired two steel producers in East Asia over the past two years for $421 million - Singapore's NatSteel and Thailand's Millennium Steel - the Tatas had already joined the global consolidation game in the steel space.
Globally, from Australia to the US and from Europe to South America, producers are seeking to integrate and consolidate their operations through a mix of mergers and strategic alliances with other steel mills for better product mix and economies of scale. They are also integrating with raw material providers to secure supplies and with distributors for keeping the order books packed.
In fact, recent weeks have seen Russia's Everaz Group acquire Oregan Steel of the US for $2.3 billion to form a 17 million tonne entity. Baosteel of China has bought a 70 percent stake in Bayi Iron and Steel, ans Gerdau Ameristeel have hiked their stakes in Siderperu of Peru and proposes a similar strategy with Sidenor of Spain.
On a more macro canvas, what does the Tata-Corus deal mean for India? As far as steel production is concerned, India has still a long way to go as it currently tanks seventh in production with 44 million tonnes, ahead of Ukraine's 40.9 million, Brazil's 30.9 million and Turkey's 20.3 million. In contrast, China with 418 million tonnes is the largest producer, followed by EU's 198 million, Japan's 116 million and US' 98.5 million.
But for corporate India, in general, the deal is the biggest-ever overseas acquisition by a home-grown company and is more than the $7 billion or so that the country expects as inward flow of foreign capital in the current fiscal. It also shows that the outbound mergers by Indian companies are getting more dispersed across industries and not restricted to software and pharmaceuticals alone.
It also demonstrates that size does not matter for acquisitions and global financiers are ready to fund Indian companies that are now seen as having professional managements and the skills to successfully clinch global deals.
For Ratan Tata, the 69-year-old chairperson of the Tata group, the deal may be a moment of great fulfillment. But for corporate India it reflects the strength of the nation's economy, which many predict will become the third largest in a decade.
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