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Tatas offer competitive price for Corus shares

Jayanta Mallick

Implies a valuation of $430 per tonne

MR RATAN TATA, Chairman, Tata Steel, at a news conference in London on Friday on the Tata-Corus deal that was broadcast in New Delhi. It was also broadcast in Amsterdam, Mumbai, and Kolkata. — Kamal Narang

Kolkata , Oct. 20

The Tata's proposed acquisition of the Corus Group's steel assets comes at a value that is lower than some of the mergers and acquisition deals done in the steel sector in the recent past. These have been put through in the $650-950 range. Arcelor for instance, acquired Dofasco, a Canadian steel company at $650/t of steel capacity. Mr L.N. Mittal in turn, paid $650 per tonne for acquiring Arcelor after a controversial battle for management control. Erdemir, another steel facility was, however, privatised at $950/t (after adjusting for capex).. Mr Mittal also paid around $950/t for Kryvorizhstal. But the price also included a value for iron ore deposits owned by the steel company.

Valuation contrast

In contrast, Tata's offer for Corus implies a valuation of $430 per tonne,according to Mr Daniel Fairclough and Mr Jason Fairclough, analysts at Merrill Lynch. But they also point out that measured as a factor of one unit of earnings likely to be available in the fiscal 2006-07 before charging interest, tax and depreciation, the price works out to a factor 10.5 .That is roughly 20 per cent more than the average value commanded by global steel peers for whom an unit of gross earnings of 2006-07 is capitalised by a factor of only 8.7.

But Mr Andrew Snowdowne of UBS offers a different perspective. In his view, the offer seems fair if compared with recent transactions multiples. On FY06E average net debt, 455p puts Corus on EV/EBITDA of 5.9, comparable to the valuation of the steel giant, Arcelor Mittal. Its current values represents 4.8 times the earnings of 2005-06. But steel prices then, were at their peak. Measured in terms of likely future earnings (2006-07) the current value should be closer to the valuation implicit in the Tata's offer for Corus shares.

UK dependence

Over 50 per cent of Corus' current sales are for the UK, showing an overwhelming dependence on the UK construction industry.

Interestingly, Corus has approximately 50 per cent of the UK market for carbon steel and 11 per cent of the European market. Sixty per cent of its crude production is rolled into HRC, 30 per cent of which is sold, 50 per cent further processed such as CRC, galvanized and coated) and 20 per cent transformed into welded tubes.

On one end of the spectrum lies the Corus' most efficient and integrated 6.5 mt mill IJmuiden in the Netherlands. At the other end of the scale is Teesside, high-cost slab British facility, which is subject to an off-take agreement (78 per cent of slab produced it is taken under long term agreement by a consortium of re-rollers, effectively at unit cost).Corus remains a high cost producer relative to other European producers.

The legacy assets of British Steel which suffer from limited volumes sold under contract; are subject to a greater exposure to short-term prices and long products produced from blast-furnace rather than electric-arc route .

The opportunity for Corus and Tata Steel is to close the high-cost upstream steel making UK units and feed the rolling mills with imported low-cost slab/semi-finished steel. Tata Steel with access to low cost raw materials and with strength in slabs as also the opportunity to add slab production, is suitably placed to reduce Corus' cost.

Based on data provided by World Steel Dynamics and referenced in the Corus FY05 results presentation, Indian steel producers have a 22 per cent lower slab production cost than the Europeans.

Market access

Corus' pluses are market share, good distribution channels and access to European carbon steel markets. After Corus acquisition, Tata Steel may find it lot easier to enter non-commodity grade European steel market, difficult to penetrate owing to historical relationships between local producers and consumers (long standing guaranteed quality and on-time delivery).

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