Late one evening last month, a group of executives sat in the London offices of Slaughter & May, the City law firm, swapping hats. They were top managers at Corus, the Anglo-Dutch steel group that includes the former British Steel; and the hat swapping was the culmination of one of the most extraordinary bid battles for a British company. After months of offer and counter-offer between Indian and Brazilian suitors, Corus was being auctioned off in a single evening of frantic activity. Every time CSN, the aggressive Brazilian company, took the lead, the Corus bosses would put on their "Brazilian" hats. When India's Tata Steel came back with a higher price, the "Indian" hats went on.
The rival bidders had set up camp in the offices of the law firm Herbert Smith (Tata) and the investment bank Lazard (CSN). But the auction was played out not only in the City but across the world. Ratan Tata, chairman of Tata Steel and head of Tata, India's biggest business empire, monitored events from Mumbai, while Benjamin Steinbruch, head of CSN, kept in constant touch from Brazil.
The fight went the distance. In setting the rules for the auction, the takeover panel allowed for nine rounds of bidding. All were used. The price went up and up - from the starting line of 1020 cents a share to 1150 cents in the penultimate round. In the end Tata won by a narrow margin, offering 1198 cents in the final round, pipping CSN's 1193 cents. The winning bid values Corus at US$13.1bn, including its debt. The takeout price - which when measured as a multiple of earnings is the most expensive deal ever done in world steel - represents a turnaround for a company that only four years ago was in the doldrums. In March 2003 Corus shares sank to only 38 cents as losses mounted and its British and Dutch halves fought over strategy. The end result was a management clear-out that led to the installation of Philippe Varin as CEO, a French businessman with a background in aluminium.
Jim Leng, a British industrialist best known for running the vast Laporte chemicals group, stepped up from being the senior non-executive to become Corus's chairman. Leng said earlier that he had thought long and hard about taking the job, such was the mess at the company. "I talked to three or four of my closest friends, and the most positive reaction I got was ‘Are you really sure about this, Jim?'" What convinced him was his nascent relationship with Varin. "As the senior non-executive I had led the recruitment process, and I knew I could work with him," said Leng.
Varin set out to put Corus back on an even keel. His three-year plan, called "Restoring Success", reduced Corus's debt (there was a share issue, and the aluminium interests were sold) and shrank its British operations from five sites to three - Port Talbot, Scunthorpe and Rotherham.
The pair also had luck on their side. Booming demand from China and India drove steel prices up, and a spate of takeover deals, culminating in Lakshmi Mittal's bid for Arcelor, pushed the valuation of steel companies to new levels.
From their early days in charge, the pair considered a tie-up with a foreign steelmaker. Three months after his appointment, Varin spent a weekend at Leng's Scottish house, where the long-term future was tackled. "We asked ourselves if a high-cost producer focused on western Europe was sustainable in the long-term.
The answer was no so the solution was to get into low-cost production and high-growth markets - which meant Russia, India and Brazil," said Leng.
The search for a partner started 18 months ago. Leng and Varin went on a tour of the three countries, a process that led to a crucial summit with Ratan Tata in Dubai last July. In October Tata announced an agreed 897 cents a share deal, but the Indian company would not have things its own way. CSN, which came close to a merger with Corus in 2004, gate-crashed proceedings, first offering 936 cents and then 1015 cents a share. Finally the takeover panel stepped in with the overnight auction plan. The final US$13.1bn price is beyond even the most optimistic of analysts' expectations, and well beyond the wisdom of the stock market, which even on the day before auction had Corus shares trading some 79 cents lower.
The most expensive rating previously put on a steel company was when Mittal bought Arcelor last year. Mittal paid 6.2 times Arcelor's earnings. For Corus, Tata is paying nine times earnings.
Jitesh Gadhia, of the investment bank ABN Amro, adviser to Tata, said earnings multiples were not the best measure to gauge steel deals. "It makes more sense to look at the enterprise value (equity plus debt) paid per tonne of steel production capacity. For Mittal/Arcelor it was about US$670 a tonne, and for Corus slightly above US$700 a tonne. They've paid more, but not that much more," he said. "It was a reasonable price compared to industry benchmarks," said Anthony Parsons at Deutsche Bank, which also advised the Indian group. Credit Suisse played a notable role, advising Corus and taking a lead role in arranging finance for the Tata bid.
Varin said while the deal was a good one for Corus shareholders, there was also value for the company's new owners. Investments across Corus's three British sites should deliver another US$235m of earnings in the coming year, he claimed.
"There is a real momentum in Corus, and we have not yet seen all the value coming through," said Varin confidently.
The takeover will provoke fears of job losses among Corus employees. The most vulnerable of the three British plants seems to be Port Talbot, a large, integrated steel plant in Wales. It could suffer from imports of cheap steel, particularly when Russia and Ukraine join the World Trade Organisation (WTO).
Copyright The Sunday Times.
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