Till
last fortnight, Tata Steel was more accustomed to being viewed
as a probable victim of consolidation rather than a predator on
the prowl for global capacities. After all, with a total steel-making
capacity of 5 million tonnes, the Tatas' metals flagship ranks
a distant 55 on the global stage amongst steel manufacturers.
The future for such small players, pointed out analysts, and one
L.N. Mittal, President, Arcelor-Mittal, appeared bleak on a fragmented
basis. Being acquired seemed inevitable. So much so, Ratan Tata,
Chairman, Tata Sons, the holding company of the Tata group, acknowledged
at the annual general meeting of the steel company that there
was an urgent need to hike the promoters' stake to protect Tata
Steel from marauders.
How the tables have turned. By evincing interest
in the $18 billion (Rs 82,800 crore) Anglo-Dutch steel giant Corus
for an estimated $9 billion (Rs 41,400 crore), the $4.84 billion
(Rs 22,264 crore) Tata Steel has indicated that not only does
it not want to be gobbled up by a bigger player, it also wants
to be invited to the table of the Big Boys. And how. Consider:
In terms of revenues, the Tata company is almost one-fourth the
size of Corus; and the $9 billion it would take to buy out Corus
is roughly 10.97 times the annual profits of Tata Steel.
Such odds don't faze the Tatas any more.
In 2001, the group displayed its first streaks of audacious ambition
when Tata Tea, with a market cap of under $400 million, paid $473
million to acquire Tetley. More recently, the same company bought
a 30 per cent stake in an American packaged water firm for $677
million (Rs 3,114.2 crore), although its topline for 2006 stood
at just Rs 971 crore. Just before that its Rs 190 crore subsidiary
Tata Coffee acquired Eight O'Clock Coffee in the us for a little
over Rs 1,000 crore-over five times its annual turnover. And,
of course, there are the big-ticket (and successful) acquisitions
of Daewoo CV by Tata Motors and NatSteel Asia-the last one by
Tata Steel itself, along with Millennium Steel in the Far East-to
name just two.
But this one's different-after all it's a
play for one of the world's top 10 steel producers, with a turnover
of £10 billion (Rs 85,000 crore), with profits of £580
million (Rs 2,668 crore). As far as the topline goes, Corus is
only a bit smaller than the entire Tata group, which posted revenues
of Rs 99,850 crore for the year ended March 2006. But look at
what Corus could do to Tata Steel. At a stroke it would add a
capacity of 18 million tonnes all over Europe (the UK, Germany
and the Netherlands), at roughly $500 million (Rs 2,300 crore)
for a million tonnes. Now this compares well with greenfield projects
being considered elsewhere in the world-including India. L.N.
Mittal, for instance, has plans to put up a 10 million tonne capacity
in Jharkhand for $5.5 billion (Rs 25,300 crore), which works out
to around $550 million per million tonnes. Corus, of course, offers
plants catering to markets right from China to the us. Such multiple
locations, however, make digesting the acquisition a challenge.
"The steel industry will take time to reap the benefits of
consolidation. The reason for this is that production capacities
and raw material sources are typically scattered across the world,"
explains Deepak Jasani, Head of Research (Retail), HDFC Securities.
However, the biggest question mark revolves around the funding
of the huge acquisition. The investment banking fraternity points
out that a leveraged buyout (LBO) route is the answer to that,
with the Tatas raising debt for the acquisition on the Corus balance
sheet itself. It is gathered that a host of banks-including ABN
Amro, Deutsche Bank and Standard Chartered-have agreed to fund
this mega-acquisition. Tata Steel, at the end of financial year
2006, according to its annual report, had reserves to the tune
of Rs 9,201 crore. A Tata Steel report released by UBS in early
September-before the Corus deal became public-outlined the fact
that Tata Steel has raised in excess of Rs 7,000 crore over the
last few months. This came through a preferential allotment of
shares to Tata Sons which brought in Rs 1,500 crore in addition
to two syndicated loans of $750 million and (Rs 3,450 crore) $500
million (Rs 2,300 crore) each. On the Corus issue, Tata Steel,
in a note to the stock exchanges, has said: "Given recent
industry consolidation, Tata Steel is reviewing various opportunities,
including Corus. However, there can be no certainty that an approach
will be made and if made that it will result in an offer."
What stands between the Tatas as a regional bit player and a global
steel powerhouse is some hard-nosed negotiation and $9 billion.
Kalyani
Joins the C(h)orus
Bharat Forge may be eyeing some bits
and pieces.
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Bharat Forge's Kalyani: On
the prowl |
The Tatas may
be in the race for Corus lock, stock and barrel, but there's another
Indian metals conglomerate that's eyeing bits and pieces of the
Anglo-Dutch giant. Bharat Forge from the Pune-based Kalyani group
has reportedly thrown its hat into the ring for acquiring Corus'
strip products and long products divisions. Bharat Forge has been
among the most active players in the automotive components space
and over the past one year has acquired Federal Forge in the US,
Sweden's Imatra Kista AB and CDP Aluminiumtechnik in Germany.
Company officials-Chairman and Managing Director, Baba Kalyani
and Executive Director, Amit Kalyani-were travelling and unavailable
for comment. What would be an attraction for the Kalyanis are
the host of value-added products in the Corus stable, namely hot
rolled steel strips, light gauge coated steel and semi-finished
steel. These are spread across Corus' divisions-some of them being
Corus Packaging Plus, Corus Tubes and Corus Rail-and are a significant
contributor to total turnover. In 2005, the strip products and
long products divisions together had a total turnover of just
over six billion pounds. It remains unclear what parts of these
Bharat Forge will eventually acquire. For the moment, the Kalyanis'
interest in the Corus divisions would end up as only that if the
Tatas go ahead with an offer for the world's ninth largest steel
maker.
-Krishna Gopalan
Smooth Landing?
Airbus' woes may not impact deliveries to
Indian carriers.
Last
fortnight when aircraft giant Airbus announced that deliveries
of its $250 million-a-piece (Rs 1,150 crore) superjumbo A380 would
be delayed yet again-for the third time since 2005-customers all
over the world let out a collective groan. A few from that anxious
lot are in India too. Together, Kingfisher, Air Deccan, GoAir,
and a number of new low-cost players have placed orders for 344
aircraft (including ATRs) slated to be delivered over the next
six years. The resignation of Airbus Chief Executive Christian
Streiff after a mere three-month stint wouldn't have soothed nerves
(Louis Gallois has since taken over).
As Airbus' clients around the world said
that they were evaluating other options, there was increasing
pressure on Airbus to compensate its clients for delays. Airbus
has committed to sell 159 A380s jets to 16 airlines across the
world. Australian airlines Qantas has been paid an initial compensation
of $77 million (Rs 354.2 crore) while China Southern Airlines
may get paid $250 million (Rs 1,150 crore) as compensation for
the A380 delays, according to reports. Back home, Kingfisher Airlines
has been reportedly paid $22 million (Rs 101.2 crore) as compensation.
Kingfisher had ordered five A380 aircraft for a 2010 delivery,
which will now only happen a year later. But if most other Indian
airlines aren't worried, it's because A380s are hardly what the
country needs today (Kingfisher plans to fly international routes
with the A380). G.R. Gopinath, Managing Director, Air Deccan,
says India is not ready for an A380. "The market in India
has not yet reached the inflection point in terms of size for
such a large seater."
Airbus officials remain mum about the ongoing
crisis. "I don't think that the Indian market will be affected
in any significant way because the deliveries of A380s are still
far away," says Kiran Rao, Executive Vice President with
Airbus, even as he refuses to comment about the compensation given
to Kingfisher. But will Airbus' woes-industry experts expect it
to lose $6 billion (Rs 27,600 crore) over the next four years-impact
delivery of other aircraft too? "The top management of Airbus
is going through a churn and Airbus itself has had a tough time
recently. It's an issue that will affect the operations of the
company globally. Having said that, the fleet in India, right
now, is predominantly narrow bodied aircraft, so there won't be
any major adverse impact," adds Kapil Kaul, CEO of CAPA (Centre
for Asia Pacific Aviation) Indian subcontinent and Middle-East.
Competitor Boeing refuses to comment specifically
on Airbus delays. Says Dinesh Keskar, Senior Vice President of
Sales for Boeing Commercial Airplanes: "Our market forecast
shows very little demand for A380 sized airplane for India. The
travelling public, and the global economy, all do better when
the industry contains healthy, competitive companies creating
value for its airline customers and the flying public day in and
day out." Boeing for its part has its hands full with over
100 Indian orders: 68 planes from Air India, 20 737ngs (next generation)
from Spice Jet, 10 737-800s and 10 777-300ers from Jet Airways,
and 10 737-800s from Air Sahara.
-T.V. Mahalingam
The Fireworks Begin
This bull frenzy is driven more by fundamentals
than liquidity.
It's
difficult to remember the last time-if ever there was such an
occasion-when the Dow Jones Index in the us and the BSE's benchmark
index hit their all-time highs within days of each other. But
that's exactly what happened last fortnight when the Dow crossed
the 12,000 mark for the first time ever, as did the Sensex which,
at the time of writing, was hurtling towards the 13,000 mark.
And along with the Dow, a number of other indices, including The
Straits Times Index of Singapore and Jakarta Composite of Indonesia,
were also perched at highs they've never scaled before (see A
Global Bull Run). Says Nilesh Shah, CIO, Prudential ICICI AMC:
"Sheer liquidity is driving the us markets. Apart from the
receding fears of another us interest rate hike, huge money pumped
in by us corporates has also been responsible for driving the
us equity markets." Adds U.R. Bhat, Managing Director, Dalton
Capital Advisors: "Expectation of a rate cut in the us has
also seen money flowing out of debt to equity." Falling oil
prices, from a peak of $78 per barrel to under $58 last fortnight,
contributed to the bullish mood.
Back home, expectations of robust earnings
growth propelled the 30-share Sensex to its all time-high-above
the previous high of 12,671 set in May. It's taken the benchmark
index 87 trading sessions to surpass the previous peak. Between
the two highs, the Sensex had slipped 30 per cent to 8,800 in
June. Says Rajesh Boghani, Dealer, Parag Parikh Financial Advisory
Services: "It's more of realignment in the market. Better-than-expected
Infosys Technologies quarterly performance as well as its improved
guidance triggered the rise in the Sensex on expectations that
others too will follow." Between 11 and 13 October 2006,
the Infosys stock jumped nearly 10 per cent, as against a 3 per
cent rise in the Sensex. Says Bhat: "The previous bull run
(up to May) was liquidity driven. This time round it is mainly
fundamentals."
-Mahesh Nayak
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