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After months of bidding and feverish speculation, Ratan Tata has finally been able to acquire Corus Steel in the biggest takeover by an Indian company. The stock market hasn't reacted very favorably. The Tata Steel stock dipped on the day the acquisition was announced. It recovered marginally yesterday.
There is a general perception that Tata Steel has overvalued Corus at $12.1 billion. This is partly because some see the demand for steel slowing down over the next year or so.
According to the ICRA Industry Monitor the world steel consumption growth is likely to slow down significantly to 5.2 per cent in 2007 from a healthy 8.9 per cent in 2006. The demand for steel in China is expected to drop from 14.4 % in 2006 to 8 % in the next four years. In India, the growth in consumption would dip marginally in 2007 to 9.1 per cent from 10 per cent in 2006. The report further says that the major drop in the growth would come from the European Union and the NAFTA region. The EU is expected to see a negative growth of 1.1 per cent in 2007 as against positive of 8 per cent in the previous year.
The NAFTA region too may see a de-growth of 0.7 per cent from a positive of 8.7 per cent.
According to The ICRA Industry Monitor the volatility in the price of steel was likely to continue due to the increased input costs, mainly iron and coal.
Yet, with the growth expected in India alone over the next five to ten years in infrastructure, construction and automobiles, the demand for steel may pick up significantly after a temporary dip, experts say.
Other companies in the Tata fold are expected to benefit from the Corus acquistion. Tata Motors requires a substantial amount of steel every year and with its expansion plans underway in Bengal, this will be heartening news for them.
Ratan Tata has also said in an interview to the Financial Times that the group’s next major push is likely to be in automotives, through the launch of products as part of a joint venture with Italy’s Fiat and an increase in production in the rapidly growing domestic market.
“We have very preliminary but conceptualised plans with Fiat to share platforms, to have joint product development to enter markets in Latin America,” Mr Tata says.
“We also this year and next year will have five or six new product launches and all of those will constitute a dramatic change in volume in our product.”
He says the company’s automotives expansion may include acquisitions, though the group is not planning anything specific
It is believed that having access to a supply of steel from its group company, Tata Steel, can help Tata Motors steal a march over its competitors if ever there is a steel shortage.
There are also indications that Tata Steel is planning to offshore some of Corus’ functions such as IT and equipment manufacture, to India in a move that could boost TCS, Asia’s largest software services firm.
A merger with Corus means Tata Steel will now be listed on the UK stock exchanges and its stock becomes liquid for overseas companies to buy and sell. This gives Tata Steel the ability to acquire companies in the future in all or part stock deals rather than paying cash as has been the norm so far.
This deal will also place Tata Steel immediately in the Fortune 500 list of companies and give a filip to its brand name which will now be valued at $9 billion say experts. This puts the Tata brand in the same league as FedEx, Chrysler, Morgan Stanley and Goldman Sachs.
Meanwhile the Tata Group is making plans to raise funds to pay for the Corus acquistion. While the stock market expects Tata Sons to dilute their stake in Tata Consultancy Services, the Tatas have denied any such plans. There is also talk of a GDR offering.
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