Another interesting emerging markets story from the Economist:
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http://www.economist.com/displayStory.cfm?Story_ID=8319447 CSN v Tata
Steel the prize
Nov 23rd 2006 | SÃO PAULO
Why the Brazilians are taking on the Indians to grab the Anglo-Dutch IT IS no longer unusual for enterprises from poor countries to gain entrée into rich ones through takeovers. But the battle between Tata, an Indian conglomerate, and CSN, a Brazilian steelmaker, for Corus, an Anglo-Dutch company that absorbed what was once British Steel, could be the first big punch-up between two emerging-market firms for a rich-world asset.
Tata and Corus had already agreed a takeover deal when CSN barged in on November 17th. Its £4.3 billion ($8.1 billion) “potential offerâ€, which will be made formal if Corus's board co-operates and due diligence goes well, is 4% higher than Tata's. If consummated, the union would—like Tata's proposed match—create one of the world's five biggest steel companies, with $22 billion in sales.
Both Tata and CSN are the number two steelmakers in their home markets and are highly profitable. But steelmakers are puny compared with their main suppliers and customers. They worry that prices will fall when China becomes a big exporter. Acquiring Corus, one of the few large producers of flat steel without a controlling shareholder, would let them bulk up and provide a way into Europe. (Evraz of Russia agreed to buy America's Oregon Steel this week for similar reasons.)
Just as Tata is expanding outside India, so CSN threatens to outgrow Brazil. It plans to boost production of semi-finished steel slabs from 5m to 14m tonnes. Benjamin Steinbruch, its aggressive boss, is looking for outlets. CSN has made small acquisitions in America and Portugal, but its bid for Wheeling-Pittsburgh, an American maker of flat rolled steel, was rebuffed last week by Wheeling's unions. So now CSN has gone for Corus.
The aim, says Mr Steinbruch, is to make Corus “the most competitive steelworks in Europeâ€. CSN's main contribution will be the supply of cheap iron ore and, later on, steel slabs. “They're going to be able to lower Corus's cost structure quite dramatically,†says Joe Bormann of Fitch, a credit-rating agency. CSN will benefit from Corus's research and strength in areas where CSN is weak, such as steel for shipping and railway tracks. “More than two-thirds of the products Corus makes, we don't,†notes Mr Steinbruch.
Sensible as this sounds, CSN's shares fell 6% after it approached Corus. The offer looks expensive, says Patrick Conrad of Santander Investment in São Paulo, and will become more so if Tata and CSN engage in a bidding war. If CSN prevails, the merged firm's combined net debt will more than double as a share of cashflow.
Mr Steinbruch calls investors' concerns “superficialâ€. The acquisition would resemble a leveraged buy-out, in which most of the new debt would be secured by Corus's cashflow and assets rather than CSN's. If necessary CSN could reduce debt by selling off minority stakes in its mines, power plants and other assets.
Just three Brazilian enterprises have enough foreign assets to rank among the top 100 emerging-market multinationals. But buoyant commodity prices and easy finance are strengthening them. CVRD became the world's second-largest mining company in October by acquiring Inco, a nickel producer in Canada. Gerdau, a specialist steelmaker, has been buying smallish American and European mills and may now go after Germany's Thüringen. CSN would love to join the list, but may face a bruising fight for the privilege.
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