India's Tata Steel raised its bid for Corus Group PLC by 10 percent to pre-empt an expected competing offer from a Brazilian company, but the move heightened concerns about how the deal might affect Tata's profitability and plans to build new plants.
Tata Steel shares dropped nearly 3 percent to 470 rupees (US$10.20) in early trade on the Bombay Stock Exchange yesterday, hours after the company said it would pay ?5.00 (US$9.81) per share to acquire Corus, a bid that values the European steel maker at ?4.7 billion (US$9.2 billion).
The board of Corus on Sunday approved the revised offer, above its Oct. 19 offer that valued Corus at ?4.55 a share.
Corus chairman Jim Leng said that the new terms were a "substantial increase" on Tata's previous offer and that the board of Corus would be recommending the deal to shareholders.
The move came as Brazil's Companhia Siderurgica Nacional, known as CSN, reportedly planned to make an offer for Corus later this week, valuing the British steel manufacturer's shares at ?4.75 each.
"We remain convinced of the compelling strategic rationale of this partnership, and the revised terms deliver substantial additional value to Corus shareholders," Tata chairman Ratan Tata said.
Doubts
But doubts have emerged about financing of the additional US$830 million that Tata would have to pay for the all-cash deal and its implications for the company's expansion plans in India.
"If they raise the funds on Tata Steel's balance sheet, it will have an immediate impact because there will be no profit flowing in from the acquisition for at least two to three years," said Kanan Shah, analyst at Mumbai-based Networth Stock Broking.
Shah said investors were assuming Tata Steel would be taking the entire burden of the additional funding, but there is a good chance that Tata Sons -- the group's holding company -- could chip in with some cash.
"It's too early to say what will happen," Shah said.
The company has approached London-based Standard Chartered Bank and the First Bank of South Korea for the additional funds, the CNBC-TV 18 television station reported without naming any source.
New projects
Investors worried that the company may find it difficult to allocate enough money for its new projects in the eastern Indian states of Orissa and Chattisgarh.
In a notice to the Bombay Stock Exchange, Tata Steel said yesterday that these projects were on track and that the Corus deal would have no bearing on their progress.
The competition for Corus is the latest in the growing consolidation of the international steel industry.
Many companies have sought to buy competitors to combine operations and share raw materials, especially iron ore, in a bid to boost profitability amid rising energy and input costs.
Corus, the world's eighth-largest steel producer, had previously said it would make sense for the company to team up with a low-cost partner with assets in countries such as Brazil, India and Russia.
A successful acquisition of Corus will transform Tata Steel -- currently ranked 56 in the world in terms of output -- into a global player in the metal business.
A combined Tata-Corus would have annual steel production of 25 million tonnes, which would make it the world's fifth-largest steel producer.
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