Corus of approval - or Tata and goodbye?Published by MAC on 2006-10-06
News that Corus may invite a takeover bid from Tata of India doesn't come as a whopping great surprise. The UK-Dutch steelmaker has, for some time, been searching for a suitor - both to reduce its high costs of production and open up new markets. Tata has been on the look-out for markets and downstream acquistions.
What the current flurry of speculation (see below) hardly recognises is the social costs involved if the buy-out goes ahead. Jobs would be lost in the UK, and Corus would doubtless want access to iron-ore reserves in India contributing significantly to the ongoing assault on rural communities - remember the Kalinganagar massacre last January?
Of course the bid may still fail, especially if the Russians choose to fight their corner, as they did when Arcelor of Luxemburg wanted a white knight to beat off LN Mittal's bid earlier this year (and failed). Russia's biggest steel maker, Evraz, listed on the London Stock Exchange in mid-2005, is certainly interested in bedding-down with Corus.
But then Tata is already a UK brand name, drunk by millions of British citizens every day in the shape of Tetley tea. And its big boss, Ratan Tata, was recently recruited to the "globalisation advisory committee," set up by Gordon Brown, UK Chancellor of the Exchequer, who is widely tipped to step into the shoes of prime minister Tony Bliar and lead the Labour Party to a fourth-term success in the next general elections.
[Comment by Nostromo Research, London, October 6 2006]
Tata: the Indian industrial giant with a core of steel
Tata Steel was set up in the teeth of racist scorn and the incredulity of many servants of the Raj
By Peter Popham, The Independent
6th October 2006
Both groups are headed by Indians and both are hungry to take over non-Indian steel companies. But there the similarities between Tata Steel, which yesterday was said to be contemplating buying the Anglo-Dutch steel firm Corus, and Mittal, in the process of merging with Luxembourg-based Arcelor, begin and end.
Mittal may be the world's largest steel group, but it is also a parvenue. Tata, by contrast, has been the most important industrial concern in India for well over a century. The huge conglomerate, consisting of some 100 largely independent companies with a group revenue in 2005 of $17.8bn (£9.5bn), is by far the biggest industrial group in India. Its history is the history of industry in the subcontinent.
The family of Bombay Parsis headed by Jamsetji Nusserwanji Tata first became wealthy through selling opium (and cotton) to the Chinese. The opium was grown in India and exported, for many decades quite legally, to China by Tata and other Parsi and Baghdadi Jewish merchant families. That awkward blemish in the company's early history is studiously ignored in the firm's official literature. For the company's historians, the Tata story begins with the determination of the patriarch to challenge Britain's monopoly of industry on the subcontinent. His first effort in 1877 was India's first modern cotton mill, set up in the city of Nagpur, near a cotton-growing area and an important railway junction right in the middle of the subcontinent.
Two other of Jamsetji's many brainwaves are still flourishing. Determined to drag his countrymen into the modern age, he fought for years to establish an Indian Institute of Science to turn out Indian engineers, technicians and scientists. Years after his death the school came into existence in Bangalore, an early forerunner of the Indian Institutes of Technology (ITTs) set up by Jawaharlal Nehru, which are still India's proudest educational institutions and critical to the nation's success.
The other brilliant idea - scorned by his relatives at the time - was to build India's first luxury hotel. The notion supposedly came to him after he was refused entry to an existing Bombay hotel on account of being an Indian. The Taj Mahal Hotel, the first in the country with foreign lifts and air conditioning, is still a byword for luxury and excellence, and has spawned many others in its image around the country.
But Jamsetji's boldest dream of all, and the one which led directly to yesterday's takeover news, was to build India's first steel mill. As with his cotton mill, he went to the place where the raw material was available: to East Singhbum, in what is now the state of Jharkhand, in the east of the country, a largely tribal area, densely forested until recently, at the heart of immense, untapped reserves of iron ore.
Here Tata set up Tata Steel, in the teeth of the racist scorn and incredulity of many servants of the Raj: the British head of India's railways, for example, had so little faith in Tata's project that he said he would personally eat all the railway lines turned out by the new factories.
By assiduously learning from foreign examples and persevering for years in the face of every imaginable setback, Tata and his sons proved the doubters wrong. But Tata was more than merely an ambitious industrialist: he harboured huge ambition for the whole of his country. That's why he made his steel plant the epicentre of the city of Jamshedpur (also known as Tatanagar, "Tatatown"). Even today Jamshedpur is in a league of its own among Indian cities, well planned, with broad, smooth roads, large parks and pleasant housing colonies, with electricity and water 24 hours a day. The fetid shanty towns just beyond the city's boundary line only serve to underline the scale of the achievement. With all these bold schemes well under way at the time of his death, the patriarch set the direction for his company for the next century. Tata continued to grow, its steel mills providing the steel for the huge fleets of Tata trucks and buses trundling along India's desperate roads, and over the decades the many dozen different parts of the empire grew more and more independent of each other.
Tata was the monopolistic beneficiary of the post-Independence decades of the so-called "Licence Raj", its existing supremacy sealed in place by government bans on private entrepreneurship. But it was also a victim of the "Hindu rate of growth", which meant that economic growth did not quite keep up with the growth of the population: Tata became, it is charged, torpid, stagnant, complacent, inefficient, like everything else in the Indian environment.
The 15 years since the introduction by Manmohan Singh, now the Prime Minister, of the first serious economic reforms, have seen the empire galvanised and transformed. Ratan Tata, 68, has been chairman of the Tata group since 1991, the year of the first reforms, and while striving to hold on to the group's reputation as the most socially enlightened of Indian firms, he has also driven it in two directions at once: cracking down on poorly performing parts of the empire at home, while spearheading an unprecedented wave of acquisitions abroad. Among his achievements: the launch, in 1998, of the Tata Indica, the first all-Indian passenger car; the takeover of Tetley Tea in 2000; and the booming success of Tata Consultancy Services, the software unit that has been one of the brightest success stories of India's software revolution.
Of his strategy, Ratan Tata told an interviewer for America's McKinsey Quarterly, "We have two guiding arrows. One points overseas, where we want to expand markets for existing products. The other points right here, to India, where we want to explore the large mass market that is emerging. Not by following but by breaking new ground in product development and seeing how we can do something that hasn't been done before."
Perhaps the most ambitious plan on the drawing board now is that of building a "people's car" for the Indian masses that would sell for the equivalent of $2,200, some $4,800 less than the Indica; Tata believes the car has a potential market in India of one million units per year. "Today in India you often see four people on a scooter: a man driving, his little kid in front, his wife behind holding a baby," Tata said. "It's a dangerous form of transportation and it leads to accidents and hospitalisations and deaths. If we can do something on four wheels... I think we will have done something for that mass of young Indians."
Steel remains at the core of Tata's business, as the Corus manoeuvre indicates. Tata said: "We are making sure that we have secure access to raw materials, because I really believe that owners of iron ore are going to rule the industry. They will be the Opec of the steel industry."
But in the drive to consolidate its grip on steel, this year Tata got some of the worst publicity in its history. On New Year's Day, during a confrontation between villagers and police in a village called Kalinganagar in Orissa over Tata's plans to build a new steel plant, 12 villagers were shot dead. Road blockades imposed in protest by angry villagers lasted for many months.
Tata Steel considering Corus merger
Lex column: FT
5th October 2006
This is the big one that India bulls have been waiting for. India’s Tata Steel is mulling a bid for Corus, its Anglo-Dutch peer, which after yesterday’s share price rise has an enterprise value of $10.4bn – only a shade less than the total value of Indian outbound deals in the past seven years. That is indisputably big, but is it clever?
Combining Corus’s production of 15m tonnes with Tata’s 5m would create the world’s fifth largest producer, based on 2005 figures, but one still far behind, say, Arcelor Mittal with 101m tonnes or 10 per cent of global production. Still,
Corus is looking for a buyer and Tata Steel is keen to grow. The Anglo-Dutch producer might gain access to India’s iron ore, while Tata would gain access to European markets.
Whether synergies would justify Corus’s valuation – its shares have risen by more than 50 per cent this year – is unclear. Tata Steel is an inexperienced dealmaker so execution risk is high. Corus is in play, having flirted with Brazil’s CSN and Russia’s Evraz. Tata’s market capitalisation of $6.5bn is below Corus’s $7.7bn. Corus would almost certainly not accept Indian stock, and the Tata family, with a quarter stake in Tata Steel, would need to inject capital to maintain control. If Tata paid entirely in cash, the new entity’s net debt, at 60 per cent of EV, would be too high for a cyclical business. A big equity raising by Tata would appear to be a prerequisite for a deal.
Is Corus worth the effort? Tata expects domestic market volumes to grow by at least 8 per cent compounded annually until 2015. It enjoys margins of earnings before interest, tax, depreciation and amortisation of 40 per cent, dwarfing Corus’ current 7 per cent. There are better targets for India’s landmark multi-billion dollar entrance on to the world’s corporate stage.
Corus future in doubt as Tata hovers
By Peter Marsh in Buenos Aires, Financial Times
5th October 2006
News that Tata Steel, India’s biggest private sector steelmaker, is considering Corus as a potential merger partner has reignited speculation about the future for the Anglo-Dutch steel producer – and throws up the possibility of the biggest international expansion to date by one of India’s largest industrial groups.
A deal would also be further evidence of the consolidation of the global steel industry, a process that that has accelerated considerably in the past few years through the combination of large companies to form bigger and more powerful groups. The most recent move in this direction was the €26.9bn takeover by Lakshmi Mittal’s Mittal Steelof Arcelor, the Luxembourg-listed European group, to form Arcelor Mittal – easily the world’s biggest steelmaker, with an output three times higher than its closest rival.
Tata Steel is part of the Tata group, a large Indian conglomerate which is owned by a private trust and headed by Ratan Tata. While the softly-spoken businessman shuns the limelight, he has led Tata into several overseas investments. These include a significant move into Europe by Tata Consultancy Services, the group’s large IT services division, and an ambitious plan to construct an automotive research centre in the English Midlands. This would be part of efforts to gain a stronger foothold in Europe by Tata Motors, the group’s automotive arm, which is also looking at various joint ventures – notably in South America and India with Fiat of Italy.
For Corus, a deal with Tata could form the culmination of a plan by Philippe Varin, its French chief executive, to link the steelmaker with a low-cost producer. Mr Varin took the helm in 2003 after several years of financial losses following the creation of the company in 1999 through the merger of British Steel and Hoogovens of the Netherlands.
Corus has since made substantial progress in sharpening its operations and is now profitable. But Mr Varin has come to realise that its European steelmaking sites – particularly those in the UK – need to be supplemented by lower-cost locations in other parts of the world. The main problems are the UK´s high labour costs, Corus’s poor record in manufacturing efficiencies and the cost of bringing to the UK increasingly expensive raw materials – chiefly iron ore.
It would make some industrial sense for Corus to shut down at least some of its high-cost steelmaking sites in the UK, such as in south Wales or Scunthorpe, and replace them with cheaper steel shipped from India in unfinished “slab” form.
Tata Steel has a large and efficient site in Jamshedpur, northern India, and its slab could in theory be “finished” in final processing or rolling procedures in the UK – to make into flat automotive sheet for use in the auto or domestic appliance industries, for example.
Such a project could involve the loss of more jobs in the UK. Corus has already cut more 10,000 British jobs since 1999 as it has battled to stay competitive. A partnership of this sort between Tata and Corus – perhaps as part of a merger or takeover by one company of the other – would also bring together two companies with different management styles but some strong common interests in areas such as marketing and use of new production methodologies.
Corus already has good marketing contacts in India – where, for instance, it sells some high-value steel used in buildings such as airports – while several top Tata Steel executives were trained at the former British Steel and admire the UK approach to business.
A combination might, however, raise the problem of uniting two companies of quite different scale. Corus is the world’s eighth biggest steelmaker with an output last year of 18m tonnes. Tata Steel, by contrast, is a minnow with production from its one site in Jamshedpur last year of 5m tonnes, making it the 55th biggest steelmaker in the world according to international rankings.
Despite that, Tata Steel has ambitious expansion plans. B Muthuraman, managing director, has announced a scheme to spend more than $20bn by the middle of the next decade to increase annual output to more than 20m tonnes, mainly through new projects in India but also by moves to set up steelmaking units overseas. (The company has already acquired fairly small steelmaking operations in Singapore and Thailand.)
Mr Muthuraman likes the idea of using India’s low-cost steelmaking sites – helped by good access to high quality but cheap iron ore - to turn out slab steel for finishing closer to the consumer. He is developing this idea partly through a partnership with Bluescope, the Australian steelmaker. Mr Muthuraman also has an upbeat view of the future for the Indian steel industry and sees steel demand in the country expanding three-fold over the next 15 years, to reach 150m tonnes a year.
So if the two companies did unite, there would be every chance that their respective managements could combine to create potentially powerful force in global steel.
Gordon brown-noses global business
Matthew Lea, Red Pepper
The ‘globalisation advisory committee’ set up by Gordon Brown consists solely of big business representatives.
Gordon Brown has gone to great lengths over the past couple of years to promote himself as a global statesman, making his feelings known on issues ranging from global warming to the joys of fatherhood. These pale into insignificance, however, in comparison to the gusto with which he has championed the fight against global poverty.
So just how serious is he about tackling inequality? Judging by the members of his ‘globalisation advisory committee’, not very.
While it was inevitable that corporate interests would feature highly on the chancellor’s committee, the fact that these are the only interests represented is astounding. Brown seems to have little interest in the trade justice/anti-globalisation movement critique of how world trade and investment rules promote poverty and environmental destruction, nor the direct role played by many of the companies represented on his committee.
Despite, for example, BP’s claim that it operates according to ‘clear ethical standards for ourselves and our contractors, ensuring that the whole of the local communities benefit from our presence’, the company’s behaviour in Colombia tells a different story. Local people who have dared to protest against the environmental damage resulting from BP’s operations have been ‘singled out for persecution, harassment and death threats’, according to Human Rights Watch. Such threats are far from idle – one group, the El Morro Association, has had six members murdered since it began its campaign against damage done by BP to the local road and water supply.
Despite re-branding itself as ‘the supermajor of choice for the environmentally-aware motorist’, BP’s actions continue to make a mockery of its ‘beyond petroleum’ claims. The controversial BP-led Baku-Tblisi-Ceyhan oil pipeline has been built through some of the world’s most earthquake-prone and conflict-ridden areas. Farmland has been flooded, oil leaks are common and water supplies to villages on the pipeline’s route have been cut off. Taken in conjunction with the company’s continuing attempts to gain access to Alaska’s last remaining pristine wilderness, the Arctic National Wildlife Refuge, it’s unsurprising that BP has been awarded Corporate Watch’s ‘greenwash’ award, while its CEO Lord Browne had the honour of walking off with Greenpeace USA’s award for the ‘best impression of an environmentalist’.
GlaxoSmithKline, meanwhile, was taken to task – though not to court – by a BBC documentary in 2004 exposing the practice of conducting drugs trials for the anti-retroviral drugs, AZT and Nervaprine, on HIV-positive orphans in New York. Despite causing a series of adverse reactions, including painful and bloody flaking of the skin in children and spontaneous abortion in pregnant mothers, the trials continued.
Estimated annual profits of $5 billion in the worldwide market for AIDS medications did not deter GSK from suing the South African government in 2001 for its attempts to supply affordable generic drugs. The company also blocked the import of generic AIDS drugs to Ghana in 2000.
Wal-Mart, of course, needs no introduction here. Despite taking home $17.5 million during 2004, CEO Lee Scott continues to preside over a company that pays on average 20 per cent less than the industry standard, while insisting that all managers must reduce labour costs at their stores by 0.2 per cent each year. In August 2002, supermarket chain Asda, which is wholly owned by Wal-Mart, sparked a banana retail price war when it signed an exclusive deal with Del Monte at what industry experts described as a ‘ridiculously low price’. Asda is now supplied with bananas grown and harvested under the world’s worst labour and environmental conditions.
Such examples are neither rare nor difficult to find. Less commonly known are the sums ‘invested’ by some of the companies represented on Brown’s committee in order to encourage favourable legislation. Just one example was the £12 million donated by Tesco to the Millennium Dome. The donation was suggested by lobbying firm LLM, who at the time were involved in a campaign on behalf of Tesco to block plans for a tax on shopping centre car parks. When the government’s white paper on transport subsequently appeared, the planned tax had been dropped. The estimated cost of the car park tax to Tesco would have been £40 million per year.
If one company can lobby effectively in defence of its commercial interests, collective lobbying carries even greater weight. At least five of the companies represented on Gordon Brown’s committee are members of the International Chamber of Commerce (ICC). The ICC is one of the most powerful – and secretive – of the international corporate lobby groups whose primary goal is continued deregulation in global trade and investment rules.
The globalisation committee also includes several members of Business Action for Africa. This lobbies hard for the enforced ‘liberalisation’ of African economies in return for debt relief, ignoring the critiques of forced-trade liberalisation, deregulation and privatisation in Africa made by development NGOs.
These are nowhere to be seen on Brown’s panel. Neither are environmental NGOs, aid agencies, trade unions or human rights groups. Their lack of representation must call into question the kind of advice that Gordon Brown is seeking, and the commitment of the man-who-would-be-prime-minister to tackle corporate power where it stands in the way of alleviating world poverty or slowing down the rate of environmental destruction.
Lord Browne, group chief executive, BP, member of the international Chamber of Commerce (ICC) and Business Action for Africa (BAA)
Dr Jean-Pierre Garnier, CEO, GlaxoSmithKline, ICC and BAA
Bill Gates, chariman, Microsoft Corp., ICC and BAA
Sir Ka-Shing Li, chairman, Hutchison Whampoa Ltd
Bernard Arnault, chairman and CEO, LVMH Sir Terry Leahy, CEO, Rolls Royce
Robert Rubin, chairman, Citigroup, ICC and BAA
Lee Scott, CEO, Wal-Mart
Ratan Tata, chairman, Tata Group, ICC
Meg Whitman, CEO, eBay
James Wolfensohn, former president of the World Bank Research by Chris Grimshaw