Empire Strikes Back: India Forges New Steel Alliance

Empire Strikes Back: India Forges New Steel Alliance

The newly confident nation is no longer afraid to let its homegrown companies make acquisitions abroad. It is a dramatic illustration of the shift in the balance of power from West to East: a £5bn bid for Corus, formerly British Steel, by Tata, an Indian industrial conglomerate that has aspirations to turn itself into an Asian version of America''s General Electric.

True, Indian tycoon Lakshmi Mittal demonstrated what could be done earlier this year when his metals company acquired Europe''s Arcelor in a hotly contested £18bn bid. But Mittal''s firm was based in Luxembourg and many of its operations were overseas.

Tata is different: it is a home-grown Indian company with most of its interests on the sub-continent. A few years ago, Tata would have been prevented from exporting capital abroad by a government anxious for its entrepreneurs to invest in a domestic economy that was struggling to keep up with China, India''s Asian arch-rival.

''This deal, if it comes off, flags up that India has come of age. It shows confidence and a willingness by New Delhi to allow its companies to take on western-owned multinationals on their own turf. Here you have the shape of things to come,'' said Ian Rodgers of UK Steel.

The flip side of the story is that Corus is a relative minnow on the world stage and needs a partner if it is to continue to prosper. Since 2005, Phillippe Varin, the group''s French chief executive, has made no secret of the fact that he has been on the lookout for a merger partner - one that would be big enough to allow Corus to survive the next economic downturn.

British Steel, which merged with Hoogovens of Holland in 1999 to form Corus, produced 55 million tonnes of steel a year and employed 250,000 people in the late 1970s. Today it produces 19 million tonnes and employs 23,000 people at four factories on Teesside, Rotherham in Yorkshire, Port Talbot in south Wales and Scunthorpe in Lincolnshire. More than 10,000 people have been made redundant in the past seven years in a desperate bid to cut costs.

Although Corus has prised open new European export markets, British customers have dwindled as UK manufacturing has dwindled - it now accounts for an ever-smaller proportion of GDP, 17 per cent at the last count.

Elsewhere, demand for steel has rocketed as China and India have industrialised at an astonishing pace. But if Asia is where it is happening, wouldn''t it be better for Tata to build its own factories in India, rather than invest in Corus, where labour costs are high and the strong pound is a drag on profitability?

Richard Brakenhoff at Rabo Securities believes that Tata may have got it wrong: ''In Corus, the Indians would be acquiring a high-cost operation. India is a low-cost producer, so one wonders about the logic of this deal.''

Others argue that it makes sense for Tata to acquire a company that brings in lucrative new contracts and access to Western markets.

Anindya Mohinta, metals analyst at JP Morgan, said: ''Many of Corus''s products are aimed at top-of-the-range customers in areas such as aerospace, electronics, motor manufacturing and diagnostic equipment. That means you can get 10 per cent or 20 per cent more on price.''

The Indians want to get into the high-value end of the game and for that, you need western factories. As a big producer of slab steel itself, Tata could export the basic commodity to Europe for finishing and refining. Either way, it helps to be near to the markets that you service, especially when you have high freight costs, which are vulnerable to rising petrol prices.

Ratan Tata, the head of the Indian parent company that is behind Tata Steel, is no doubt taking his cue from Mittal, who fired the starting gun for global steel consolidation when he made his move on Arcelor.

One London-based investment banker said: ''I am sure that Tata does not want Mittal to steal all the glory. There is always an element of egotism somewhere in the equation.''

Tata and his lieutenant, B Muthuraman, head of Tata Steel, have a lot of catching up to do if they want to be as big in steel as Mittal, whose business is three times larger than the second biggest producer, Nippon Steel of Japan.

The international steel business is changing. In the old days it was a fragmented system of regional markets with a handful of major players in each. Now, to meet demand from the emerging economies of Latin America, Asia and Eastern Europe, big steel corporations are beginning to take shape, Mittal being the prime example.

The worry for Corus''s workers is that once Tata has acquired western know-how and technology, it could switch production to India. But Ian Christmas, secretary-general of the International Iron and Steel Institute, said: ''I don''t think it''s an issue. If there [were] a severe economic downturn, Corus''s factories would be at risk anyway. It has a much better chance if it is part of a bigger organisation.''

He might also have asked whether it is likely that Tata would splash out £5bn on a company, only to close it down a few years later.

Not that Varin, a 54-year old clarinet enthusiast, can be accused of selling from a position of weakness. He has turned around the fortunes of Corus since his appointment in 2003, when the share price was as low as 19p. The offer from Tata is worth 455p a share, so if the deal flies, he will have achieved one of the biggest financial turnarounds in corporate history.

Varin has also revived the business commercially, streamlining the operation and investing in new technology. He has been helped in no small measure by the rise in the price of steel over the past three years. But no one can take away from him the fact that the company produced profits of £167m in the first half of 2006 against £2bn of accumulated losses in the five years before he took the helm.

Perhaps one of the most remarkable things about the proposed deal - so far, at least - is the absence of protectionist sabre-rattling.

The Indian government is happy to let Tata invest in Britain, while the UK''s open market means that there are fewer barriers than if the Indians wanted to expand in France or Germany. ''Steel in this country is hardly a national treasure these days,'' said Christmas. Still, some politicians are certain to ask the government to scrutinise India''s restrictions on foreign investment in sectors such as telecoms, banks and life assurance.

But it is not certain that Tata will get a clear run at Corus, despite the fact that the British company''s board recommended the offer on Friday. Rumours abound that a Russian company such as Severstal, which challenged Mittal over Arcelor, could intervene. Other possible counter-bidders include Russia''s Novelipetsk and Brazil''s CSN.

''No one is ruling out anything,'' said Brakenhoff of Rabo Securities.

Ratan Tata: driving force behind the family business

Ratan Tata, 69, has been the chairman of Tata Sons since 1991. He is also chairman of all major Tata companies. During his tenure, the group''s revenues have grown more than sixfold to nearly 970bn rupees (£11.3bn). He joined the group in December 1962 and was named chairman of Tata Industries, the holding company, in 1981. He transformed it into a group strategy think-tank, and a promoter of new ventures in hi-tech businesses.

Founded by Jamsetji Tata in the 1860s, the group''s Tata Tea was the first Indian multinational in the global tea industry. Now Tata Steel is one of the world''s lowest-cost producer of steel; Tata Chemicals is one of Asia''s largest manufacturers of soda ash; Titan is one of the world''s top six manufacturer-brands in the watch sector, and Tata Motors is among the top six commercial vehicle manufacturers in the world. The group is increasingly focusing on new technology areas. Besides being the largest software services provider in India, it is one of the leading private sector telecom service providers and is also India''s largest international long-distance and internet services provider.

The group''s stable of brands includes many national and internationally renowned names such as the Taj Group of Hotels and Tetley Tea.

Nearly two-thirds of the equity of Tata Sons, the Tata group''s promoter company, is held by philanthropic trusts, which have created a host of national institutions in science and technology, medical research, social studies and the performing arts. The trusts also provide endowments, grants and programme aid to NGOs in education, health and social development.

The company, with its headquarters in Mumbai, has a reputation for keeping its 234,000 employees across 96 operating companies happy.

Ratan Tata himself has a strong image. ''He is a long-term strategist,'' says HV Harish, head of mergers & acquisitions at Grant Thornton India. ''His grand strategy revolved around making the group a global multinational, and he has successfully implemented it.''

Harish cites the example of Tata''s successful launch of the Indica saloon car when the domestic market was ruled by international giants such as Hyundai, Ford and Honda. Then, when Mittal Steel merged with Arcelor and subsequently raised fears of a takeover threat to Tata Steel, Tata raised the bar with the Corus takeover.