Jeremy Warner's Outlook: A done deal as India's Tata Steel pitches in with historic £4bn bid for Anglo-Dutch Corus

Thames: another Macquarie steal; Consolidation of exchanges continues
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The Independent Online

Is the stock market right to be betting on a higher bid for Corus than the 455p a share in cash mooted by India's Tata Steel yesterday? Don't count on it. Press reports in India have put the eventual price Tata might pay at as much as 500p. Perhaps so, but unless Ratan Tata, the chairman, has truly taken leave of his senses then 455p will be as good as it gets.

Only 40 per cent of the £4bn purchase price would come from Tata Steel itself, with the rest from ring-fenced borrowings. Even so, that's quite a punt for a company which has only a quarter of Corus's revenues. Corus would also be left with dangerously high levels of leverage. The fact that the wider Tata business empire presumably stands behind the endeavour provides only limited cause for comfort. It would be unwise to pay any more.

Yet even leaving aside the difficulties of financing such an offer, and the extent to which gearing Corus up with debt might threaten its future, 455p a share looks a pretty toppy price which the board of Corus might struggle to better from anyone else.

As a multiple of ebitda, the 6.6 times valuation compares to a sector average of 4.8, and the 6 times ebitda Arcelor recently went for in agreed merger terms with Mittal Steel. What's more, the proposed Tata bid is all cash, which arguably makes it more valuable still. Never say never. It is always possible that a Russian steel maker might outbid Tata, but it seems unlikely.

Corus decided to make yesterday's announcement because it was worried that market expectations were becoming overly inflated. Despite hopes for better still, this already seems to be a done deal which the board will shortly recommend. Some hedge funds have been buying at above the suggested 455p a share, yet few are going to shed a tear for any losses they sustain. For those who bought three and a half years ago, when the company's very existence was in doubt, the return has been a fabulous one.

Philippe Varin, the chief executive, has always said that a standalone future for Corus is not an option. One way or another, the Anglo-Dutch steel group had to do a deal that would give it access to the low-cost slab steel and fast-growing markets of the developing world. Tata provides just such a way forward. Looked at cynically, the bid also provides investors with a clean exit at what is highly likely to be the top, or close to the top, of the cycle.

Both India and China plan massive increases in steel capacity over the next ten years. High international steel prices coupled with soaring domestic demand have triggered an investment boom in both these countries. Yet China is already a net exporter of steel. India plans to become one over the years ahead. A return to the days of over-capacity in the global steel industry may be nearer than we think. In these circumstances, access to low-cost, high-growth markets will be a vital ingredient of survival.

As a symbol of the way the world has changed, they don't come much more striking than this. Once a subservient part of the British empire, India is returning, cash in hand, in the largest outward investment ever made by the subcontinent, to take control of this still-key part of Britain's industrial heritage. Even five years ago, nobody would have dreamt this strange reversal of roles even remotely possible. There may be a lot wrong with the way globalisation works, but this must surely count as one of its triumphs.

Thames: another Macquarie steal

My, what a fantastic price a truly useless corporation is capable of commanding. Any ordinary company which had failed its customers on the heroic scale achieved by Thames Water would be lucky to be worth anything at all. Yet Thames is no ordinary company, open to the normal rigours of competition. It is a monopoly, whose customers have no option but to use its services whether they like them or not. Either that or go thirsty and dirty.

This puts it in an extraordinarily powerful position. Even as prices are rising steeply to pay for investment deemed necessary by the company and the regulator, the service has been going down the drain. Last summer, the situation was so dire that the company was forced to seek a drought order banning its customers from using a hose to sprinkle their lawns and wash their cars. Yet at the same time, it was losing 30 per cent of its water to leaks.

Where else can you earn a return for treating the customers so cynically. Fifteen years after privatisation, and with countless billions of our money spent on goodness knows what, Thames is still incapable of guaranteeing security of supply in a land where rain falls from the sky in abundance. Whether customers get the product they are sold or not, they must pay. Quite a business model, you might think.

Macquarie Bank of Australia thinks so too, which is why it is splashing out an eye-watering £8bn to buy the company from its German owners RWE. Few companies carry as little risk as Thames Water, making it a near-perfect match for the pension funds that typically invest in Macquarie's various infrastructure funds. This is a business where the more you invest, the more you make. Never mind whether the environmentally unfriendly desalination plant the company plans to build on the Thames estuary is a decent use of money, it is guaranteed by the regulator to earn its investors a rate of return come what may. Few other private companies could dream of such thievery.

Small wonder that infrastructure is the latest red-hot investment craze. Small wonder too that most other assets in the water sector which are still remotely possible to buy are under siege. The only real surprise is that it has taken the City so long to realise what a profitable opportunity they present.

What about regulatory risk? Well maybe, but in 15 years of privatisation, there hasn't been much sign of it so far. Economic regulation of privatised utilities was always likely to make a poor substitute for competition in delivering benefits to customers, and so it has proved. The regulator has been repeatedly hoodwinked. Even the dreams of avarice would struggle to replicate the returns made by investors from funding this lucrative natural monopoly. It beats the usual rigours of risk-taking any day of the week.

Consolidation of exchanges continues

Having combed the world in search of a merger partner, what do you know - the Chicago Mercantile Exchange has found that the right gal was sitting on its own windy-city doorstep all along. Ever since it demutualised and floated, CME has been linked with virtually everyone of any size in the game of consolidation now being played out globally among the world's leading exchanges. The last such talks were said to have been with Deutsche Börse. There have also been talks with Euronext, and, for all we know, with the London Stock Exchange too.

Perhaps wisely, CME has instead opted for the all-American solution of a merger with the Chicago Board of Trade, a similar exchange which is strong in futures and derivatives. What seems to have put the Americans off in talks with Deutsche Börse and Euronext is that they didn't particularly want to get involved in cash equity trading, which they have little experience of.

If it can be got through anti-trust authorities, the present proposal offers both bigger synergies and less risk. Whether it will also help the US win back competitiveness in global capital markets is rather more doubtful. The CME has been viciously protectionist in keeping European competition out of American futures markets, using access to the clearing system as the main barrier of entry. As the City's success demonstrates, being closed to outsiders is no way to win friends and influence people in global capital markets.

j.warner@independent.co.uk

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