An awful lot has already been written and said about Tata Steel's £4.3bn takeover bid for Corus, but two key questions remain to be addressed. The first is whether Tata's 455p a share is enough. Standard Life, Corus's largest shareholder, was quick to say it wasn't. Nothing less than 600p a share would do. Is this just fantasy, or is the Corus board indeed underselling the company?
The second question concerns whether the industrial logic of this takeover is quite as compelling as it is portrayed. These are linked questions, so I will try to answer them in combination. The manner of this takeover is much more akin to a private-equity buyout than a conventional industrial merger. Tata is putting up $3.5bn of equity, but the balance of Corus's $10.2bn enterprise value - or around 65 per cent of the total - is being satisfied by debt which will be secured against Corus's own cash flow.
Corus is thus being bought as a standalone company. There may eventually be synergies to be derived from its association with Tata, but, initially at least, they are likely to be very limited. As things stand, India is not allowed to export any of its cheap sources of iron ore. Nor does Tata apparently believe this would be a good idea in any case. Indigenously produced iron ore should be kept for India's own use, Tata stated yesterday, so that value could be added to it for India. In these circumstances, it is not entirely clear how the stated aim of procuring raw materials jointly would much improve matters for Corus. Presumably, Corus already scours the world for the cheapest possible sources. So not much benefit for Corus there.
A more promising source of synergies is the intention of shipping cheap, Tata-produced slab steel for finishing and distribution by Corus in Europe. However, Tata is still some years away from being able to do this. Significant new investment on greenfield sites in India is required first. That gives Port Talbot, the main producer of slab steel in Britain, a stay of execution, but it may be no more than that.
Philippe Varin, Corus's chief executive, makes the point that Port Talbot's competitiveness as a producer of commodity steel will be threatened by the expansion of steel production in the developing world whether Corus does the deal with Tata or not. By linking with Tata, Corus might give Port Talbot a more secure and competitive future as a producer of finished steel products. Which brings us to the final rationale for the takeover - access to the high growth markets of Asia.
M. Varin has long believed that staying independent is no longer an option for Corus. To survive, it must both find secure sources of commodity steel that it can add value to and gain access to the high-growth markets of the developing world. Tata is capable of delivering both these ambitions. Yet there are a lot of "ifs" and "buts" in this strategy. It sounds compelling enough on paper; in practice it is all quite a long way off. In the meantime, Corus carries on as before.
Nor is it obvious that the deal does indeed make Corus more secure. On the contrary, the debt leverage involved in the buyout self-evidently weakens the company financially, endangering long-term investment plans and lumbering it with a crushing debt-servicing obligation just as the steel cycle is beginning to turn down.
Perhaps unfortunately, these are not considerations shareholders feel obliged to take account of. A clean cash exit is being offered; for them the only matter of substance is the size of it. So is it enough? If Corus is right that it has no viable future without such a link-up, then shareholders have to be content with what they can get.
In the long term, Corus may be worth very little on its own, yet it plainly does have strategic value to one of the fast growing producers of the developing world. Some shareholders believe that strategic value is not properly reflected in the 455p a share Tata is offering. Yet according to Corus, none of the obvious alternatives to Tata have so far shown any serious interest. Directors can only consider what is actually on the table. Factoring in the £126m Tata is putting into one of the group's pension funds, worth 30p a share, the price seems to them acceptable.
I'm not entirely convinced by the industrial logic. This would be a lot more compelling if the deal had been structured as a proper merger, allowing Corus shareholders to participate in the perceived long-term upside. Instead it has been structured as a private equity-style buyout, which smacks as much of high-risk, financial engineering as strategic logic.
If you believe what M. Varin says about the rationale, then shareholders are right to be demanding a higher price for the strategic advantage they are selling to Tata. Yet obtaining that premium is dependent on a bidding war. It's not clear anyone else has the stomach for it.
Lloyd's of London: a chapter finally closes
Equitas is the organisation set up by Lloyd's of London in the dark days of the mid 1990s when crushing losses incurred writing asbestos and pollution-related business were threatening to sink the entire market. By separating out all non-life liabilities prior to 1992 and bundling them together for runoff under the Equitas umbrella, Lloyd's managed to ensure a fresh start for the rest of the insurance market.
Yet it has always been touch and go as to whether Equitas would have sufficient by way of assets to satisfy the mountain of claims it still faces. Though the present surplus over estimated liabilities is a relatively healthy 12 per cent, that could easily change, and so long as Equitas existed, there would always be the threat of further calls on the market. Some 34,000 reinsured names also remain on the hook should there be a shortfall.
The decision to offload these liabilities on to Warren Buffett's Berkshire Hathaway therefore makes sense on virtually every level. Policyholders get the comfort of the further $7bn of reinsurance capital that Berkshire intends to provide, names get a dividend, albeit a tiny one, and eventual freedom from any further liability, and Lloyd's finally gets shot of a now historic problem which nonetheless hangs like an albatross around its neck.
Small wonder that Lord Levene, the Lloyd's of London chairman, calls it a milestone. It's more than that. It's the final closure on Lloyd's darkest hour. So what's in it for Warren? Well of course he gets all the upside should the cost of the runoff eventually fall short of present estimates.
It's a risk. Nor will Mr Buffett ever know whether it was a good one. The final outcome won't be known until long after he's dead. Yet I suspect he knows what he's doing. This seems to be one of those rare instances where everyone emerges a winner.
Climate change: taking responsibility
Long after socialism was discredited, new causes keep on popping up to justify curtailment of our personal liberties. Global warming looks like being the best of the lot, for no one can argue any longer against the idea that something must be done to prevent selfish, unbridled capitalism from destroying the planet. Marx was right after all. Free markets would ultimately self- destruct, though not in his wildest imaginings would he have thought they might do so through a melting of the polar icecaps.
So is that what we have to look forward to - a miserable choice between being boiled alive and massive state intervention in the collective interest of preventing it? Don't despair. The solution lies largely in our own hands. We don't need to rely on governments. If everyone made the small effort necessary to reduce their carbon consumption, the problem would start to go away. That's the idea being promoted by Global Cool. The brainchild of a London-based social entrepreneur, Dan Morrell, we can expect to hear a lot more about it over the months ahead as he takes his campaign of personal empowerment global. It may not work, but we had better hope it does. An increasingly Stalinist future beckons if it doesn't.Reuse content