The takeover of Corus by Tata Steel reminds us of another acquisition by the Tata Group. This was Tata Tea’s purchase of Tetley, owner of the iconic tea brand, in 2000. The purchase of Tetley was the largest cross-border deal by an Indian company at the time, just as the Corus deal is one of the biggest of its type today. In both deals, the acquirer was smaller than the target. Both involve an overseas special purpose vehicle to raise junk bonds to fund leveraged buy-outs (LBOs). And Tata Tea shareholders were initially concerned that the Tetley acquisition would dilute the earning power of their equity; Tata Steel shares fell sharply on Wednesday on similar concerns. But the Tatas did eventually turn around Tetley and used the extra cash flow to re-pay the expensive debt raised to fund the acquisition. Can they do an encore with Corus?
The nature of the business is different. Unlike Tetley, Corus is in a notoriously cyclical business where cash flows are volatile. A downturn in the steel industry could threaten this LBO.