After the euphoria of winning a high-stakes bidding war to acquire Corus Group, Tata Steel top brass had to face some tough questions from the media and analysts today morning. Tata Group chairman Ratan Tata led the Tata Steel top management in defending the buy-out and espousing the long-term strategic vision for the Tata Steel-Corus combine.

Tata Steel believes that, though the Corus valuations appear to be very steep based on current performance, it can achieve significant gains in future through operational synergies and access to mature markets. Ratan Tata was categorical in dismissing the criticism that the deal was detrimental to shareholder interests.

He went on to add that the negative reaction of the stock market was without appreciating the long-term gains and strategic importance of the deal. "With this acquisition we can prove that Indian industry can step outside the national shores and prove itself as a global player", he said.

As expected, most of the questions were centred on the valuation of Corus, which most analysts have termed as very high. Tata Steel managing director B Muthuraman admitted that the price offered by his company is expensive on the basis of 2005 EBITDA levels of Corus. However, he argued that the deal is not very expensive on the basis of enterprise value per tonne of capacity - especially when compared to similar deals in recent years. Muthuraman asserted that the cost of setting up a greenfield plant is considerably higher and would take anywhere between three to five years to become operational.

Tata Steel management also sought to allay fears of very high financial burden on Tata Steel because of the acquisition. The equity infusion by Tata Steel into its subsidiary Tata Steel UK, which is the acquiring company, would be around $4.1 billion. The Tata Steel management elaborated that this amount would be tied up in such a way that the investment by Tata Steel would be attractive in terms of the capacity being acquired. A part of this amount would come from Tata Sons, which has already subscribed to a preferential issue of equity shares by Tata Steel.

The remaining amount of close to $9.5 billion, including existing debt of Corus which would be re-financed, would come from borrowings which have already been tied up. Tata Steel said these debt facilities have been structured in such a way that they would be serviced from future cash flows of Corus. Though these liabilities would appear on the consolidated financial statements of Tata Steel, their servicing would not affect the standalone cash flows of the company.

However, the stock market refused to buy these arguments and the Tata Steel stock ended the day with substantial losses of nearly 10.5 per cent. Most of the leading stock brokerages have downgraded the stock while some have come out with recommendations to sell.

While a majority of analysts are willing to concede that the acquisition makes strategic sense and may pay off in the long term, the consensus view is that stock price of Tata Steel would remain depressed in the short to medium term because of the higher financial risks.