Speculative reports indicate the possibility of such a bid. Is this just a wild rumour? By Rex Mathew.

A report in a national daily today speculates on the possibility of Tata Steel – Corus making an acquisition bid for Brazilian steel company Companhia Siderugica Nacional (CSN). The report suggests that Corus Group's major stakeholders and bankers who are financing Tata Steel's Corus bid are encouraging the Tata – Corus combine to make a bid for CSN and are also willing to provide their financial backing.

The report further states that the Tata group is interested in a bid for CSN only if it is a friendly deal. This is in line with the group's stated policy that it would never ever make a hostile acquisition bid.

CSN is considered as the most probable candidate to challenge Tata Steel and make a counter-bid for Corus, though a counter-bid looks increasingly unlikely with every passing day. So is this a case of a potential hunter becoming the hunted or just wild speculation?

CSN, the largest steel manufacturer in South America, was a government-owned company till 1993, when it was privatised and was acquired by a team led by local entrepreneur Benjamin Steinbruch - who is currently its chairman - for $800 million.

The company, which had accumulated losses of over $6 billion till privatisation, was restructured and has become profitable – also helped by higher steel prices in recent years.

Steinbruch pulled off another big deal in 1997, when a consortium including CSN acquired a 42-per cent stake in Companhia Vale do Rio Doce (CVRD) – the largest global producer and supplier of iron ore and pellets – for over $3 billion. CVRD wields enormous influence in setting iron prices as it is the principal supplier to many large steel makers, including Corus.

Would Steinbruch, whose stated ambition is to build a giant Brazilian steel and mining conglomerate, agree to sell out? Businessweek had reported recently that the fortunes of Steinbruch were on the wane due to the large amount of debt he piled on to finance acquisitions and differences with partners.

Steinbruch even tried to cut a deal with his partners under which he would keep CSN while his partners would buy out CSN's 16.3-stake in CVRD, according to the Businessweek report.

Much of CSN's attractiveness to large steelmakers as a potential acquisition target is dependent on its stake in CVRD. So if Steinbruch arrives at a settlement with his partners and sell out the CVRD stake, as speculated, the value of CSN would slip substantially.

Even if this settlement does not happen and CSN retains the CVRD stake, potential bidders would have to strike deals with Steinbruch's partners, which include two Brazilian financial institutions, to have effective control over CVRD. That would make it very complicated and risky for large steel makers contemplating a bid on CSN.

Even if all these hurdles are negotiated, potential bidders can expect to face very stiff opposition in Brazil to any acquisition bid. Both CSN and CVRD were once state-owned companies and the Brazilian government many not easily digest their sell-out to foreigners.

Besides, CVRD is like a prized jewel for Brazil, which gives the country enormous clout in the global commodities space. For the government, allowing the transfer of control of CVRD to a foreign company would be as difficult as the Indian government agreeing to sell off ONGC.

However, a joint acquisition bid by Tata – Corus for CSN would make eminent sense from a strategic perspective. Such a bid would force CSN to build its defences and would most definitely kill any possibility of CSN making a counter-bid for Corus.

This is reportedly one of the benefits being suggested by the bankers who are trying to sell the idea. Very good strategy and a killer one at that! But would the Tatas go for a hostile bid?