Why Corus broke pact with 'Devil'

TEN men traipsed into a windowless boardroom in London and sat down around a long, oval table. Outside, it was raining. Inside, the mood was sombre.

The meeting last Tuesday was chaired by Sir Brian Moffat, 63-year-old veteran of the UK steel industry who took over as chairman of British Steel nine years ago and retained the chair after the company merged with Dutch rival Hoogovens in 1989 to create Corus.

The group had two main topics to discuss. First, should Corus go ahead with a £3bn merger agreed four months previously to combine the Anglo-Dutch group with Brazilian steelmaker CSN? Second, how should Corus break the news to its investors that the company's finances were suffering more than the City apparently realised?

Since September, signs had been emerging that the outline merger deal with CSN was creaking. Investors were voicing concerns about the idea of Corus teaming up with a company in an economy, Brazil, seen as unstable. The value of the Brazilian currency against the US dollar has fallen by more than 20% since the merger deal was announced in July.

And there were misgivings about the colourful style of Benjamin Steinbruch, head of CSN, known in Brazil as 'The Devil'. Under the merger deal, Steinbruch was to take over the chair of the combined group when Moffat retired within the next 18 months.

By the end of Tuesday's meeting, according to Corus chief executive Tony Pedder, the board was unanimous - the CSN deal should be scrapped. As the meeting broke up, Moffat went to his office and phoned Steinbruch. The wedding plans were off.

The two sides have been flirting with one another for 16 months. Moffat, Pedder and Steinbruch started a series of meetings before Christmas 2001. The men then got together in London, New York and Rio de Janeiro and their ideas crystallised: a merger would give Corus a stake in a growing market and access to CSN's lowcost supplies of ore; and Corus would be able to share its technical expertise with the South Americans.

Pedder concedes that it became obvious that Corus's own problems were becoming increasingly acute. 'We have to batten down the hatches in Europe and didn't need the distraction of trying to press ahead with the CSN merger,' he said last week. The company is pulling out of aluminium and stainless steel to concentrate on carbon steel alone.

The price at which Corus and its rivals in the industry can sell steel has actually risen this year. It hit a nadir of £165 a tonne in the early part of the year, but it is now about £200. But the stalling of economic growth in the eurozone and the decline of UK manufacturing mean that Corus now believes that it will cut its operating losses to about £150m in the second half of the company's financial year - not the recovery that had been hoped for.

On Wednesday, the Stock Exchange knew the truth about Corus. Its shares fell nearly 30% and continued to tumble over the week. By Friday, Corus was worth just £840m - less than one-third of its value in July.