Within days of the formal announcement by Tata Steel about an initial non-binding offer to acquire Corus Group Plc, speculation about a possible bidding war is rising. Some steel industry analysts are suggesting that Brazilian steel maker Companhia Siderurgica Nacional (CSN) may be readying a counter-bid for Corus.

Rumours of a possible counter-bid helped lift the Corus stock on the LSE yesterday. The stock gained 8 pence, or nearly 2 per cent, to close at 487 pence yesterday.

CSN and Corus know each other very well. The two companies had tried to merge in 2002, but talks were called off for undisclosed reasons. They were partners in a Portuguese venture till early this year, when Corus sold its stake to CSN.

CSN is the largest steel maker in Brazil and has access to large reserves of iron ore though it''s controlling stake in Companhia Vale do Rio Doce (CVRD). The latter is the largest global producer and supplier of iron ore and pellets. For Corus, which needs access to cheap iron ore, a merger with CSN would be equally – if not more – attractive as a merger with Tata Steel.

CSN has so far declined to confirm the possibility of a bid and has dismissed these reports as ''market speculation''. Other potential bidders like Russian steel makers Severstal and Novolipetsk have also not made any public announcements about possible counter-bids.

Meanwhile, the Corus board is reported to have met yesterday to discuss the Tata Steel Offer. No announcements have been made and the Corus management is likely to wait till Tata Steel makes a firm offer, which is expected later this week.

Analyst opinion on the possible benefits of a merger between Tata Steel and Corus is widely split. Some argue that Tata Steel would be able to achieve considerable cost savings through cheaper inputs and efficiency gains. The combined entity would have a very strong marketing footprint across Europe and a dominant position in value-added products.

However, there are concerns about the future viability of some units of Corus. While its Dutch units are performing well, Corus''s UK-based plants are struggling – according to industry analysts. There are also worries about the substantial pension liabilities of Corus, which would be a drag on future profitability.

Besides, Tata Steel would be raising substantial amount of debt to finance the deal. The company has already announced investment plans of at least $15 billion for organic expansion in India, which would require additional debt financing. Many analysts are worried about Tata Steel''s ability to service this debt, especially if the steel cycle takes a down turn.