tata - corus - merger report

8/13/2019 Tata - Corus - Merger Report

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SHAH AND ANCHOR KUTCHHI ENGINEERING COLLEGE

DEPARTMENT OF MANAGEMENT STUDIES

Subject:Mergers & Acquisitions

(Finance Specialization - Semester 3)

Project Report on:L.B.O. of Tata - Corus

Submitted To:Prof. Dr. Bhatia


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SUMMARY:

Tata Steel acquired Corus Group in April 2007 for 6.2bn. Tata Steel is Indias

largest private sector steel company with 2005/06 revenues of US$5.0 billion and

crude steel production of 5.3 million tons across India and South-East Asia. CorusGroup is Europe's second largest steel producer with annual revenues of over 9.2

billion and a crude steel production of 18.2 million tons in 2005. This is an

interesting acquisition as the acquired company was almost four times the size of

the acquirer in terms of revenue. The combined entity became the fifth largest steel

company in the world. The acquisition allowed Tata Steel entry into the European

market. This deal follows the merger of Arcelor-Mittal forming worlds largest

steel company. It is the biggest deal ever from an emerging market. The deal is a

powerful combination of low cost upstream production in India with the high end

downstream processing facilities of Corus. The deal occurred through 9 rounds of

competitive bidding between Tata Steel and Brazilian Steel Maker CSN. The final

deal valued Corus at 607 pence per common share which was 67% higher than the

price of Corus before the deal was announced. It was an all cash deal and financing

was done by a mixture of debt and equity.


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TATA CORUS ACQUISITION:

On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus

accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company, at455 pence per share of Corus. The following months saw a lot of negotiations from

both sides of the deal. Tata Steel's bid to acquire Corus Group was challenged by

CSN,the Brazilian steel maker. Finally, on January 30, 2007, Tata Steel purchased

a 100% stake in the Corus Group at 608 pence per share in an all cash deal,

cumulatively valued at USD 12.04 Billion. The deal is the largest Indian takeover

of a foreign company and made Tata Steel the world's fifth-largest steel group.

There are not many opportunities for producers in emerging low-cost markets to

gain access to the markets of Europe other than by acquiring a company like

Corus, John Quigley (Editor, Industry Publication Steel week) Thousands of

Indians didnt offer prayers for Tata Steel to clinch the deal for the Anglo- Dutch

steel maker Corus, as they have for the recovery of hospitalized Bollywood

superstars. Nor did they erect 40-foot billboards of a smiling Ratan Tata, chairman

of Tata Steel, after he won Corus. And the stock markets were clearly concerned

about the Tata Steels new debt load. But despite all this, euphoria gripped the

nation. Finance minister P. Chidambaram offered unspecified help, if needed, to

close the deal; fellow steel magnate Lakshmi Niwas Mittal cheered the acquisition,

and excited TV newsreaders gushed. Indias first Fortune 500 MNC was born. Tata

acquired Corus, which is four times larger than its size and the largest steel

producer in the U.K. The deal, which creates the world's fifth-largest steelmaker, is

India's largest ever foreign takeover and follows Mittal Steel's $31 billion

acquisition of rival Arcelor in the same year. Over the past five years, Indian

companies had made global acquisitions for over $10 billion. The Tata bid almost

equals this amount. Most of them have averaged $100 to 200 million.
http://en.wikipedia.org/wiki/Corus_Grouphttp://en.wikipedia.org/wiki/Companhia_Sider%C3%BArgica_Nacionalhttp://en.wikipedia.org/wiki/Companhia_Sider%C3%BArgica_Nacionalhttp://en.wikipedia.org/wiki/Corus_Group


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"It is a two-way street now," Kamal Nath (Commerce Minister, India) said. "Not

only India is seeking foreign investment, but Indian companies are emerging

investors in other countries."

Ratan Tata has said he is confident the two companies have a cultural fit and

similar work practices. Nearly 30 years ago J.R.D Tata had lured away a young

engineer from Coruss predecessor company, British Steel, to work at Tata Steel.

That young Sheffield-educated engineer Sir Jamshed J. Irani (knighted by the

Queen 10 years ago)was Tata Steels managing director until six years ago.

Until the 1990s, not many Indian companies had contemplated spreading their

wings abroad. An Indian corporate or group company acquiring a business in

Europe or the U.K. seemed possible only in the realm of fantasy. Recent reports of

United Nations Conference on Trade and Development (UNCTAD) and other

organizations have recorded the fact that nowadays Foreign Direct Investment

(FDI) is more likely to flow in through cross border mergers (and not through

Greenfield Projects). Though Corus is four times bigger than Tata but in the year

2006 the operating profit for Tata was $840 million, whereas in case of Corus it

was $860 million. There are some major inputs, which leads Tata towards this

huge profit.

Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making the

Indian company the worlds fifth largest steel producer. This acquisition process

has started long back in the year 2005. However, Corus was involved in a

considerable number of Merger & Acquisition (M&A) deals and joint ventures

(JVs) before Tata. This process started in the year 2000 and with Tata it came to an

end. In a period of seven years Corus was involved in 14 deals apart from Tata.

(Refer Exhibit 1 for the details about M&A deals by Corus). In 2005, when the


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deal was started the price per share was 455 pence. But during the time of

acquisition held in 2007, the price per share was 608 pence, which is 33.6% higher

than the first offer. For this deal Tata has financed only $4 billion, although the

total price of this deal was $12billion. Here the important point is how Tata could

manage to get such a huge amount for this deal? Did Tata Steel overheat in its zeal

to win Corus?

However as stated by Muthuraman (the Managing Director of Tata Steel), the bid

made to Corus was unanimously supported by the management of the company

and recommended to its shareholders. In an interview to CNBC India, B

Muthuraman also said that they are acquiring Corus for synergy and not for

tonnage. "There are synergies in operations, manufacturing, marketing etc."

'Tata Steel', formerly known as TISCO(Tata Iron and Steel Company Limited),

was the world's 56th largest and India's 2nd largest steel company with an annual

crude steel capacity of 3.8 million tonnes. It is based in Jamshedpur, Jharkhand,

India.[1][2]It is part of theTata Group of companies. Post Corus merger, Tata Steel

is India's second-largest and second-most profitable company in private sector with

consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350crore

during the year ended March 31, 2008.[3][4]The company was also recognized as

the world's best steel producer byWorld Steel Dynamics in 2005. The company is

listed onBSE andNSE;and employs about 82,700 people (as of 2007).

Coruswas formed from the merger of Koninklijke Hoogovens N.V. with British

Steel Plc on 6 October 1999. It has major integrated steel plants at Port Talbot,

South Wales; Scunthorpe,North Lincolnshire; Teesside, Cleveland (all in the

United Kingdom) andIJmuiden in the Netherlands. It also has rolling mills situated

at Shotton,North Wales (which manufactures Colorcoat products), Trostre in

Llanelli, Llanwern inNewport,South Wales, Rotherham andStocksbridge,South
http://en.wikipedia.org/wiki/Tata_Steelhttp://en.wikipedia.org/wiki/Tata_Steelhttp://en.wikipedia.org/wiki/Limited_companyhttp://en.wikipedia.org/wiki/Jamshedpurhttp://en.wikipedia.org/wiki/Jharkhandhttp://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-1http://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-1http://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-1http://en.wikipedia.org/wiki/Tata_Grouphttp://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-ta-3http://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-ta-3http://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-ta-3http://www.worldsteeldynamics.com/http://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/Corus_Grouphttp://en.wikipedia.org/wiki/Corus_Grouphttp://en.wikipedia.org/wiki/Port_Talbothttp://en.wikipedia.org/wiki/Scunthorpehttp://en.wikipedia.org/wiki/North_Lincolnshirehttp://en.wikipedia.org/wiki/Teessidehttp://en.wikipedia.org/wiki/Cleveland,_Englandhttp://en.wikipedia.org/wiki/IJmuidenhttp://en.wikipedia.org/wiki/Shotton,_Flintshirehttp://en.wikipedia.org/wiki/North_Waleshttp://en.wikipedia.org/wiki/Colorcoathttp://en.wikipedia.org/wiki/Llanwernhttp://en.wikipedia.org/wiki/Newporthttp://en.wikipedia.org/wiki/Rotherhamhttp://en.wikipedia.org/wiki/Stocksbridgehttp://en.wikipedia.org/wiki/South_Yorkshirehttp://en.wikipedia.org/wiki/South_Yorkshirehttp://en.wikipedia.org/wiki/Stocksbridgehttp://en.wikipedia.org/wiki/Rotherhamhttp://en.wikipedia.org/wiki/Newporthttp://en.wikipedia.org/wiki/Llanwernhttp://en.wikipedia.org/wiki/Colorcoathttp://en.wikipedia.org/wiki/North_Waleshttp://en.wikipedia.org/wiki/Shotton,_Flintshirehttp://en.wikipedia.org/wiki/IJmuidenhttp://en.wikipedia.org/wiki/Cleveland,_Englandhttp://en.wikipedia.org/wiki/Teessidehttp://en.wikipedia.org/wiki/North_Lincolnshirehttp://en.wikipedia.org/wiki/Scunthorpehttp://en.wikipedia.org/wiki/Port_Talbothttp://en.wikipedia.org/wiki/Corus_Grouphttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://www.worldsteeldynamics.com/http://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-ta-3http://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-ta-3http://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/Tata_Grouphttp://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-1http://en.wikipedia.org/wiki/Tata_Corus_acquisition#cite_note-1http://en.wikipedia.org/wiki/Jharkhandhttp://en.wikipedia.org/wiki/Jamshedpurhttp://en.wikipedia.org/wiki/Limited_companyhttp://en.wikipedia.org/wiki/Tata_Steel


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Yorkshire,England,Motherwell,Scotland,Hayange,France, andBergen,Norway.

In addition it has tube mills located atCorby,Stockton andHartlepool in England

and Oosterhout, Arnhem, Zwijndrecht and Maastricht in the Netherlands. Group

turnover for the year to 31 December 2005 was 10.142 billion. Profits were 580

million before tax and 451 million after tax.

About Tata Steel (Prior to Acquisition)

Tata Steel is one of the few steel companies in the world that is Economic Value

Added (EVA) positive. Ranked the "World's Best Steel Maker", for the third time

by World Steel Dynamics in its annual listing in February, 2006. Worlds 55thlargest steel producer in 2005. Tata Steel is Indias largest private sector steel

company with 2005/06 revenues of US$5.0 billion and crude steel production of

5.3 million tonnes across India and South-East Asia. Tata Sons, Tata Steel and

other Tata companies had combined revenues in 2005/06 of approximately US$22

billion. Second largest steel producer in India after SAIL. Acquired Singapore-

based steel company, NatSteel for $486m in 2005. Acquired 67.5% in Thailand-

based steel company, Millennium Steel in 2005. Acquisitions are core part of

companys strategy for growth.

REASONS FOR MERGER:

Consistent with Tata Steel's stated objective of growth and globalization. Creates worlds fifth largest steel company. Tata Steels entry into European market. Lowest cost position in two continentsWestern Europe and Asia. Market presence in automotive, construction and packaging.
http://en.wikipedia.org/wiki/South_Yorkshirehttp://en.wikipedia.org/wiki/Motherwellhttp://en.wikipedia.org/wiki/Hayangehttp://en.wikipedia.org/wiki/Bergenhttp://en.wikipedia.org/wiki/Corbyhttp://en.wikipedia.org/wiki/Stockton-on-Teeshttp://en.wikipedia.org/wiki/Hartlepoolhttp://en.wikipedia.org/wiki/Oosterhouthttp://en.wikipedia.org/wiki/Arnhemhttp://en.wikipedia.org/wiki/Zwijndrecht,_Netherlandshttp://en.wikipedia.org/wiki/Maastrichthttp://en.wikipedia.org/wiki/Maastrichthttp://en.wikipedia.org/wiki/Zwijndrecht,_Netherlandshttp://en.wikipedia.org/wiki/Arnhemhttp://en.wikipedia.org/wiki/Oosterhouthttp://en.wikipedia.org/wiki/Hartlepoolhttp://en.wikipedia.org/wiki/Stockton-on-Teeshttp://en.wikipedia.org/wiki/Corbyhttp://en.wikipedia.org/wiki/Bergenhttp://en.wikipedia.org/wiki/Hayangehttp://en.wikipedia.org/wiki/Motherwellhttp://en.wikipedia.org/wiki/South_Yorkshire


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Growth through new, higher end-markets and a more sophisticated customerbase.

Powerful combination of low cost upstream production in India with thehigh end downstream processing facilities of Corus will improve the

competitiveness of the European operations of Corus significantly.

Combination will also allow the cross-fertilization of research anddevelopment capabilities in the automotive, packaging and construction

sectors and there will be a transfer, from Europe to India, of technology, best

practices and expertise of senior Corus management.

Retain access to low cost raw materials and slab for the enlarged group. Benefit from high growth in emerging markets and price stability in

developed markets.

Belief of high degree of cultural compatibility. Manufacturing will be organized so as to produce slabs/ primary steel in

low-cost facilities and produce high-end products in proximity to client base

- in both Europe and India.

Utilize combined enlarged distribution network.SYNERGIES BETWEEN THE TWO COMPANIES:

There were a lot of apparent synergies between Tata Steel which was a low cost

steel producer in fast developing region of the world and Corus which was a high

value product manufacturer in the region of the world demanding value products.

Some of the prominent synergies that could arise from the deal were as follows:


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Tata was one of the lowest cost steel producers in the world and had self-sufficiency in raw material. Corus was fighting to keep its productions

costs under control and was on the look out for sources of iron ore.

Tata had a strong retail and distribution network in India and SE Asia.This would give the European manufacturer an in-road into the emerging

Asian markets. Tata was a major supplier to the Indian auto industry and

the demand for value added steel products was growing in this market.

Hence there would be a powerful combination of high quality developed

and low cost high growth markets

There would be technology transfer and cross-fertilization of R&Dcapabilities between the two companies that specialized in different areas

of the value chain

There was a strong culture fit between the two organizations both ofwhich highly emphasized on continuous improvement and ethics. Tata

steel's Continuous Improvement Program Aspire with the core values:

Trusteeship, integrity, respect for individual, credibility and excellence.

Corus's Continuous Improvement Program The Corus Way with the

core values: code of ethics, integrity, creating value in steel, customer

focus, selective growth and respect for our people.

COUNTER BID BY CSN:

In November 2006, Brazilian steel markerCompanhia Siderrgica Nacional (CSN)

challenged Tata Steel's proposal for acquisition. They countered Tata Steel's offer

of 455 pence per share by offering 475 pence per share of Corus.
http://en.wikipedia.org/wiki/Companhia_Sider%C3%BArgica_Nacionalhttp://en.wikipedia.org/wiki/Companhia_Sider%C3%BArgica_Nacional


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THE DEAL:

The deal (between Tata & Corus) was officially announced on April 2nd, 2007 at a

price of 608 pence per ordinary share in cash. This deal is a 100% acquisition and

the new entity will be run by one of Tatas steel subsidiaries. As stated by Tata, the

initial motive behind the completion of the deal was not Corus revenue size, but

rather its market value. Even though Corus is larger in size compared to Tata, the

company was valued less than Tata (at approximately $6 billion) at the time when

the deal negotiations started. But from Corus point of view, as the management

has stated that the basic reason for supporting this deal were the expected synergies

between the two entities. Corus has supported the Tata acquisition due to differentmotives. However, with the Tata acquisition Corus has gained a great and

profitable opportunity to make an exit as the company has been looking out for a

potential buyer for quite some time. The total value of this acquisition amounted to

6.2 billion (US$12 billion). Tata Steel the winner of the auction for Corus

declares a bid of 608 pence per share surpassed the final bid from Brazilian Steel

maker Companhia Siderurgica Nacional (CSN) of 603pence per share. Prior to the

beginning of the deal negotiations, both Tata Steel and Corus were interested in

entering into an M&A deal due to several reasons. The official press release issued

by both the company states that the combined entity will have a pro forma crude

steel production of 27 million tones in 2007, with 84,000 employees across four

continents and a joint presence in 45 countries, which makes it a serious rival to

other steel giants. The official declaration of the completed transaction between the

two companies was announced to be effective by Court of Justice in England and

Wales and consistent with the Scheme of Arrangement of the Tata Steel Scheme

on April 2, 2007. According the Scheme regulations, Tata Steel is required to

deliver a consideration not later than 2 weeks following the official date of the

completion of the transaction.


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The process has started on September 20, 2006 and completed on July 2, 2007. In

the process both the companies have faced many ups and downs. The details of this

process has described below.

September 20, 2006: Corus Steel has decided to acquire a strategic partnership

with a Company that is a low cost producer

October 5, 2006: The Indian steel giant, Tata Steel wants to fulfill its ambition to

expand its business further.

October 6, 2006: The initial offer from Tata Steel is considered to be too low both

by Corus and analysts.

October 17, 2006: Tata Steel has kept its offer to 455p per share.

October 18, 2006: Tata still doesnt react to Corus and its bid price remains the

same.

October 20, 2006: Corus accepts terms of 4.3 billion takeover bid from Tata

Steel

October 23, 2006: The Brazilian Steel Group CSN recruits a leading investment

bank to offer advice on possible counter-offer to Tata Steels bid.

October 27, 2006: Corus is criticized by the chairman of JCB, Sir Anthony

Bamford, for its decision to accept an offer from Tata.

November 3, 2006: The Russian steel giant Severstal announces officially that it

will not make a bid for Corus

November 18, 2006: The battle over Corus intensifies when Brazilian group CSN

approached the board of the company with a bid of 475p per share

November 27, 2006: The board of Corus decides that it is in the best interest of its

will shareholders to give more time to CSN to satisfy the preconditions and decide

whether it issue forward a formal offer


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December 18, 2006: Within hours of Tata Steel increasing its original bid for

Corus to 500 pence per share, Brazil's CSN made its formal counter bid for Corus

at 515 pence per share in cash, 3% more than Tata Steel's Offer.

January 31, 2007: Britain's Takeover Panel announces in an e-mailed statement

that after an auction Tata Steel had agreed to offer Corus investors608 pence per

share in cash

April 2, 2007: Tata Steel manages to win the acquisition to CSN and has the full

voting support form Corus shareholders

On January 31, 2007, following the lack of agreement on an offer, an auction

process was triggered. Following the conclusion of the auction process (at an

unprecedented length of nine rounds) conducted by the Panel in accordance with

Rule 32.5 of the Code (the "Auction"), Tata Steel announced the proposed

acquisition of Corus Group at 608p per share, that being 5p more than CSN's top

offer of 603p. The final valuation of Corus was thus put at $12.04 Billion.


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MARKET REACTION:

Corus Stock Price moved upwards as the bids moved upward.

Tata steel stock moved downwards showing some volatility.


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From the announcement date till the deal completion, Corus stock gained 67% and

Tata Steel stock lost around 12%.

POST-ACQUISITION TATA:

Tata Steel has formed a seven-member integration committee to spearhead its

union with Corus group. While Ratan Tata, chairman of the Tata group, heads the

committee, three of the members are from Tata Steel and the other three are from

Corus group. Members of the integration committee from Tata Steel include

managing director B Muthuraman, deputy managing director (steel) T Mukherjee,

and chief financial officer Kaushik Chatterjee. The Corus group is represented in

the committee by CEO Phillipe Varin, executive director (finance) David Lloyd,

and division director (strip products) Rauke Henstra.

The acquisition by Tata amounted to a total of 608 pence per ordinary share or

6.2 billion (US $12 billion) which was paid in cash. First of all, the general

assumption is that the acquisition was not cheap for Tata. The price that they paid

represents a very high 49% premium over the closing mid market share price of


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Corus on 4 October, 2006 and a premium of over 68% over the average closing

market share price over the twelve month period. Moreover, since the deal was

paid for in cash automatically makes it more expensive, implying a cash outflow

from Tata Steel in the amount of 1.84 billion.

Tata has reportedly financed only $4 billion of the Corus purchase from internal

company resources, meaning that more than two-thirds of the deal has had to be

financed through loans from major banks. The day after the acquisition was

officially announced, Tata Steels share fell by 10.7 percent on the Bombay stock

market. Despite its four times smaller size and smaller capacity, Tata Steels

operating profit for 2006, earning $840 million on sales of 5.3 million tones, were

very close in amount to those generated by Corus ($860 million in profits on sales

of 18.6 million tons).

Tatas new debt amounting to $8 billion due to the acquisition, financed with

Corus cash flows, is expected to generate up to $640 million in annual interest

charges (8% annual interest cost). This amount combined with Corus existing

interest debt charges of $400 million on an annual basis implies that the combined

entitys interest obligation will amount to approximately $725 million after the

acquisition. The debate whether Tata Steel has overpaid for acquiring Corus is

most likely to be certain, since just based on the numbers alone it turns out that at

the end of the bidding conflict with CSN Tata ended up paying approximately 68%

above the average price of Corus shares. Another pressing issue resulting for this

deal that has created a dilemma between experts and analysts opinions is whether

this acquisition for the right move for Tata Steel in the first place. The fact that

Tata has managed to acquire a British steel maker that has been a symbol of

Britains industrial power and at the same time its dominion over India has been

perceived as quite ironic. Only time will show whether Tata will be able to truly


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benefit from the many expected synergies for the deal and not make the typical

mistakes made in many large M&A deal during this beginning period.

I believe this will be the first step in showing that Indian industry can in fact step

outside the shores of India in an international marketplace and acquit itself as a

globalplayer.

FINAL DEAL STRUCTURE:

$3.53.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.51.8bn through a bridge loan)

$5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn throughhigh yield loan)

NEW BOARD FORMULATION:

A new board was formulated with representation from both the companies to

provide a common platform for strategy and integration.

Mr. R.N. Tata will be the Chairman of Tata Steel and Corus Mr. Jim Leng will be the deputy chairman of Tata Steel and Corus Mr. B Muthuraman, Mr. Ishaat Hussain and Mr. Arun Gandhi to join the

Corus board

WHAT WENT WRONG?

It has been close to 6 years since Tata Steel acquired Corus, (now known as TataSteel Europe) for over $12billion. The deal increased the companys steel

producing capacity by fivefold, but did the deal really live up to the expectation?


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ECONOMY:

Tata Steel's European operations have had a torrid time since the acquisition. The

UK has seen steel production fall every year since 2007. So can this be attributed

to bad timing?

Probably yes! Volatile demand from consumer intensive industries such as

automobiles, consumer durables and capital goods in the European region resulting

from the setbacks of the credit crisis, has affected the company's financial

performance. Despite producing less than50% of the steel volumes that European

operations produce, Tata Steel's Indian operations have accounted for a major

share (upto 96 per cent in some years) of the firms total profits between 2008 and2011. If we compare Tata Steel on a standalone basis with Tata Steel on a

consolidated basis, we realize that the NPM of Tata on a standalone basis (16-18%

range from 2008-2012) far exceeds the NPM on a consolidated basis (-2% to 9%)

thereby indicating that Corus is actually incurring losses! Outside of structural

inefficiencies at the UK operations, the root problem for the European operations

lies in its inability to pass on high-raw material costs to the end-consumer given

the weak demand scenario.In an attempt to insulate the European arm from volatile

input costs, Tata Steel has in the past five years invested in iron ore and coking

coal mines in Canada, Africa and

Australia. These moves are expected to begin boosting margins of the European

operations over the next few years.

A range of other assets have either been sold off (including Corus' aluminium and

chemical businesses) or mothballed (South wales hot strip mill). Since the

beginning of 2009, it has cut more than 5,000 jobs, mostly from its UK plants with

the most recent layoff happening in November 2012 when close to 900 employees

were laid off. While the benefits accruing from captive sourcing for Corus will


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result in better margins, Europe is likely to remain a challenging market for Tata

given the weak demand. It will therefore be up to the Indian operations once again

to drive growth for the company over the next couple of years. Therefore the

company needs to increase its presence back home while reducing costs in Europe.

Tata Steel increased its brown field steel capacity from 7 million tonnes to 10

million tonnes last November and with the addition of Odhisha, the capacity will

move to 13 million tonnes.

THE ROAD AHEAD...

Therefore the critical question that arises now is whether the situation in Europewill improve and in the meantime will Tata be able to turnaround Corus?

In our opinion, the Economy moves in cycles-booms and busts. Europe has been

witnessing a slowdown since 2008 (Credit crisis) but we at Third Wave are of the

opinion that the worst is behind us. The only uncertainty that we foresee is the

standoff over the fiscal cliff in the United States. (The economic effects that could

result from tax increases, spending cuts and a corresponding reduction in the US

budget deficit beginning in 2013 if existing laws are not changed by the end of

2012). If that goes off smoothly, then the situation in Europe should begin to

improve. Corus is currently losing Rs.2000 cr on a standalone basis.

We are of the opinion that Tata would do whatever it takes to atleast get Corus to

breakeven. (Tata is trying to cut costs by mothballing plants, reducing the

workforce!).

If it manages to do so, and if we assume a stable multiple of 7, then that is a

straight Rs.14000cr jump in Market cap to Rs.49000 from a current market cap of

Rs.35000 cr.


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CONCLUSION:

Leveraged buyout activity in India is currently at a nascent stage. The Indian

companies have immense growth potential that provides opportunities for

leveraged buyouts. Financial experts regard leverage as a double edged sword.

Similarly a right leveraged buyout can lead to immense growth of a company

because of certain inherent benefits of debt. Leveraged buyout magnifies the

returns of the shareholders and reduces weighted average cost of capital as interest

is tax deductible. But on the other hand leveraging increases the risk. If after LBO,

the company is not able to pay interest & principal then severe financial

consequences are to be faced. LBO may fail and the company may go bankrupt ifthe cash flows are insufficient to meet the interest payments. Hence companies

must be cautious before going for a leveraged buyout.

tata - corus - merger report

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