Group 5

Case Facts

• 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 steel maker , is India’s largest ever foreign takeover and follows Mittal steel’s $31 billion acquisition of rival Arcelor in the same year .

• Tata acquired Corus on the 2nd April 2007 for a price of $12 billion . The price per share was 608 pence ( Rs 484 ), which is 33.6% higher than the first offer which was 455 pence.

About The Deal

TATA Acquired CORUS on 2nd April 2007

The deal price was US $ 12.11 Billion

On 17 Oct, 2006 TATA’s bidded at 455 pence per share and price per share was 390 pence at that time

TATA Steel, the winner of the auction for CORUS declares a bid of 608 Pence per share

TATA Surpassed the final bid from Brazilian steel maker ‘COMPANHIA SIDERURGICA NACIONAL’ (CSN) of 603 pence per share

The combined entity has become the world’s fifth largest steelmaker after the deal.

Rationale behind Acquisition

Consistent with Tata Steel's objective of growth and globalization.

Creates the 5th largest steel producer in the world.

Corus is an ideal combination of high-quality developed and low-cost high-growth markets and much broader distribution network.

There were opportunities for significant synergies between Tata Steel and Corus.

There was a considerable culture fit attributed to the Anglo-Saxon background of Corus and India's colonial past.

Corporate Strategy

To develop its carbon steel business

Look beyond western Europe

Globalization

Deliver cost competitive steel to high- end product customers

Play an active consolidator role in the steel industry

“light touch” integration strategy

Tata Steel pre-merger profile

• Tata Steel a part of the Tata group, one of the largest diversified business conglomerates in India.

• Founded in 1907,by Jamshedji Nusserwanji Tata

• 102 yrs in steel bazaar• In the mid- 1990s, Tata steel emerged as Asia’s first and India’s

largest integrated steel producer in the private sector.• In February 2005, Tata steel acquired the Singapore based steel

manufacturer NatSteel, that let the company gain access to major Asian markets and Australia.

• Tata steel acquired the Thailand based Millennium Steel in December 2005.

World’s 56th largest capacity of 30 million presence in 26 nations

SWOT Analysis of Tata Steel

-Low Cost productio

n.-Easy

access to raw

material.- Low Debt

Equity Ratio.

- Quality of Steel was not of International

standards.-Non availability of latest R&D facility

- To become a World leader in low cost and

high quality steel products. - To

Compete with

other big global players

SWOT

Reasons for Tata Steel to Bid

To tap European Mature Market

Cost of acquisition is lower than setting up of Green field plant &

marketing and distribution channel

TATA manufactures Low Value ,long and flat steel products ,while

Corus produce High Value Stripped products

diversified product mix

◦ reduces risks

◦ higher end products will add to bottom line

Reasons for Tata Steel to Bid(contd.)

• Economic of scale

• Will help TATA to feature in Top 10 players in world

• Technology Benefit

o Corus holds number of patents and R&D facilities.

Corus Pre merger profile

Corus Group plc was formed on 6th October 1999, through the merger of two companies, British Steel and Koninklijke Hoogovens

World’s 6th largest

2nd in Europe, 1st in UK

Presence in 50 nations

◦ Corus has manufacturing operations in many countries with major plants located in the UK, The Netherlands, Germany, France, Norway and Belgium

Supplier to many of the most demanding markets worldwide including construction, automotive, packaging, engineering

40,000 people worldwide

SWOT Analysis

World’s ninth largest and

Europe’s second largest

steel producer.

- Wide range of products of

high technology.

- High operational Cost.- Lack of Access to raw

material

- To merge with a company to eliminate duplication and

remove overlaps in marketing, accounting etc.

- To get access to raw material and growth markets

through merger.

- Increasing losses

resulting to winding up of

company-

SWOT

Reasons For Corus For Accepting Bids

To extend its Global reach through TATA.

To get access to Indian Ore reserves, as well as market for steel.

To get access to low cost raw materials.

Saturated market of Europe.

Decline in market share and profit.

Strategies Behind this Merger

1. Growth through international expansion.

2. Capture the European customers in the automobile and aerospace industries

3. Capture the Indian automobile market by supplying high grades of steel.

4. Add more high technology products.

Funding for the deal

Routed through Tata Steel’s UK Special Purpose Vehicle(SPV) named Tata Steel UK

Debt equity ratio was 1.9:1

Equity◦ $ 4.1 billion

Debt◦ $ 8 billion through junk bonds◦ Senior term loans from banks

ABN Amro bank Deutche Bank CSFB

 •  Immediate takeover was required.•  Share Swap deal would have been less attractive to the Corus shareholders.•  Share Swap would have meant FDI and that  brings a lot of regulatory hassles which might not have been accepted by Corus shareholders.  • Share Swap would have diluted Tata Steel’s Equity base which was not in favour of Tata shareholders.• And  moreover  cost  of  equity  at  around  15%  is higher  than that of debt of around 8%, so paying  in cash brings down the cost of acquisition.

WHY CASH DEAL????

Integration efforts

Post Acquisition Strategies

•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.

•As the core values of the two companies were same so Tata used ‘Light Handed Integration Approach’.

•Top management of the company remained same.

Legal compliances in the Deal

DEALING DISCLOSURE REQUIREMENTS Under the provisions of Rule 8.3 of the City Code, if any person is, or

becomes, “interested” (directly or indirectly) in one per cent or more

of any class of “relevant securities” of Corus, all the dealings must be

publicly disclosed by no later than 3.30 p.m. (London time) on the

London business day following the date of the relevant transaction.

This requirement will continue until the date on which the Scheme

becomes effective, lapses or is otherwise withdrawn or on which the

“offer period” otherwise ends.

Under the provisions of Rule 8.1 of the City Code, all “dealings” in

“relevant securities” of Corus by Tata Steel, Tata Steel UK, CSN, CSN

Acquisitions or Corus, or by any of their respective “associates”, must

be disclosed by no later than 12.00 noon (London time) on the London

business day following the date of the relevant transaction.

EFFECT ON CONVERTIBLE BONDHOLDERSOn 4 December 2006, a meeting of the holders of the

Dutch Bonds was held at which a proposal to amend the terms and conditions of the Dutch Bonds so that they would be redeemed early (at or about the Effective Date), was passed. That early redemption proposal is conditional upon the Scheme Effective Date being on or before 28 February 2007.

MANAGEMENT, EMPLOYEES AND LOCATIONSTata Steel intends that the existing contractual and statutory

employment and pension rights of all directors and employees of Corus Group will be fully safeguarded upon completion of the Revised Acquisition.

Valuation of the Deal In 2005, Corus annual prod. was 18mt. & that of Tata was 5mt.

The Enterprise Value was placed at $10 billion including the outstanding debt.

The price to earning ratio was higher than what they paid for Arcelor.

In case of Arcelor, the acquisition turned out to be $840 per tonne as compared to $750 per tonne for Corus assets even though EV/EBITDA was higher for Corus at 7.6 as against 5.4 in case of Mittal.

EBITDA = Revenue- Expenses( Excluding tax, interest, depreciation and amortization)

Enterprise Multiple = EV/EBITDA

Logic for the Valuation The strategic objective of the deal was to bring to Tata

Steel 19 million tonne capacity at once.

It also gives the company access to the European markets.

Corus has high R&D capabilities.

Corus had multi-locational plants and was not a fully integrated steel company.

5 Yr. Financial performance of Tata Steel

Category Unit FY`02 FY`03 FY`04 FY`05 FY`06

Production `000 Mt 3,636 3,941 4,089 4,109 4,552

Revenue $ Mn1583 2150 2755 3532 3884

EBIDTA $ Mn283 516 840 1378 1401

EBIDTA Margin

% 20% 27% 34% 42% 40%

PBT $ Mn52 277 616 1178 1187

Net Profit $ Mn43 222 404 773 794

Net Profit Margin

% 3% 12% 16% 24% 23%

EVA $ Mn

-96 34 156 528 529

Category Unit FY`02 FY`03 FY`04 FY`05 FY`06

Production `000 Mt 17.1 19.4 19.5 18.7 18.8

Revenue $ Mn 11456 10018 12165 10845 12845

EBIDTA $ Mn 512 305 1251 1142 1846

EBIDTA Margin

% 4.47 % 3.04% 10.28% 10.53 % 14.37 %

PBT $ Mn - 644 - 321 766 649 610.35

Net Profit $ Mn - 741 - 388 593 512 446

Net Profit Margin

% - 6.47 - 3.87 4.87 4.72 3.47 %

5 Yr. Financial performance of Corus

2006-07 31st Dec,2006

Turnover 4546 18979

EBITDA 1704 1846

PBT 1440 610.35

PAT 971 446

Net Profit Margin

23% 2.35 %

EPS 1.70 0.41

Dividend 254 134

TATA Steel

Corus

Financial just before Acquisition

TATA Steel before & After… 2006-07 2007-08 2008-09

EBITDA/Turnover

31.14% 14.08 % 12.55 %

PBT (In crores Rs)

6313 16371 6743

PAT(In crores Rs)

4165 12321 4849.24

PBT/Turnover 24.61 % 12.39 % 7.43 %

Interest Coverage Ratio

16.35 3.46 4.32

EPS 64.66 177.18 66

Debt /Equity 0.71 1.99 1.65

P/E 6.95 3.91 3.12

A Financial take on the Acquisition.

1. Valuation

• TATA Steel Paid 7 Times EBITDA of Corus Enterprise Value

• Also,9 times EBITDA for 12 Months ended 30th September

2006

Comparing with Arcelor - Mittal deal-

• Mittal Steel Acquired at an EBITDA of 4.5 times,

• The point is Arcelor has much superior assets, wider market

reach and financially stronger than Corus

The price paid by Tata Steel looks almost obscenely high.

A Financial take on the Acquisition2. Interest charges

◦ New Debt of $ 8 bn @ 8% annual interest cost i.e. $ 640 mn

◦ Corus’s existing interest debt amounts to $ 725 mn.

Benefits of the Deal

Augmented its crude steel capacity to 27 mtpa

The combined entity forms the 5th largest Steel company

The merged entity has brought Tata Steel to the world platform

Provided Tata Steel access to new markets and presence across the steel value chain

Much broader distribution network

Synergies from the Deal

Tata was one of the lowest cost steel producers and Corus was fighting to keep its productions cost under control

Tata had a strong retail and distribution network in India and south east Asia. Hence there would be a powerful combination of high quality developed and low cost high growth markets

Technology transfer and cross –fertilization of R&D capabilities There was a strong culture fits between the two organizations both

of which highly emphasized on continuous improvement and ethics Economies of Scale Increase in profitability Backward integration for Corus and Forward integration for Tata

Steel

•High value paid.

•Corus’ EBITDA was at 8% which was much lower as compared to Tata Steel’s 30%.

•Debt of US $ 6.14 was raised against the cash flows of Corus. It was a risky proposition.

•Tata’s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was maintaining earlier.

•Fast consumption of Tata Steel’s captive iron ore reserves as production capacity increased from 5.3 million ( estimated for 50 years at this capacity) to 27 million tons of steel per annum.

PITFALLS OF THE DEAL

The Road Ahead

•Integration has to be fast and efficient.

•Increasing reach to joint entity to 4 continents and 45 countries including high value market of Europe.

•Increasing the EBITDA to 25% for joint entity by executing Tata steel’s brownfield and greenfield projects well in time.

•Increasing the capacity of the company beyond 50 million tons by 2015 so as to become one of 3 top steel producers in the world.

Critical Analysis

Swot analysis of Tata Corus

Strengths :•Easy Access to quality raw material.•New technology for producing high value products.•Reach in 4 continents and 45 countries.• Economies of Scale and production.

Weakness :• Cost of production per unit bound to increase.•High Debt equity ratio.•High dependability on the growth of market. •A lot of stress on the cash flows of combined entity.

Opportunities :• To become global player in steel industry.•Takeover more companies successfully.•Increase in production capacity beyond 56 mn tons by 2015

Threats :•Cultural Diversifications are not easy to integrate.•Markets should continue to grow.•Rising cost of raw material.•Rising terrorism and political unrest among nations.

If TATA steel were to create, from scratch, 19 million tonnes of steel making capacity comparable in quality to what Corus possesses, It would end up investing 70% to 85% more than it is paying now.

Besides, setting up a new factory, a 3 to 5 years project if everything goes well, has great execution risk.

With Corus in its fold, Tata steel can confidently target becoming one of the top 3 steel makers globally by 2015 . the company would have an aggregate capacity beyond 50 million tones per annum, if all the planned Greenfield capacities go on stream by then.

We can conclude that if the acquisitions well planned , executed and the necessary precautions taken for the deal a company can achieve its strategic objectives and thus ensure its growth through acquisition.

A FINAL WORD ON THIS DEAL

“ I believe this will be the first step in showing that Indian industry can step outside the shores of India in an international market place and acquit itself as a global player”

- Ratan Tata