Tata Steels Acquisition of Corus

Presented By :
Anil Puri Ankur Gupta Ayushi Mittal Chetan Taneja

Introduction
Tata Steel acquired the Corus Group for US$ 13.70 billion. Merged Entity, produce 27 million tons of steel per annum , 5 largest steel producer in the world as of early 2007. Mr. Ratan Tata said Together, we are a balanced company strategically well placed to compete at the leading edge of a rapidly changing global steel industry Tata Steel first offered to pay- 455 pence , then CSN offered 475 pence , Then Tata revised the bid to 500 pence , in reply to that CSN made a counter bid of 515 pence Finally an auction on 31 January Tata Steel finally clinch the deal with final bid 608 pence. Analysts and industry experts felt that the deal was expensive for Tata Steel

BACKGROUND OF TATA STEEL

Tata Steel is a part of Tata Group , Tata Group companies generated revenues of Rs 967,229 million. In 1907, Jamshedji Tata established Tata Steel at Sakchi in West Bengal and it had a good supply of Iron Ore and Water. By 1911, it had its own railway network that connected its factory to the iron and coal beds. In 1973, it took over some flux mines and collieries near Jharia. In 1983, the company acquired the Indian Tube Company Limited . In 1991,it acquired the ferrochrome unit of OMC Alloys Limited . In mid 1990s , it emerged as Asias first and Indias largest steel producer. In 2005,it acquired the NatSteel Limited , with this company gained access to major Asian markets and Australia. It generated Net sales of Rs 175.52 Billion, PBT of Rs 64.14 Billion , PAT of Rs 42.22 Billion.

BACKGROUND OF CORUS
Corus can be traced back to the early 20th Century when Hoogovens was founded by the government of Netherlands in the Hague on 20 September. Major Objective was to enable the Dutch Industry become less dependent on imports of steel. After Several Acquisition it become 1 of the major players in the European Steel Industry. In 1999, it Merged with British Steel to form Corus Group, the worlds 3 largest steel producer. The Merger was initiated to help British Steel revive its business. The Merger did face a few problems in the beginning, a few decisions were called off, and merger with CSN was abandoned. By 2001 the entity suffered an operating loss. In 2003, Philippe Varin took over as the CEO of Corus, and then corus was able to earn an operating profit. In April 2003, the share price moved up and it stood at 390 pence before the merger.

FINANCING THE ACQUISITION

Total enterprise value of Corus- US$ 13.7 bn. All cash deal by Tata with a mix of debt and equity(US$ 6.14 billion and US$7.56bn resp.) Mode of finance Tata Steel UK- Long Term Debt- US$ 6.14 billion Tata Steel Asia- Bridge Loans- US$ 2.66 billion Tata Steel Equity Contribution- US$ 4.90 billion

 The first rights issue generated US$ 862 million. The second rights issue was of convertible preference shares generated US$ 1.4 billion The foreign issue in the form of ADRs or GDRs was planned to generate US$ 798 million. However, mode of fund raising for Tata got mixed reactions from some financial experts. But the all cash deal by Tata was a good deal as share swap would have been less attractive to Corus shareholders and may have diluted Tata Steels equity base.

Integration Effect
Light Handed Integration Approach

According to Tata Steel, Corus would not be Indianised . In Tata-Corus Board, there were 3 members of Corus, therefore only cultural integration.
Tata Steel form 7 Members Committee which: - follow strategic priorities of T-C in future. - identifies areas for business benefits and to those areas.

Benefits of Deal to Tata

Deal moves Tata Steel from 56th position to 5th in global steel production. Supply of semi finished steel to Corus for targeting high-value markets. Cost of acquisition is lower than setting up of green field plant, marketing and distribution channel.

PITFALLS
Corus EBITDA was 8% that was much lower than Tata Steels 30% in the year 2006-2007. Corus was valued at approx. 7.7 times the enterprise value to EBIDTA, which was considered an overvalued. Tata steel would become highly leveraged due to US$6.4 billion debt that was raised for acquisition. Tata-Corus net debt-equity ratio would be 2.74:1 as against Tata Steels 1:1 Reduction in the cash inflow would lead to a default on the loan taken

ROAD AHEAD
After the acquisition, the Europe and Uk together would consume 59% of the total production. Achievement of an EBITDA of 25% was also targeted. As a result of acquisition, Tata Steel got access to the developed market of Europe. By 2015, Tata-Corus targeted that production should increase to more than 50MTPA from 27MTPA in early 2007