Small Fish Swallows the Big Fish

Acquisition of Corus by Tata Steel

Tata Steel We think we started on sound and straightforward business principles, considering the interests of the shareholders our own and the health and welfare of the employees, the sure foundation of our success. -Jamsetji Nuservanji Tata, Founder

The welfare of the labouring class must be one of the first cares of the employer. Sir Dorab Tata It was the first time that the raw materials of India did not go out and return as finished articles to be sold in the country. Above all, it was purely Swadeshi enterprise financed by Swadeshi money and managed by Swadeshi brains. - Sir Dorab Tata describing the first share issue in 1907

Tata SteelPerformance Highlights 2006-07

Consolidated Turnover (excluding Corus) up by 23% at USD 6,311 million

Consolidated EBITDA (excluding Corus) up by 20% at USD 1,815 million Consolidated Profit After Tax (excluding Corus) up by 12% at USD 961 million Highest ever Dividend: 130% + 25% special dividend Saleable Steel Production up by 8% at 4.93 million tonnes

G blast furnace crossed 2 million tonnes production

Highest ever annual production at HSM (3.24 Mtonnes) and CRM (1.5 Mtonnes) In-house upgradation of E blast furnace completed

Commissioning of 4 Precision and 3 Commercial Tube Mill in Jamshedpur

Gross Steel sales up by 8% at 4.79 million tonnes

Sales to Automotive sector up by 29% at 0.86 million tonnes Global Supplier Approval received from Honda Engg. Services (Honda Car, Japan) for CRCA Sales of Branded Products up by 13% at 0.99 million tonnes Turnover of Branded Products up by 20% at Rs. 4,604 crores (USD 1,059 million) crossed USD 1 billion for the first time Consolidation of NatSteel Asia equity holding in Xiamen, China and Vietnam Tata Steel (Thailand) integration process completes one year

Tata Steel Performance

Tata Steel Performance

Tata Steel Performance

Corporate Sustainable Responsibility at Tata

Globalization at Tata Steel

Tata Steels Growth Strategy

Tata Steel

Tata Steel Performance

Corus Created from the merger of British Steel and Hoogovens Corus was Europe's second largest steel producer with

Acquisition of Corus: by Tata Steel

Revenues GBP 9.2 billion (in 2005) &

Crude steel production 18.2 million tons (primarily in U.K. and Netherlands)

Ninth-largest steel maker worldwide

Activities- 3 main divisions: Strip products, Distribution and building systems division, Global network of sales & services offices It opened the bid for its 100% stake late in 2006 Tata (India) & Companhia Siderurgica Nacional (CSN) emerged as most powerful bidder

Performance of Corus (2000-05)

Mergers Acquisitions Takeovers

Merger
A strategy through which two firms agree to integrate their operations on a relatively co-equal basis

Acquisition
A strategy through which one firm buys a controlling, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

Takeover
A special type of acquisition when the target firm did not solicit the acquiring firms bid for outright ownership

Increased market power

Reasons for M&A

Mergers & Acquisitions

Cost new product development/increased speed to market

Increased diversification

Overcoming entry barriers

Avoiding excessive competition

Lower risk compared to developing new products

Learning and developing new capabilities

M&A Process
Analysis Target Due Identification Diligence

Negotiation

Deal Closing

Post Merger Integration

Date Line Initially Corus agreed 455p a share offer from India's Tata Steel on 20th October 2006, valuing the group at 4.3bn

But Standard Life, the largest investor in Corus (7.9% stake): terms were too low Sir Anthony Bamford (Britain's leading industrialist): Tata's first bid was too low and that it would damage Britain's manufacturing industry

Tata was advised by ABN Amro, Deutsche Bank and NM Rothschild, while

CSN's advisers were Goldman Sachs, Lazard and UBS Corus was advised by Credit Suisse, JP Morgan Cazenove and HSBC

CSN announced on November 17th an indicative bid of 475p a share Corus reported on November 29th a 60% surge in third-quarter profits on the back of booming European demand for steel Tata Steel on December 11th upped its offer to 500p a share, valuing Corus at 4.7bn

CSN on the same day, raised its terms to 515p, valuing Corus at 4.9bn The Corus board promptly recommended both the revised offers to its shareholders Tata won the battle and acquired Corus on January 31st 2007 upping their bid to 608p per share, valuing Corus at 6.7 bn ($11.3bn) Corus's chairman Jim Leng deputy chairman. became the group's

Whereas the Brazilians CSN final offer in an auction by the U.K.'s Takeover Panel was 603 pence

Financing of Corus Acquisition

Financing Plan of Tata Steel Equity

Tata Steel - Corus: Capacity before acqusition

19 20 15 10 5 0
Corus Group Tata Steel (in UK & The Jamshedpur Nl) NatSteel Singapore M illennium Steel Thailand

(in M.Ton./annum) 5 2 1.7

Tata Steel-Corus: Projected Capacity

20 18 16 14 12 10 8 6 4 2 0
Corus Gr.(in TSTS- TS- Orissa TSNatSteel - Millennium UK & Nl) JharkhandJamshedpur ChattisgarhSingapore Steel Thailand

19

12 10 6 5 2 1.7

(in M.Ton./ann um)

Effect in Share market for both Tata & Corus Shares of Tata felt more than 10 per cent in Mumbai on 31st Jan 2007 following the conclusion of the auction, as some analysts said the deal was expensive and could strain Tata finances at least in the short term whereas, Corus shares jumped 38p or 6.8 per cent in London trading to 601p on the same day.

Bid battles effect on Corus share price

(From 5th Oct 06-31st Dec 07)

Share Price of Tata Steel (From bid starting in Oct 06 to acquisition & after)

The Acquisition was made by Tata Steel U.K., A wholly-owned indirect subsidiary of Tata Steel, recently incorporated in the UK for the purpose of completing the acquisition Acquisition was effected by means of a scheme of arrangement: Under Section 425 of the (English) Companies Act 1985; subject to High Court of Justice in England and Wales and Corus' shareholders approval

Tata Steel leapfrogged from 56th to 5th position world wide after aquisition
Total Global Production (1131.8 Mton)
Arcelor Mittal (Global), 120 Nippon Steel (Japan), 32 POSCO (South Korea), 30.5 JFE (Japan), 29.9 Tata Steel (India), 28.2

Other Companies, 891.2

Benefits from the deal

Enhanced scale positioned the combined group as the fifth largest steel company in the world by production, The powerful combination of low cost upstream production in India with high end downstream processing facilities of Corus

Will improve the competitiveness of the European operations of Corus significantly

Financial Performance Consolidated (excluding Corus) (FY 2006-07 vs FY 2005-06)

2005-06 Rs.crores 22,272 6,591 32% USDMillion 5,123 Turnover 1,516 EBITDA 32% EBITDA Margin Rs.crores 27,437 7,888 31% 2006-07 USDMillion 6,311 1,815 31%

5,515
3,735 67.62

1,269 Profit before Tax

859 Net Profit 1.56 EPS (Rs per share)

6,313
4,177 73.06

1,452
961 1.68

Financial Performance Pro-forma Consolidated with Corus (Jan-March 2007 vs Jan-March 2006)

Jan-March 06 Rs.crores 25,411 2,672 11% 1,750 1,198 USD Million 5,845 Turnover 615 EBITDA * 11% EBITDA Margin 403 Profit before Tax 276 Net Profit

Jan-March 07 Rs.crores 31,296 4,231 14% 2,464 1,717 USD Million 7,199 973 14% 567 395

Raw Material Self-sufficiency

The cross-fertilisation of development capabilities

research

and

A transfer, from Europe to India, of technology, best practices and expertise of senior Corus management

Tata Steel will retain access to low cost raw materials, Slab for the enlarged group and Exposure to high growth in emerging markets, whilst gaining price stability in developed markets

Group Ambition (Tata & Corus)

Tata Steel & Corus: a compelling vision in steel Global player with a balanced presence in developed European and fast growing Asian markets Strong positions in construction, automotive and packaging market sectors Significant raw material security & greenfield / brownfield developments Lowest cost position in Europe and South East Asia

Current: EBITDA of 13% ; 25 million tonnes: # 6 By 2012: EBITDA of 25% : 40 million tonnes: Potential #2

Enhanced Product Portfolio Strong High Value Added Product Portfolio straddling Automotive and Construction Spaces

Access to New Markets

Combined entity has significant presence in both emerging and developed economies

Strong Cultural Fit

Strategic Integration

Significant identified Synergies

Statements On its first bid in October chairman of Tata Steel Ratan Tata said This proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with our strategy of growth through international expansion

Mr. Ratan added Corus and Tata Steel are companies with long, proud histories. We have compatible cultures of commitment to stakeholders and complementary strengths in technology, efficiency, product mix and geographical spread. Together we will be even better equipped to remain at the leading edge of the fast changing steel industry.

Jim Leng, Chairman of Corus, said This offer from Tata Steel reflects the substantial value created for Corus shareholders since the placing and open offer and launch of our Restoring Success programme in 2003.

Ratan Tata said at opening speech on 31st January 2007

I believe that this will be the first step in ensuring that the Indian industry can in fact step outside the shores of India in an international market place and in fact acquit itself as a global player MD Tata Steel Mr. Muthuraman commented:

It brings the capacity of nearly 19 million tonne per annum immediately and It gives us access to very matured and developed markets of Europe Corus has a very highly developed R&D capability, which India in general lags

Muthuraman added In terms of EBITDA multiple it is about 9 times on the last one year EBITDA for the period ended 30 September 2006, which I must admit is a little higher than the industry average of the last 5 to 6 years but it is roughly representation of last uneven figured years. Mr. Tata said This is another step in Tata Steel's journey to what it wants to become in the next 10 to 15 years.

In response to questions about possible job cuts at Corus, Mr Muthuraman said (Employees by region: see in graph) This is not about cutting jobs. The company has to be made more competitive so jobs can be secured." When completed, the deal became India's biggest-ever foreign takeover and establish the country as a new force in the fastconsolidating steel industry.

The acquisition immediately made Tata the fifth-biggest steelmaker and allowed the company to cut costs by $350m a year.
Jim Leng, chairman of Corus, said: "Tata and Corus are stronger together and will be able to compete effectively in an increasingly global environment. "This combination creates a strong and robust platform for growth that will benefit all stakeholders."

Scope of the Project

Steel Industry At a glance Tata Steel market position / competitiveness CSN - Overview Analysis: Drivers for the acquisition Attractiveness Strategic fit Valuation Vs Cost of acquisition Mode of Funding Legal and cultural aspects Post merger integration issues

STEEL INDUSTRY CHARACTERISTICS

-

Cyclical nature in steel industry is countered by Economies of scale Movement of steel from surplus market to shortage market Fragmented nature of industry Top 5 companies having 20 % market share Low bargaining power of steel producers due to price of iron ore High bargaining power of buyers

Global Steel output (in million tonnes) Country China Japan US Russia South Korea Germany 2005 355.8 112.5 94.9 66.1 47.8 44.5 40.9 38.6 29.4 31.6 1,028.8 2006 418.8 116.2 98.5 70.6 48.4 47.2 44.0 40.8 31.6 30.9 1,120.7 % change 17.7 3.3 3.8 6.8 1.3 6.1 7.6 5.7 7.5 (2.2) 8.9

Global steel ranking Company Arcelor - Mittal Nippon Steel Posco JEF Steel Tata Steel - Corus Bao Steel China US Steel Capacity (in million tonnes) 110.0 32.0 30.5 30.0 27.7 23.0 19.0

India
Ukraine Italy Brazil

Nucor
Riva Thyssen Krupp

18.5
17.5 16.5

World production

Steel Industry At a glance

Indian Scenario
After liberalization, there has been no shortages of iron and steel materials in the country. Apparent consumption of finished (carbon) steel increased from 14.84 Million Tonnes in 1991-92 to 39.185 million tonnes (Provisional) in 2005-06. Steel industry that was facing a recession for some time has staged a turnaround since the beginning of 2002. Demand has started showing an uptrend on account of infrastructure boom.. The steel industry is buoyant due to strong growth in demand particularly by the demand for steel in China.

Steel Industry in India

Steel industry was delicensed and decontrolled in 1991 & 1992 respectively. Today, India is the 7th largest crude steel producer of steel in the world. In 2005-06, production of Finished (Carbon) Steel was 44.544 million tonnes. Production of Pig Iron in 2005-06 was 4.695 Million Tonnes. The share of Main Producers (i.e SAIL, RINL and TSL) and secondary producers in the total production of Finished (Carbon) steel was 36% and 64% respectively during the period of April-November, 2006.

Steel Production in India

(in mmt)

Category

2002 -03

2003 -04

2004 -05

2005 -06

2006-07 (April-Nov' 06)

Pig Iron

5.28

3.76

3.22

4.69

3.074

Finished Carbon Steel

33.6

36.9

40.0

44.5

30.689

(Source: Joint Plant Committee)

Steel Imports - India

Year 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 (Prov.) Qty. (In mmt) 1.271 1.510 1.540 2.109 3.765 2.500 2006-07 (Apr-Nov, 2006) (Prov. estimated)

Steel Exports - India

(Qty. in Million Tonnes) Finished (Carbon) Steel 2002-2003 2003-2004 4.506 4.835 Pig Iron 0.629 0.518

2004-2005
2005-2006 2006-2007(April-Nov 06) (estimated)

4.381
4.350 3.150

0.393
0.300 0.200

Indian Steel At a Glance.

1947 : Steel production 1.25 million tonne Present capacity : 44.5 million tonnes.

Source: Deustche Bank Research

Indias Growth vis--vis World

Indian Steel Productivity & Performance

Labour Productivity in India: 144 tonnes / labour/ yr West Europe: 600 tonnes

Rising Import Demands because of - Dynamic Growth - Demand for high quality products Share of Steel demand: - Construction Industry - Mechanical Engg. - Automotive

: 43% :32% : 5%

Indian Steel Growth Vs Impediment

Indias increase : 25% World Increase: 27%
Factors Holding back the Growth: - Power Supply (India is likely to be the worlds 4th largest energy consumer by 2010 after the US, China and Japan). - Raw material Supply (Iron ore, Coal, Steel scrap) - Inefficient Transport System

India and the World

Growth Indias Steel output expected to rise +6% p.a compared to around 4% rise in global steel outputs. Indias share of global crude steel output is forecast to rise to just under 4% in the next ten years. This is still comparatively tiny compared to Chinas share of 41%. Technology Increased use of continuous casting technology 38% in mid-90s to 66% However, in India 6% of crude steel is still made using the outdated open-hearth process (EU-25: 0.3%) so, still a huge potential for restructuring.

Demand Condition

In India demand is being driven up by mammoth infrastructure projects, like the construction of dams, ports, power plants, railways and motorways. In addition, the key industrial sectors (such as construction, automotive and shipbuilding) are experiencing rapid growth.
With salaries and wages rising, consumers are becoming more discerning with regard to their cars, household appliances and the like, which is also boosting steel demand.

Indian Steel Industry Tata Steel

Tata Steel Indias largest private sector steel company capacity : 5.3 mmtpa

The TATAs' first steel plant under construction in Jamshedpur in 1911.

TATA STEEL- A GLANCE

Established in 1907 - Asia first and Indias largest private sector steel company one of the lowest cost producers EVA+

Competitive edge captive raw material resources and 5 MMTPA plant at Jamshedpur 8 MMTPA in 2008
Natsteel, Asia and Millenium Steel, Thailand in its fold 8 manufacturing facilities in S E Asia and pacific rim countries 5th largest steel producer with acquisition of Corus prospected output 56 MMTPA in 2015 Future green field projects 5 MMTPA in Chattisgarh, 6 MMTPA in Orissa, 12 MMTPA in Jharkhand overseas project in Iran and Bangladesh Steel products targeted at quality conscious auto sector and booming construction industry emerging as a leader in wire business

TATA STEEL - PRODUCTS

Hot and cold rolled coils and sheets Galvanized sheets Tubes & wire rods Construction rebars Rings and bearings Tata Steelium ( worlds first branded cold rolled steel ) Tata Shaktee ( Galvanized corrugated sheets ) Tata Tiscon ( re bars ) Tata Agrico ( hand tools and implements ) Tata Wiron ( Galvanized wire products ) Tata Pipes ( pipes for construction ) Tata structure ( contemporary structural material ) Steel Junction ( Indias first retail steel store )

Tata Steel growth plans

Tata Steel has committed itself to attaining global scale operations Output exceeding 30 million tonnes and a strong regional presence Tata Steel making a total estimated investment of Rs. 70,000 crores in the next decade,in greenfield projects and other strategic acquisition Tata Steel proposes to establish three greenfield facilities in Orissa, Chhattisgarh and Jharkhand, with an aggregate capacity of 23 million tonnes.

TATA STEEL FINANCIAL STATISTICS

2005-06
REVENUES (Cr) PBT(Cr)
PAT(Cr) EBITDA MARGIN PBT MARGIN EPS(Rs) DIVIDEND

2004-05 16181 5442

3571 42.48 % 36.17 % 62.77 23.61 %

20491 5515
3721 40.19 % 34.04 % 63.35 23.4 %

Corus overview

CSN History & Growth

Companhia Siderrgica Nacional was incorporated in 1941 Initially focused on producing coke, pig iron castings and long products Three major expansions were undertaken at the Presidente Vargas Steelworks during the 1970s and 1980s. The first, completed in 1974, increased installed annual production capacity to 1.6 million tons of crude steel. The second, completed in 1977, raised capacity to 2.4 million tons of crude steel. The third, completed in 1989, increased capacity to 4.5 million tons of crude steel. privatized in 1993 and early 1994, through which the Brazilian government sold its 91% interest in company

CSNs strategy for business

Mission is to increase value for the shareholders Maintaining position as one of the world's lowest-cost steel producers Maintain a high EBITDA margin. Strengthen position as a global player

CSN in steel

Fully-integrated manufacturing facilities Second largest steel producer in Brazil Crude steel capacity 5.6 million tonnes Rolled product capacity is 5.1 million tons

CSN policy for Steel

Implement a carefully crafted globalization strategy. This may include the acquisition or construction of steel operations, steel-related businesses or distribution or service centers outside Brazil, as well as the association with other companies engaged in such ventures Emphasize a wide range of value-added products, mostly galvanized, pre-painted and tin-coated.

CSN Product range

Produce a broad line of steel products Slabs Hot- and Cold-rolled Galvanized and Tin mill products

Process flow chart -CSN

CSN products / market share

CSN Market structure

In 2004 sold steel products to customers in Brazil and 61 other countries. in 2002 Our domestic steel sales, as a percentage of total sales volume were 65% and operating revenues were70%,, In 2003 the above figures were 59% and 61%,respectively In 2004 it was 71% and 73%, respectively,

CSN Exports markets

The three principal export markets for exports of products (%of our export sales volume in 2004) North America 44%, Europe 32% Asia11%

Tata Steel & CSN

Both bidders have presence in emerging economies. Both have access to cheap sources of iron ore. CSN may have an edge because it owns one of the largest iron ore mine in the world. Both are among the most efficient producers globally.

Sales - Tata Steel,CSN and Corus

Operating revenues(US m$)
3903 2383 2920 2078 2169

2000

2001

2002

2003

2004

Operating revenues million pounds

10140 9332

2004

2005

Profitability CSN Vs TATA Steel

1600 1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 Adj. EBITDA in millions of US $

CORUS BUYOUTSTATEGY

Tata Steel, CSN both planned a leveraged buy-out Raising debt on the security of future cash flows from Corus. Tata Steel's financing arrangements no recourse CSN ,part of the new credit facilities are with recourse . Can CSN shareholders be comfortable about that exposure

Stock price movement

Situation 1: Corus decides to sell

Reasons for decision: Total debt of corus is 1.6bn GBP Corus needs supply of raw material at lower cost Though Corus has revenues of $18.06bn, its profit was just $626mn(Tatas revenue was $4.84 bn & profit $ 824mn) Corus facilities were relatively old with high cost of production Employee cost is 15%( Tata steel- 9%)

Situation 2: Tata Steel decides to bid

Reasons: Tata is looking to manufacture finished products in mature markets of Europe At present manufactures low value long and flat steel products while corus produces high value stripped products A diversified product mix will reduce risks while higher end products will add to bottomline.

Situation 2: Tata Steel decides to bid

Corus holds a no. of patents and R & D facility. Cost of acquisition is lower than setting up a green field plant and marketing and distribution channels Tata is known for efficient handling of labour and it aims at reducing employee cost and improving productivity at Corus

Situation 3: CSN decides to bid

Reasons: There was an abortive merger with corus 3 years ago. It had offered $3.5bn. CSN has a 3.8% stake in corus since 2002 Every 10p increase in bid gets CSN an extra 3mn GBP CSN also looking for producing finished steel products in Europe CSN is paid 1% of the offer price as an incentive remuneration from Corus

Situation 4: Takeover panel intervenes

The UK Takeover panel set the following rules for bidding: Of the maximum nine rounds 8 will be for the suitors to table a fixed price bid in cash In the event of competitive situation continuing a final round would be held to give chance to the bidders to outbid the other within a ceiling that has already been informed to the panel There has to be a difference of 5p for each round of the bid between the 2 suitors

TATA-CORUS: STRATEGIC FIT

Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to some of the largest steel buyers The acquisition would open new markets and product segments for Tata Steel, which would help the company to de-risk its businesses through wider geographical reach. A presence in mature markets would also provide Tata Steel an opportunity to go further up the value chain as demand for specialized and high value-added products in these markets is high The market reach of Corus would also help in seeking longer-term deals with buyers and to explore opportunities for pushing branded products. Corus is also very strong in research and technology development, which would add to the competitive strength for Tata Steel in future. Both companies can learn from each other and achieve better efficiencies by adopting the best practices

Tata Steel - Corus : Present capacity (in million tonnes per annum) Corus Group (in UK and The Netherlands) Tata Steel Jamshedpur NatSteel - Singapore Millennium Steel Thailand Aggregate present capacity 19 5 2 1.7 27.7

Tata Steel - Corus : Projected capacity (in million tonnes per annum) Corus Group (in UK and The Netherlands) Tata Steel Jamshedpur Tata Steel - Jharkhand Tata Steel - Orissa Tata Steel - Chattisgarh NatSteel - Singapore 19 10 12 6 5 2

Millennium Steel Thailand

Aggregate projected capacity

1.7
55.7

Funding Scenarios- Need to both create and protect share holder value
Equity- $ 4.1 billion- (Options)

(i) Borrowings by Tata Steel- Dilute EPS( 1.4% FY 08); Funding domestic greenfield ventures
(II) Preferential share issue by tata steel to tata sons- Also EPS unfriendly( 13.1% FY 08) (iii) $2.3-$2.4 billion cash reserves of tata balance- $1.7-$1.8 billion- Dilution of TCS shares in LSE

Debt:-Senior debt, junk bonds etc- 8 billion

Impact on Tata steels FY 08 P & L with $1.7 b pref issue to TATA sons
Addnl debt on B/s Net D/E at FY07 end(%) Net D/E at FY08 end(%) Price for equity issue(Rs) Equity dilution (%) Interest/loss of other Income Tata Steels share in SPV profits Synergy gains Net increase in PAT Increase in EPS(%) Net debt/equity post dilution(%) FY 08 ROE without considering Corus acquisition(%) FY 08 ROE with Corus acqn(%) (Fig Rs. In crores) 5,802.5 0.4 0.4 500 25.1 (814) 618.2 450.0 374.3 (13.1) 0.39 22.10 17.30

Source: CLSA

Valuation
Based on replacement value: At current rates-1100-1300$/ton---$22 billion(15 yrs) Actual amount agreed .$12.1billion Based on DCF : PV @ 8% would take around 15 years E:\term4\M & A\project\corus valuation.xls Hence financially does not appear attractive in the near term.

Financing the deal

Leveraged buyout: Loans of $8 billion are arranged for acquisition. The current EBIDTA of Corus is sufficient to pay the annual interest of the loan Around $2.5bn will come from cash reserves of TATA steel TATA sold 0.84% of TCS stake Financiers for the deal- ABN Amro, Deutsche Bank Increased debt obligations will create more credit risk for Corus

Brokerage house First Global estimates that a $50 fall in global steel prices could lead to a $414-million loss from the acquisition in FY08 there is a $ 75 fall, the losses could climb to $ 846 million.

Valuation Contd.
Leverage, Corus currently - low net debt-equity ratio of 0.25 times. So, while Corus has room on its balance sheet to take on more debt, it may come under pressure on debt servicing, if steel prices head in the wrong direction

Key for improving profitability: export of low-cost slabs from India Coruss profitability. But currently, Tata Steel does not have spare slab capacity its Jamshedpur plant of almost 5 million tonnes (mt) is operating at full tilt. It now has to get its greenfield expansions in Orissa, Chhattisgarh and Jharkhand up and running in double quick time. But analysts expect these to be commissioned not before 2010 Need for steel up cycle to stay intact

Valuation Contd

Tata Steel is paying 7 times EBITDA of Corus for 2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison, Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that Arcelor has much superior assets, wider market reach and is financially much stronger than Corus, the price paid by Tata Steel looks almost high.

Valuation Contd

Manufacturing assets donot deserve such high price as UK plants of Corus

Target EBITA margins by Tata Steel -25 per cent once it starts supplying crude steel to Corus. (Long way off??)

Assuming 7 percent interest rate, interest and principal outgo requires annual fund of $1.5 b which looks tough for cash flow from Corus

Comments as an Investment Banker

Alternatives used to mitigate external debt financing and risk: - Partial settlement by cash and partial settlement through convertible/non convertible debentures Use of share swap ???

Legal issues
Needed approval from EU Approval of Share holders of Corus as per UK companies Act Use of subsidiaries to structure the deal -Avoidance of FIPB and RBI approval by avoiding share swap Corus pension liabililites-British Steel Pension Scheme -Corus Engg Steel Pension Scheme-126m GBP

Integration difficulties

Problems in Achieving Success

Too large

Acquisitions

Managers overly focused on acquisitions

Too much diversification

Inadequate evaluation of target

Large or extraordinary debt

Inability to achieve synergy

Post acquisition issues

Digesting large deals and create share holder value will be a concern UK steel unions want job guarantee. British trade unions launched protest on grounds of potential layoffs. The biggest challenge one would face is how to integrate these two companies, how to integrate these two cultures, how to work with new type of management, how to work in the matured market verses working in developing market.

Post Merger Integration Issues

For the Tatas, the Corus acquisition is only half the battle won Robert Bruner, dean of the Darden School of Business, University of Virginia, says, "When integration gets bogged down, bad things happenall stemming from the 'me issues." Issues are complex because it is a mammoth cross borer deal Even more complex because Corus itself is the result of a cross-border merger.

Post Merger Integration Issues.

An estimate suggests that 70% of all failed M&As are because of cultural issues
Considering that there aren't too many overlaps between Tata Steel and Corus, a "light-handed integration will make more sense, wherein the Tatas bring in some changes, but don't do a complete overhaul of how Corus is run says Prof. Venkiteswaran of IIM-A Employees loathe uncertainty about their fate in the company. Phanish Puranam, professor, London Business School, says, "Productivity drops, competition takes away business and soon the value of the deal is gone even before integration starts."

So, Tatas should not view the acquired company as a loser. It makes sense for the Tatas to allow the existing management to continue as before. Some level of planned restructuring can come in later.

Post Merger Integration Issues.

Tetley, the Tata's previous UK buy, ran into cultural and racial obstacles because of concerns that British employees would resent having managers from a former British colony. Tatas to learn from their Tetley acquisition and maybe use some of the managers who handled that integration

In the initial volatile phase, competitors may try to snatch away good managers and customers from Corus
The Tatas need to identify the key people at Corus and ways to keep them as headhunters try to snatch good managers in such vulnerable situations - Tatas have put two Corus people in the Tata Board

Post acquisition issues

ICRA forecasts slow down in global steel growth in 2007 - a significant drop to 5.2 per cent in 2007 from a healthy 8.9 per cent in 2006 The Tata Steel share's had declined by over 10 per cent on the announcement of the Tata`s acquiring Corus on apprehensions of the deal being "overvalued. Reviving the companys value would be challenge Acquiring synergies necessitates include improving Corus operating margins, controlling costs & adopting the best practices of both sides

Conclusion

ANY QUESTIONS ?