TATA CORUS TATA STEEL BACKGROUND TATA Steel was established in 1907 One of the largest diversified business

ness conglomerates in India. Tata Steel has set an ambitious target to achieve a capacity of 100 million ton by 2015. Tata Steel is planning a 50-50 balance between Greenfield facilities and acquisitions. In August 2004, Tata Steel acquired Singapore based NatSteel Ltd $486.4 million (approximately Rs 1,313 crore) in an all cash transaction. Strong retail and distribution network in India and South East Asia. Ranked 56th producers in the world before Acquisition and ranked 5th after acquisition One of the lowest cost producers of steel in the world. In 2005, Tata Steel acquired 40% Stake in Millennium Steel based in Thailand for $130 million (approx. Rs 600 crore) Key People: Ratan Tata (Chairman),B Muthuraman (Vice Chairman),H M Nerurkar (Managing Director) CORUS BACKGROUND Corus was formed from the merger of two companies i.e. British Steel plc & Koninklijke Hoogovens on 6th October,1999. 2nd largest European steel producer Annual turnover of 12bn (~2.5bn in Wales), with 42,000 employees worldwide Major manufacturing sites in UK, Netherlands, Germany, France and Belgium & sales offices/service centres in over 40 countries Supplier to many of the most demanding markets worldwide including construction, automotive, packaging, engineering Corus was acquired by Tata Steel in 2007 and is now part of Tata Steel Group, which is the 5th largest global steel producer Hoogovens had good access to the sea for the supply of raw materials and export of finished goods Corus was involved in 14 M & A deals & joint ventures before Tata starting from 2000 Key People:Kerby Adams (CEO),Karl-Ulrich Kohler (COO) SWOT ANALYSIS TATA STEEL STRENGTHS: Lowest cost producer in world, Low Debt to equity ratio, TATA group has successfully acquired some companies in the past WEAKNESS: Corus was triple the size of TATA, steel in terms of production OPPORTUNITIES: Exposure to global steel market, Consolidation trend in Steel industry THREATS: CSN Brazilian and Severstal Russian bidder SWOT ANALYSIS CORUS STRENGTHS: Worlds 9th largest & Europe's 2nd Largest steel producer, Wide range of products WEAKNESS: High operational cost

OPPORTUNITIES: Consolidation trend in Steel industry, To get right price at a time when market is less volatile THREATS: Huge pension liabilities might have collapsed the deal, Disagreement of Labor and government due to possibility of job cut Tata Decides to bid Reasons for decision: Tata is looking to manufacture finished products in mature markets of Europe At present mfgr low value long and flat steel products while Corus produces high value stripped products A diversified product mix will reduce risk Corus holds a number 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 labor and it aims at reducing employee cost and improving productivity at Corus It had already expanded its capacities in India. Helped TATA to feature in Top 10 players in world, Technology Benefit, Economies of scale Corus decides to Sell Reasons for decision: A chance to Bail out of Debt of Corus 1.6bn GBP Access to cheap high quality Iron ore from India. 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%) To extend its Global reach through TATA Access to New Market Post Acquisition (TATA) Was the deal Overpriced? An all-cash expensive deal Only $ 4 Bn from internal resources and rest from major banks Operating Profit of the Companies, New Debt SYNERGIES Manufacturing, Tatas Raw Material resources and Corus looking out for it Retail & Distribution Network Demand for steel products for the auto industry Technology transfer & cross fertilization of R & D facilities 5 Yr. Financial performance of Tata Steel Category Production Revenue EBIDTA Unit `000 Mt $ Mn 1583 $ Mn 283 FY`02 3,636 FY`03 3,941 215 0 516 FY`04 4,089 2755 840 FY`05 4,109 3532 1378 FY`06 4,552 3884 1401

EBIDTA Margin PBT Net Profit Net Profit Margin

% $ Mn $ Mn %

20% 52 43 3%

27% 277 222 12%

34% 616 404 16%

42% 1178 773 24%

40% 1187 794 23%

5 Yr. Financial performance of Corus Category Productio n Revenue EBIDTA EBIDTA Margin PBT Net Profit Net Profit Margin Unit `000 Mt $ Mn $ Mn % $ Mn $ Mn % FY`02 17.1 11456 512 4.47 % FY`03 19.4 10018 305 3.04% FY`04 19.5 12165 1251 10.28% 766 593 4.87 FY`05 18.7 10845 1142 10.53 % 649 512 4.72 FY`06 18.8 12845 1846 14.37 % 610.35 446 3.47 %

644 741

321 388

- 6.47

- 3.87

Financial just before Acquisition 2006-07 31st Dec,2006 TATA CORUS Turnover EBITDA PBT PAT Net Profit Margin 4546 1704 1440 971 23% 18979 1846 610.35 446 2.35 %

THE ROUTE ADOPTED Tata Steel Limited, India - Parent Company Tata Steel Holdings Asia (Singapore) Ltd. - Holding Co. for all foreign acquisitions Tata Steel UK - Wholly owned Subsidiary to ease acquisition funding (SPV) Corus Plc, UK - Target Company acquired Valuing the Acquisition EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of Financing and accounting decisions.

EBITDA = Revenue- Expenses( Excluding tax, interest, depreciation and amortization) Valuing the Acquisition EV = Mkt Cap. + Pref. Stocks + Min. interest + Long Term debt - Cash Equivalent = 3.5 billion + 0 + 26 million + 1600 million 871 million = 4.255 billion. EBITDA = 947 Million Enterprise Multiple= EV/EBITDA = 4.255/.947 = 4.4931 X Peer Comparison Ratio EV/EBIT DA Corus 4.5 X CSN 6.29 X Severstal 18.98 X Nucor 9.14 X

Why Enterprise Multiple ratio ??? EV/EBITDA is not affected by the capital structure of a company It allows fair comparison of companies with different capital structures. We have a transnational comparison in our case and EV/EBITDA ignores the distorting effects of individual countries taxation policies. ALLOCATION OF FUNDS Equity contribution by Tata Steel to Tata Steel UK via Singapore of $4.1 b o Internal generation- $1.267 b o External commercial borrowings- $0.5 b o Proceeds from rights issue- $1.888 b o Foreign equity offering- $0.445 b Non-recourse debt financing by bank consortium (at Tata Steel UK) of $6.143 b o Five-year amortizing loan of $3.236 b o Seven-year minimally amortizing term loan of $2.907 b

Bridge financing in Tata Steel Asia Holdings (Singapore) of $2.662 b

IMPACT ON TATA STEEL SHAREHOLDERS Tata Steel raised funds via rights issue and not private placement o Increase in value to existing shareholders Earnings per share and market capitalization of Tata Steel shareholders will get diluted immediately after the takeover due to high debt-equity ratio Fall in share prices will allow Tata to pick up its own shares from the market at lower prices, fending off a takeover WHY CASH DEAL???? 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 Steels Equity base which was not in favor 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.

TATA Steel before & After 2006-07 PBT (In crores Rs) PAT(In crores Rs) Interest Coverage Ratio EPS Debt /Equity P/E 6313 4165 16.35 64.66 0.71 6.95 2007-08 16371 12321 3.46 177.18 1.99 3.91

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 Acquisition 2. Interest charges New Debt of $ 8 bn @ 8% annual interest cost i.e. $ 640 mn Coruss existing interest debt amounts to $ 725 mn. Aggregate crude steel production capacity of around 28.1 million tonnes. Global Player with a balanced presence in developed European and fast growing Asian Markets. May 07 EBITDA of 13 %, 25 mn tonnes of production ,Ranked 5th 2012 EBITDA of 25 %,40 mn tonnes of production, Ranked 2nd The group is growing aggressively and targets 50 mn tonne capacity by 2015.

PITFALLS OF THE DEAL High value paid. Approximately 7.7 times its Enterprise Value. Corus EBITDA was at 8% which was much lower as compared to Tata Steels 30%. Tatas debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was maintaining earlier.

Fast consumption of Tata Steels 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