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Session III - Tata-Corus

Session III - Tata-Corus

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Tata Corus merger case analysis
Tata Corus merger case analysis

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Published by: Kirti Sharma on Jun 14, 2013
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Small Fish Swallows the Big Fish

Acquisition of Corus by Tata Steel

the sure foundation of our success. it was purely Swadeshi enterprise financed by Swadeshi money and managed by Swadeshi brains. Above all.” – 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.Sir Dorab Tata describing the first share issue in 1907  .Tata Steel  “We think we started on sound and straightforward business principles. Founder  “The welfare of the labouring class must be one of the first cares of the employer. considering the interests of the shareholders our own and the health and welfare of the employees.” -Jamsetji Nuservanji Tata.” .

5 Mtonnes) • In-house upgradation of E blast furnace completed .93 million tonnes • G blast furnace crossed 2 million tonnes production • Highest ever annual production at HSM (3.24 Mtonnes) and CRM (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 4.311 million • Consolidated EBITDA (excluding Corus) up by 20% at USD 1.Tata SteelPerformance Highlights 2006-07  Consolidated Turnover (excluding Corus) up by 23% at USD 6.

86 million tonnes • Global Supplier Approval received from Honda Engg. 4. Services (Honda Car. China and Vietnam • Tata Steel (Thailand) integration process completes one year .059 million) – crossed USD 1 billion for the first time • Consolidation of NatSteel Asia equity holding in Xiamen. Japan) for CRCA • Sales of Branded Products up by 13% at 0.604 crores (USD 1.79 million tonnes • Sales to Automotive sector up by 29% at 0.99 million tonnes • Turnover of Branded Products up by 20% at Rs. Commissioning of 4’ Precision and 3’ Commercial Tube Mill in Jamshedpur • Gross Steel sales up by 8% at 4.

Tata Steel Performance .

Tata Steel Performance .

Tata Steel Performance .

Corporate Sustainable Responsibility at Tata .


Globalization at Tata Steel .

Tata Steel‟s Growth Strategy .

Tata Steel .

Tata Steel Performance .

2 million tons (primarily in U.2 billion (in 2005) & Crude steel production 18.K.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. and Netherlands)  .

3 main divisions: Strip products. Distribution and building systems division. Ninth-largest steel maker worldwide Activities. 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 .

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 firm‟s bid for outright ownership . 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.

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 .

the largest investor in Corus (7. valuing the group at £4.3bn  But Standard Life.Date Line  Initially Corus agreed 455p a share offer from India's Tata Steel on 20th October 2006.9% 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.7bn   . 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. raised its terms to 515p.7 bn ($11. CSN on the same day. valuing Corus at £6. became the group's     Whereas the Brazilians CSN final offer in an auction by the U.3bn) Corus's chairman Jim Leng deputy chairman. valuing Corus at £4.K.'s Takeover Panel was 603 pence .

Financing of Corus Acquisition .

Financing Plan of Tata Steel Equity .

/annum) 5 2 1.7 .Ton.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.

/ann um) .Millennium UK & Nl) JharkhandJamshedpur ChattisgarhSingapore Steel Thailand 19 12 10 6 5 2 1.7 (in M.Orissa TSNatSteel .(in TSTS.Ton.TS.Tata Steel-Corus: Projected Capacity 20 18 16 14 12 10 8 6 4 2 0 Corus Gr.

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 battle‟s 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) .

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  ∙ ∙ . A wholly-owned indirect subsidiary of Tata Steel. The Acquisition was made by Tata Steel U..K.

2 Other Companies.Tata Steel leapfrogged from 56th to 5th position world wide after aquisition Total Global Production (1131. 29. 28. 891.8 Mton) Arcelor Mittal (Global). 120 Nippon Steel (Japan). 32 POSCO (South Korea). 30.9 Tata Steel (India).5 JFE (Japan).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 .

437 7.591 32% USDMillion 5.269 Profit before Tax 859 Net Profit 1.Financial Performance –Consolidated (excluding Corus) (FY 2006-07 vs FY 2005-06) 2005-06 Rs.311 1.888 31% 2006-07 USDMillion 6.68 .313 4.272 6.crores 27.452 961 1.62 1.516 EBITDA 32% EBITDA Margin Rs.crores 22.735 67.56 EPS (Rs per share) 6.177 73.515 3.123 Turnover 1.06 1.815 31% 5.

crores 25.845 Turnover 615 EBITDA * 11% EBITDA Margin 403 Profit before Tax 276 Net Profit Jan-March 07 Rs.231 14% 2.199 973 14% 567 395 .crores 31.750 1.717 USD Million 7.411 2.464 1.Financial Performance – Pro-forma Consolidated with Corus (Jan-March 2007 vs Jan-March 2006) Jan-March 06 Rs.198 USD Million 5.672 11% 1.296 4.

Raw Material Self-sufficiency .

Slab for the enlarged group and Exposure to high growth in emerging markets. of technology. from Europe to India. whilst gaining price stability in developed markets ∙ . best practices and expertise of senior Corus management ∙ Tata Steel will retain access to low cost raw materials.∙ The cross-fertilisation of development capabilities research and ∙ A transfer.

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” .

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

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”.Jim Leng. 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. which India in general lags” . 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 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.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. Tata said “This is another step in Tata Steel's journey to what it wants to become in the next 10 to 15 years.” .

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.  . the deal became India's biggest-ever foreign takeover and establish the country as a new force in the fastconsolidating steel industry." When completed. In response to questions about possible job cuts at Corus.

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

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  .Scope of the Project Steel Industry – At a glance  Tata Steel – market position / competitiveness  CSN .

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 .

5 94.120.8 2006 418.0 32.Corus Bao Steel China US Steel Capacity (in million tonnes) 110.0 19.8 31.0 India Ukraine Italy Brazil Nucor Riva Thyssen Krupp 18.2) 8.6 5.0 40.8 6.6 29.028.5 (2.4 47.7 23.Mittal Nippon Steel Posco JEF Steel Tata Steel .0 27.9 66.0 30.2 98.8 1.6 48.6 30.9 1.6 1.9 38.Global Steel output (in million tonnes) Country China Japan US Russia South Korea Germany 2005 355.5 70.9 Global steel ranking Company Arcelor .7 % change 17.8 116.2 44.1 7.5 World production .3 3.7 7.5 16.7 3.4 31.5 30.1 47.3 6.5 17.5 40.8 44.8 112.


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.

•In 2005-06. India is the 7th largest crude steel producer of steel in the world.695 Million Tonnes. •Today.544 million tonnes. production of Finished (Carbon) Steel was 44. . •The share of Main Producers (i. 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.e SAIL. •Production of Pig Iron in 2005-06 was 4.Steel Industry in India •Steel industry was delicensed and decontrolled in 1991 & 1992 respectively.

074 Finished Carbon Steel 33.0 44.28 3.9 40.22 4.76 3.6 36.689 (Source: Joint Plant Committee) .69 3.5 30.Steel Production in India (in mmt) Category 2002 -03 2003 -04 2004 -05 2005 -06 2006-07 (April-Nov' 06) Pig Iron 5.

estimated) . (In mmt) 1. 2006) (Prov.271 1.540 2.Steel Imports .India Year 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 (Prov.109 3.765 2.500 2006-07 (Apr-Nov.) Qty.510 1.

629 0.300 0.Steel Exports .835 Pig Iron 0. in Million Tonnes) Finished (Carbon) Steel 2002-2003 2003-2004 4.350 3.150 0.506 4.518 2004-2005 2005-2006 2006-2007(April-Nov 06) (estimated) 4.200 .393 0.India (Qty.381 4.

5 million tonnes. 1947 : Steel production 1.25 million tonne Present capacity : 44. Source: Deustche Bank Research .Indian Steel – At a Glance….

India’s Growth vis-à-vis World .

Indian Steel – Productivity & Performance Labour Productivity in India: 144 tonnes / labour/ yr West Europe: 600 tonnes • Rising Import Demands because of .Demand for high quality products • Share of Steel demand: .Automotive : 43% :32% : 5% .Dynamic Growth . .Construction Industry .Mechanical Engg.

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

3%) – so. This is still comparatively tiny compared to China’s share of 41%.India and the World Growth India’s Steel output expected to rise +6% p. still a huge potential for restructuring.a compared to around 4% rise in global steel outputs. in India 6% of crude steel is still made using the outdated open-hearth process (EU-25: 0. . India’s share of global crude steel output is forecast to rise to just under 4% in the next ten years. Technology Increased use of continuous casting technology – 38% in mid-90s to 66% However.

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

Indian Steel Industry – Tata Steel Tata Steel – India’s largest private sector steel company capacity : 5. .3 mmtpa The TATAs' first steel plant under construction in Jamshedpur in 1911.

Asia first and India‟s 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. 6 MMTPA in Orissa. Asia and Millenium Steel. 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    . 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.TATA STEEL.A GLANCE  Established in 1907 .

TATA STEEL .PRODUCTS              Hot and cold rolled coils and sheets Galvanized sheets Tubes & wire rods Construction rebars Rings and bearings Tata Steelium ( world‟s 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 ( India‟s first retail steel store ) .

. Chhattisgarh and Jharkhand.000 crores in the next decade. with an aggregate capacity of 23 million tonnes.in greenfield projects and other strategic acquisition Tata Steel proposes to establish three greenfield facilities in Orissa. 70.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.

17 % 62.48 % 36.19 % 34.61 % 20491 5515 3721 40.35 23.4 % .TATA STEEL – FINANCIAL STATISTICS 2005-06 REVENUES (Cr) PBT(Cr) PAT(Cr) EBITDA MARGIN PBT MARGIN EPS(Rs) DIVIDEND 2004-05 16181 5442 3571 42.04 % 63.77 23.



Corus overview .

completed in 1977. The second. The first. increased capacity to 4.CSN –History & Growth        Companhia Siderúrgica Nacional was incorporated in 1941 Initially focused on producing coke. through which the Brazilian government sold its 91% interest in company . privatized in 1993 and early 1994. increased installed annual production capacity to 1.5 million tons of crude steel.4 million tons of crude steel. completed in 1989. pig iron castings and long products Three major expansions were undertaken at the Presidente Vargas Steelworks during the 1970s and 1980s. raised capacity to 2. completed in 1974. The third.6 million tons of crude steel.

Strengthen position as a global player .CSN’s 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.

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 .

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 Market structure     In 2004 sold steel products to customers in Brazil and 61 other countries..

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


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. .

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 .Sales .Tata Steel.

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

CSN both planned a leveraged buy-out Raising debt on the security of future cash flows from Corus.CORUS BUYOUTSTATEGY      Tata Steel. 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 .

84 bn & profit $ 824mn) Corus facilities were relatively old with high cost of production Employee cost is 15%( Tata steel.6bn GBP Corus needs supply of raw material at lower cost Though Corus has revenues of $18.06bn.Situation 1: Corus decides to sell       Reasons for decision: Total debt of corus is 1.9%) . its profit was just $626mn(Tata‟s revenue was $4.

.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. 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 . of patents and R & D facility.

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


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

Orissa 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 .Singapore Millennium Steel Thailand Aggregate present capacity 19 5 2 1.Tata Steel .7 55.7 .Corus : Present capacity (in million tonnes per annum) Corus Group (in UK and The Netherlands) Tata Steel Jamshedpur NatSteel .7 Tata Steel .Singapore 19 10 12 6 5 2 Millennium Steel Thailand Aggregate projected capacity 1.7 27.Chattisgarh NatSteel .








Dilute EPS( 1.8 billion . junk bonds etc.4% FY 08).3-$2.7-$1.1% FY 08) (iii) $2.$ 4.Funding Scenarios.Dilution of TCS shares in LSE  Debt:-Senior debt.Also EPS unfriendly( 13.Need to both create and protect share holder value Equity.$1.1 billion.8 billion.(Options) (i) Borrowings by Tata Steel.4 billion cash reserves of tata balance. Funding domestic greenfield ventures (II) Preferential share issue by tata steel to tata sons.

802.10 17.4 0.1 (814) 618.39 22.7 b pref issue to TATA sons Addnl debt on B/s Net D/E at FY‟07 end(%) Net D/E at FY‟08 end(%) Price for equity issue(Rs) Equity dilution (%) Interest/loss of other Income Tata Steel‟s 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.Impact on Tata steel‟s FY „‟08 P & L with $1.0 374.2 450. In crores) 5.1) 0.30 Source: CLSA .4 500 25.5 0.3 (13.

Valuation Based on replacement value: At current rates-1100-1300$/ton---$22 billion(15 yrs) Actual amount agreed ………….  .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.$12.

5bn will come from cash reserves of TATA steel TATA sold 0.ABN Amro.Financing the deal       Leveraged buyout: Loans of $8 billion are arranged for acquisition.84% of TCS stake Financiers for the deal. The current EBIDTA of Corus is sufficient to pay the annual interest of the loan Around $2. Deutsche Bank Increased debt obligations will create more credit risk for Corus .

the losses could climb to $ 846 million. .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.

Chhattisgarh and Jharkhand up and running in double quick time. So. Corus currently . while Corus has room on its balance sheet to take on more debt.Valuation Contd. But analysts expect these to be commissioned not before 2010 Need for steel up cycle to stay intact  . Tata Steel does not have spare slab capacity — its Jamshedpur plant of almost 5 million tonnes (mt) is operating at full tilt.low net debt-equity ratio of 0. But currently. Leverage. it may come under pressure on debt servicing. It now has to get its greenfield expansions in Orissa. if steel prices head in the wrong direction  Key for improving profitability: export of low-cost slabs from India Corus’s profitability.25 times.

Considering the fact that Arcelor has much superior assets. the price paid by Tata Steel looks almost high.5.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. Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.  . wider market reach and is financially much stronger than Corus. In comparison.

interest and principal outgo requires annual fund of $1. (Long way off??)  Assuming 7 percent interest rate.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.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. how to work in the matured market verses working in developing market. how to integrate these two cultures. The biggest challenge one would face is how to integrate these two companies. . how to work with new type of management. British trade unions launched protest on grounds of potential layoffs.

bad things happen—all stemming from the 'me‘ issues. . University of Virginia. the Corus acquisition is only half the battle won Robert Bruner. "When integration gets bogged down." 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. dean of the Darden School of Business.Post Merger Integration Issues For the Tatas. says.

professor. Venkiteswaran of IIM-A  Employees loathe uncertainty about their fate in the company.Post Merger Integration Issues…. Some level of planned restructuring can come in later. competition takes away business and soon the value of the deal is gone even before integration starts." So. It makes sense for the Tatas to allow the existing management to continue as before. "Productivity drops. Tatas should not view the acquired company as a loser. London Business School. Phanish Puranam. wherein the Tatas bring in some changes. but don't do a complete overhaul of how Corus is run – says Prof. a "light-handed integration― will make more sense. says. .  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.

Post Merger Integration Issues…. ran into cultural and racial obstacles because of concerns that British employees would resent having managers from a former British colony. the Tata's previous UK buy.Tatas have put two Corus people in the Tata Board . 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 to learn from their Tetley acquisition and maybe use some of the managers who handled that integration In the initial volatile phase. Tetley.

controlling costs & adopting the best practices of both sides .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“.a significant drop to 5.2 per cent in 2007 from a healthy 8.Post acquisition issues    ICRA forecasts slow down in global steel growth in 2007 . Reviving the company‟s value would be challenge Acquiring synergies necessitates include improving Corus operating margins.

Conclusion .


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