FACD

Project:
Tata Steel’s
Acquisition of Corus

Done by:
CV Saketh (19P059)
Ankush Sindol (19P072)
Vamsi Sunkara (19P117)
Neha Jain (19P204)
Priya Gupta (19P208)
INDEX

Industry Outlook
Global Steel Industry…………………………………………………….…...2
Indian Steel Industry………………………………………………………....3
Challenges and Trends………………………………………………….……4
Company Background
Tata Steel………………………………………………………………….…6
Corus………………………………………………………………………....9
Rationale of Acquisition…………………………………………….……….10
Counterbids…………………………………………………………….…….12
Timing and Need for deal…………………………………………………...13
Market Reaction……………………………………………………………..14
Timeline of Deal……………………………………………………………...15
Deal Structuring/Funding…………………………………………………...17
Details of Rights Issue of shares, convertible preference
shares, and CARS…………………………………………………………...19
Impact of Acquisition
Industry……………………………………………………………………...20
Otherwise…………………………………………………………………....20
What went wrong?.......................................................................................... 20
Subsequent Performance……………………………………………………22
Viability of the deal………………………………………………………….26
Valuation Analysis of Deal………………………………………………….27
Learning from the project ………………………………………………….28
References…………………………………………………………………....29

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Industry Outlook

Global Steel Industry

The global steel industry saw that the consumption of steel witnessed drastic decrease in 2007, in
comparison to 2006. In 2005 World Crude Steel output at 1129.4 million metric tonne was 5.9%
more than the previous year, the trend of which didn’t follow. China remained the world's largest
Crude Steel producer in 2005 also and USA India occupied the 8th position (38.08 million metric
tons). Post that the global production of steel has surged around 7-8% since 2002. China’s hunger
for steel has pushed global prices sharply upward. In about 4 years i.e. from late 2001- to late
2005- prices then rose dramatically. At the same time, strong price increases for Steel’s raw
materials- including iron ore, coke, scrap and alloying material- contributed for a very high floor
cost for steel.

Two additional factors have triggered this price increase:

- Temporary shortages of raw materials and steelmaking capacity
- Deliberate reduction in production by steel makers in the developed regions of the world.

Global Steel Output (in million tons)

Country 2005 2006 % change
China 355.8 418.8 17.7
Japan 112.5 116.2 3.3
US 94.9 98.5 3.8
Russia 66.1 70.6 6.8
South Korea 47.8 48.4 1.3
Germany 44.5 47.2 6.1
India 40.9 44.0 7.6
Ukraine 38.6 40.8 5.7
Italy 29.4 31.6 7.5
Brazil 31.6 30.9 (2.2)
World production 1,028.8 1,120.7
8.93%

The ISSI- International Iron & Steel Institute had confirmed that the trend of recent years of an
increase in steel use in-line with general economic growth and with the fastest growth occurring
in the countries with the highest GDP growth such as India and China. The steel market back in
the year 2004 was highly buoyant with high consumption rates. In the OECD areas we saw a very
high increase in demand as compared to the other areas.

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 Apparent world-wide Steel Demand is forecast to grow
to between 1,040 and 1,053 million tonnes in 2006 from
a total of 972 million tonnes in 2004. This is a growth of
4-5% over the two year period. In the long term, there is
a strong possibility for the industry to benefit from
greater pricing power resulting from further expected
consolidation, a lower cost structure, and a continuation
of the cyclical decline of the U.S. dollar.

India Steel Industry

India has traditionally been one of the major producers of steel in the world. Till the 1990s the
steel industry of India was regulated and controlled by government policies. Since its
independence, India has experienced steadily growth in the steel industry; the governments have
supported the industry and pushed its robust development.

Further illustrating this plan is the fact that a number of steel plants were established in India, with
technological assistance and investments by foreign countries. The Indian Steel industry is
regarded as the most important component for the development of nation, because steel industry
(heavy industry) is considered as a very important and influential parameter for the development
of any modern economy.

In 1991, the Indian government introduced a substantial number of economic reforms. One of the
economic reforms allowed no licenses to be required for capacity creation, except for some
geographical areas. These reforms boosted the development process of a number of steel industries
in India.

The country’s production of crude steel in 2005-06 stood at 42.1 million tonnes, reflecting an
increase of 7.1 per cent over the previous fiscal. On the other hand, the consumption of steel during
the year was pegged at 41.43 million tonnes, a massive growth of 13.88 per cent when compared
with the 2004-05 figures. India’s major market for steel and steel items include USA, Canada,
Indonesia, Italy, West Asia, Nepal, Taiwan, Thailand, Japan, Sri Lanka and Belgium.

Powered by an increased demand for steel from neighbouring China, which has been clocking a
15 per cent sectorial growth annually on account of construction projects in preparation for the

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Olympics. The steel industry in India is also being competitive over the past two years and has
grown about 10 per cent compared with the global growth rate of about 6 per cent a year.

The steel industry is important for the government. at is why India has the Ministry of Steel. There
are two major government-owned steel companies and a few others in the business of iron ore
(NMDC Ltd.), and manganese ore (MOIL Ltd.) etc. The steel industry in India faces certain deep
structural flaws. The industry is built around a widely diverse technology mix with co-existence
of both very small, medium and large integrated works with high degree of vertical disintegration.

Further, with both the public and private producers present, the ownership pattern and the style of
management remained fairly complex. The entire system exhibits high degree of conflicts with
multiple industry identities trying to survive or gain from government policies on matters starting
from raw materials to external trade. e lack of uniformity has actually led to high system costs
instead of reducing the same as excess capacity exists more than warranted in various segments.
Also, an analysis of steel import/export in India is as follows:

Challenges : The cost of raw materials and energy would continue to represent a major challenge
for the world steel industry. Since the year 2000 scrap metal prices have increased by 171%, iron
ore by 164% and coke by 69%. The margins of the mining companies have outstripped the margins
of the steel companies by two times.

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The consolidation equation is really simple. Greater consolidation means the industry will have
less price volatility and higher bargaining power. Hot-rolled coil prices are a good example of how
fragmentation has affected the industry. The developments in the steel industry since the 1990s
have not been much different from other industrial sectors in comparable sizes.

Although much of the project management was overseen by established foreign companies as
technology and equipment were taken from abroad, the local issues such as land acquisition, forest
clearance, manpower management, getting raw materials linkages, etc. were all beyond the scope
of technology management. What one saw across the manufacturing sector was a lack of proper
planning before projects were rolled out. Also, each private group had their hands filled with
multiple projects in widely diverse areas.

A risk profile of select industries at the end of March 2017, as carried out by the Reserve Bank of
India, showed that the steel industry continues to suffer from the high leverage and interest burden.
Also, Given the history of the steel industry, the probability of a price fall any time in the future
cannot be ruled out. The Indian steel industry in particular will have to realize that steel prices are
no longer exclusively determined by demand and supply forces in the market. Much of the
direction is shaped by speculative and manipulative actions of various agents in the economy
which may, in fact, include many unscrupulous steel industry players, too.

Trends: During those times, the steel industry witnessed a high degree of global consolidation
due to:

• A desire amongst the key players to gain efficiencies resulting from scale,
• Obtaining access to new and growing markets,
• Enhancing purchasing power with respect to suppliers and buyers.

Few significant events of the industry were:

1. Steel prices were on an upward trend after 2004 and worldwide demand for steel continued to
increase until the global economic crisis emerged
2. Production costs in part depended on manufacturing technology and degree of backward
integration having access to power and raw material.
3. The rapid growth in the Chinese economy and other developing countries like India during the
mid-2000s also created an increasingly strong demand for steel.

4. For the domestic steel industry, the year 2002- 07 was a period of rapid growth with significant
increases in both production and consumption of steel.

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 Comparative cost of steel production (Figures in %)
Item USA UK France Germany India (Base)
Energy 24.1 19.8 22.1 23.4 32.9
Iron Ore 15.4 12.7 12.7 13.9 5.4
Fluxes and Ferro alloys 5.9 7.6 7.6 6.8 8.5
Others 25.6 27.5 27.3 27.1 21.9
Total materials 71.0 67.6 69.7 71.2 68.8
Labour 40.7 27.1 36.6 43.4 13.9
Miscellaneous Taxes 1.9 1.9 4.1 2.4 6.6
Works cost 113.6 96.6 110.5 117.1 89.3
Depreciation & interest 9.1 6.6 2.4 12.2 10.7
Total cost 122.7 103.2 122.9 129.3 100.0

Company Backgrounds

1. Tata Steel

Tata Steel, formerly known as TISCO (Tata Iron and Steel Company Limited), was the
world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity
of 3.8 million tonnes. It is part of one of India’s largest business conglomerates, the Tata
Group established by Jamsetji Tata and his extended family. Based in Jamshedpur, India, it
was part of the Tata group of companies.

Post Corus merger, Tata Steel was India's second largest and second-most profitable
company in the private sector with consolidated revenues of Rs 1, 32,110 crore1 and net
profit of over Rs 12,350 crore during the year ended March 31, 2008. The company was also
recognized as the world's best steel producer by World Steel Dynamics in 2005.

Tata Steel was one of the world‘s lowest cost producers of steel because of its high level of
vertical integration and process improvisation, excellent product mix and good perception
regarding product quality. On the flip side, Tata steel imported about 35% of its total coking
coal requirement, leading to some dependence on coking coal contract price movements.
The vision of Tata Steel is “To be the global steel industry benchmark for Value Creation
and Corporate Citizenship”.

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 Tata Steel's operations are grouped under six Strategic Business Units include Bearings
Division, Ferro Alloys and Minerals Division, Agrico Division, Tata Growth Shop (TGS),
Tubes Division and Wire Division. They have introduced several branded steel products,
including Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee
(Galvanised Corrugated Sheets), Tata Tiscon (rebars), Tata Pipes, Tata Bearings, Tata
Structural, Tata Agrico (hand tools and implements) and Tata Wiron (galvanised wire
products).

In the year 2006, the company inaugurated India's first automated Jigging and Hydrocyclone
Plant, with a 1.6 MTPA throughput, at Noamundi Iron Mines. They commenced the work
on Ferro Chrome Plant by acquiring Rawnet Ferrous Industries Pvt Ltd, in Orissa, a Ferro
Alloys plant with a capacity of 50,000 tpa of high carbon chrome. They set up a Joint
Venture Company with Larsen and Toubro Ltd for developing an all weather modern deep
water port in the state of Onssa on the Eastern Coast of India. Tata NYK Shipping Pte Ltd,
a joint venture shipping company between the company and Nippon Yusen Kabushiki
Kaisha was set up to cater to dry and break bulk cargo and also the shipping activities. In
August 7, 2006, the company inaugurated the Roll Forming and Pre-Engineered Building
Facilities of Tata Bluescope Ltd at Pune.

Presence: Tata Steel operates in 26 countries with key operations in India, Netherlands and United
Kingdom, and employs around 80,500 people.[4] Its largest plant (10 MTPA capacity) is located in
Jamshedpur, Jharkhand.

Other Key Acquisitions:

1. Acquisition of Singapore-based NatSteel for $486.4 million in cash in 2004.

2. Majority stake in the Thailand-based steelmaker Millennium Steel for a total cost of $130 million
in 2005.
3. NatSteel Asia Pte Ltd, acquired controlling stake in both rolling mill companies located in Vietnam:
Structure Steel Engineering Pte Ltd (100% stake) and Vinausteel Ltd (70% stake) in 2007.
4. Bhushan Steel in 2018.

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 Porters Five Force Analysis

1. High Entry Barriers

Tata Steel had made justified efforts to try and safeguard itself in this regard. Its has a lineup of
Greenfield projects which it plans to establish not only in domestic markets and internationally. It
still enjoys a premium for their products because of its quality and its brand value created more
than 100 years back. Tata Steel has introduced brands like Tata Steelium (the world’s first branded
Cold Rolled Steel), Tata Shaktee (Galvanized Corrugated Sheets), Tata Tiscon (re-bars), Tata
Bearings, Tata Agrico (hand tools and implements), Tata Wiron (galvanized wire products), Tata
Pipes (pipes for construction) and Tata Structura (contemporary construction material).

2. High Competition

The steel industry is truly global in terms of competition with large producing countries like China
significantly influencing global prices through aggressive exports. The 4 major domestic rivals are
SAIL, JSW, ISPAT and ESSAR STEEL, which the rests are all smallish mills which together
accounts for 30 % of the total market share.

Currently, two Global Steel majors namely Arcelor- Mittal, which is the world’s largest I and
POSCO, are posed to be the biggest threat as they plan to enter the Indian Steel Industry very soon.
Look at table appendix 1.0.2, page analysis on Tata Steel Competitor.

3. Low supplier bargaining power

The bargaining power of suppliers is low for fully integrated steel plants as they have their own
mines of key raw material like iron ore coal for example Tata Steel. However, those who are non-
integrated or semi integrated has to depend on their suppliers for example SAIL, which imports
coking coal. Also since domestic raw material sources are insufficient to supply the Indian steel
industry, a considerable amount of raw materials has to be imported.

4. High threat of substitutes

Plastics and composites pose a threat to Indian steel in one of its biggest markets – automotive
manufacture. For the automobile industry, the other material at present with the potential to
upstage steel is aluminum. Perhaps the most attractive alternative to stainless is aluminum.
Stainless producers themselves are offering their customers a range of alternatives in an effort to
prevent business being lost to non-ferrous or carbon steel materials. Such options include lower-

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nickel duplex grades and ferritic types. In the meantime, nickel’s fluctuations will continue to
create problems for the stainless industry worldwide.

5. Mixed buyer bargaining power

Some of the major steel consumption sectors like automobiles, oil & gas, shipping, consumer
durables and power generation enjoy high bargaining power and get favourable deals. However,
small and retail consumers who are scattered and consume a significant part do not enjoy these
benefits.

2. Corus

Corus Group plc, one of the largest steel companies in Europe, came into being in 1999
with the merger of British Steel plc and Dutch steelmaker Koninklijke Nederlandsche
Hoogovens en Staalfabrieken NV. The company manufactures, processes, and distributes
metals products to the construction, automotive, mechanical engineering, packaging, and
other markets--primarily in Europe.

Corus had about 42,600 employees in over 40 countries and sales offices and service
centres worldwide. The number of employees in UK has been about 23,600; in Germany
about 2,600; in Netherlands about 11,400 and in other countries about 5000. Combining
international expertise with local customer service, the Corus brand represents quality and
strength.

The bulk of its production facilities are in the United Kingdom, but it also has a presence
in The Netherlands, Germany, France, Belgium, the United States, and Canada. The
company's products include coated and uncoated steel strip products, sections and plates,
tubular products, engineering steels, wire rods, stainless steel, and carbon steel products.
Corus also operates a significant aluminium business; as of early 2002, however, the
company was planning to sell its aluminium-related units.

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 Rationale for the Acquisition

The Corus Group was on Tatas' radar for many years. There were many apparent synergies
between the companies, some of which are as follows:

o Tata was one of the lowest cost steel producers in the world and had self-sufficiency in raw
material. Corus was fighting to keep its productions costs under control and was on the
lookout for sources of iron ore
o There would be technology transfer and cross-fertilization of R&D capabilities between
the two companies that specialized in different areas of the value chain.
o There was a strong culture fit between the two organizations both of which highly
emphasized on continuous improvement and ethics
o Tata had a strong retail and distribution network in India and South East Asia. This would
give the European manufacturer an inroad into the emerging Asian markets. Tata was a
major supplier to the Indian auto industry and the demand for value added steel products
was growing in this market. Hence there would be a powerful combination of high quality,
developed and low cost, high growth markets. The new entity would have a meaningful
market presence in both Europe (where Corus was a well-established brand name) and Asia
(where Tata was a well-established brand name).
o Increased market power through horizontal merger
o This acquisition would position the combined group as the fifth largest steel company in
the world by production output, without the acquisition it would have remained a medium-
sized player, apart from Corus there weren’t other companies in top-10 which would have
become acquisition targets in the near future

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Benefits to Tata Steel

-To tap the European market, access to the largest steel buyers
- Cost of acquisition expected to be lower than setting up Green field plant and marketing and
distribution channel
- Economy of scale
- An increase in Tata’s capacity exponentially along with a wider customer base and an enhanced
product portfolio
- Corus holds various patents and R&D facilities, would lend Tata Steel a competitive advantage
- The product portfolio of Corus would be a perfect fit for the disintegrated production strategy of
Tata steel i.e. making the raw material or semi-finished steel in India and further value add in
Europe.

Benefits to Corus
- A chance to Bail out of Debt and Financial stress
- Access to cheap high quality Iron ore from India
- Reduction from high cost of productions
- Saturated market in Europe

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 - Extend its global reach
- The combination of low-cost stream production in India along with the high-end
downstream processing facility of Corus in Europe would improve the competitiveness of
the European operations

Counterbids

CSN

CSN announced on November 11, 2006 that it had made an informal bid approach to Corus, which
set the stage for a bidding war and throwing Tata Steel's agreed takeover into jeopardy after CSN
hired the investment bank Goldman Sachs to advise them on whether there was a good chance to
make a counter offer. CSN's offer of 475 pence per share for Corus, which would value the firm
at $5.3 billion pounds, including debt, topped Tata's bid of 455 pence. Both companies had a
significant presence in the manufacture of tinplate in Europe.

On January 31, 2007, following the lack of agreement on an offer, an auction process was
triggered. With an annual production capacity of 5.8 million tons and around eight thousand
employees, CSN was focused on steel production, mining and infrastructure. The company had
one of the most comprehensive lines of high added value flat steel on offer throughout the
continent. According to the rules, a resolution pertaining to the bid would have to garner support
from 50 percent of shareholders and 75 percent of shares at the EGM, which was adjourned to
December 20. The difference between Tatas’ winning bid and CSN offer was a mere five pence.

12
Both sides increased their offers and after eight rounds of bidding, CSN backed out when Tata
Steel offered 608 pence a share.

The appointed advisors for Tata Steel were:

- ABN Amro
- Deutsche Bank
- Standard Chartered

The appointed advisors for CSN were:

- JP Morgan
- HSBC
- Cazenove

Timing of the deal

The last few years were some of the best ever for the global steel industry as robust demand

from emerging economies like China pushed up prices. Profits of steel manufacturers across the
globe swelled and their market capitalizations have multiplied many times. Tata Steel believed the
steel cycle was in a long-term up-trend and the risk of a downturn in prices was low. In fact,
managing director B Muthuraman said the global steel industry might witness sustained growth as
during the 30-year period between 1945 and 1975.

The International Iron and Steel Institute (IISI), a respected steel research body, corroborated this
in its outlook. The growth in demand for global steel would average 4.9 per cent per year till 2010
according to the IISI. Between 2010 and 2015, demand growth is expected to moderate to 4.2 per
cent per annum according to IISI forecasts. Much of this demand growth would come from China
and India, where the IISI estimates growth rates to be 6.2 per cent and 7.7 per cent annually from
2010 to 2015.

The need for scale

Going by the IISI forecasts, global steel demand would be 1.32 billion tonnes by 2010 and 1.62
billion tonnes by 2015. Even Arcelor-Mittal, the largest global steel player by far, had a capacity,
which was just 6.8 per cent for projected demand in 2015. To maintain its then current share,
Arcelor-Mittal would have to add another 50 million tonnes of capacity by then. This confirmed
the view that there was still considerable scope for consolidation in the steel industry.

Tata Steel - even with its planned greenfield capacity additions - would have remained a medium-
sized player after a decade. This made it absolutely vital that the company did not miss out on

13
large acquisition opportunities. Apart from Corus, there weren’t many among the top-10 steel
makers, which would have become possible acquisition targets in the near future.

Market Reaction

Tata Steel share prices fell upon announcement of the acquisition and continued to slide during
the next two months. After a battering of two-and-a-half months (in December), shares of Tata
Steel staged a partial recovery with a gain of over 5 percent with some market players speculating
that the company might withdraw its bid to acquire Anglo-Dutch steelmaker Corus. Stock
investors were not happy with Tata Steel's aggressive bidding. Tata Steel shares had lost about 20
per cent ever since the reports first poured early in October that it was planning to acquire Corus,
as it was felt that the costly takeover would have an adverse impact on the company's balance
sheet. The brokers said the deal might have significant long-term synergies, but market players
were worried about the adverse impact in the short term. Analysts felt that Tata was overpaying
for the acquisition, citing, for example, that the price was 9 times Corus's (EBITDA) earnings that
dwarfed the 6 times that Mittal Steel had paid to acquire Arcelor. Mr. Muthuraman accepted that
the deal "may look expensive" but was in fact in the strategic interests of both companies allowing
Tata Steel access to Corus's markets and Corus the access to cheap raw materials and low costs of
steel making. Tata Steel's share price closed 5.4 per cent higher at Rs 459.25, after hitting an intra-
day high of Rs 461.45 at the Bombay Stock Exchange. However, the stock was still 14 per cent
below the level it was trading at in the beginning of October. Interestingly, the CSN stock price
went up when it announced its bid.

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Timeline of the Deal

It is important to gain an understanding of the events that led to Corus‘s desire to be acquired
before launching into a detailed discussion of the acquisition activity. The activities of the were
acquisition were as follows:

11/2005 Corus‘s top management meet Ratan Tata in Mumbai.

Mid-2006 Ratan Tata made an offer of 455p per share to buy Corus

10/17/06 Tata Steel makes a cash offer of GB 5.1billion pounds ($10 billion) bid for Corus worth
455p a share in cash.

10/20/06 Corus‘s Board of Directors recommend acceptance of Tata Steel‘s offer.

11/17/06 Companhia Siderúrgica Nacional (CSN) of Brazil makes a bid of GBP 5.3 billion for
Corus, worth 475p a share in cash.

11/27/06 Corus postpones shareholder meeting from December 4 to Dec 20 to give CSN time to
prepare a formal bid.

11/28/06 Corus reports a 63 per cent increase in quarterly profits.

12/10/06 Tata Steel raises its offer by 10 per cent and makes an offer of GBP 5.5 billion including
debt, worth 500p a share in cash.

12/11/06 CSN raises its formal offer for Corus from 500p to 515p a share in cash.

1/21/07 Corus accepts a 515 pence per share offer from CSN, but speculation in the financial
markets anticipating a counter offer resulting in Corus‘s shares closing at 545 p per share, well
above CSN‘s latest offer.

1/27/07 Tata Steel and CSN agreed to terms for an auction that will begin January 30 at 4:30 p.m.
London time and end by 2:30 a.m. with an announcement of the winner by 3:00 a.m. There would
be up to nine rounds of bidding.

1/31/07 The ―battle for Corus starts. It is seen as a clash of two steel titans: Ratan Tata and CSN‘s
Benjamin Steinbruch.

2/1/07 After three months of bids and counter-bids, Tata Steel wins a fiercely contested 8-hour
closed-door auction against Brazil‘s CSN for Corus. Tata Steel acquires 21.1 percent of the equity
share capital for 608 pence per share ($11.7), besting the CSN bid of 603 pence, paving the way
to acquire Corus.

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4/2/07 The courts officially approved Tata Steel‘s acquisition of Corus in a deal valued at GBP 6.2
billion ($12 billion dollars).

4/11/07 Tata Steel‘s board of directors meet on 4/17 to consider proposals for raising equity funds
to finance the Corus acquisition. Tata Steel shares trade at Rs. 495.55 on the Bombay Stock
Exchange.

4/18/07 Tata Steel announces that it has deployed teams to work on synergies in areas of
manufacturing, procurement, logistics, marketing, iron and steel making. By the end of May, long-
term strategic issues and specific areas of synergy were close to conclusion.

4/28/07 Tata Steel announces it will raise $4.1 billion equity capital as partial payment for Corus
using a rights issue and a convertible preference share issue along with other financial methods.

5/4/07 Tata Steel borrowed $7.3 billion in loans as part of its long-term financing arrangements in
the takeover of Corus. It took advantage of high liquidity in the leveraged loan market and went
with a long-term arrangement with Citigroup,Standard Chartered and ABN Amro.

5/17/07 Tata Steel announced plans that would potentially make it the second largest steelmaker
in the world within five years. Manufacturing capacity is planned to increase from about 25 million
tons a year to 40 million by 2012, and then to 50 million by 2015.

After the final round of bidding and when the results were awaited Ratan Tata seemed to
have asked Muthuraman to prepare two speeches viz., (a) on conceding defeat and (b) on
winning the bid. A group of executives from Tata Steel described on what Muthuraman
had to say about his writing the two speeches.

“When Mr. Muthuraman tried to write the speech on conceding defeat; he could not write
anything for long; his hand writing which is usually neat and beautiful was illegible with
number of overwriting. After a lot of attempts he was able to write one. Whereas, he could
smoothly and in beautiful hand writing wrote the winning speech.

During the final rounds of bidding, the top management team of the Tatas including Ratan
Tata, Muthuraman, Kaushik Chaterjee and their key support staff were in a secluded
location that was inaccessible to others. Further, all their communication devices were
changed in order that the competitors of the bidding or the rivals had any access to the
discussion of the negotiating team of the Tatas.

16
Deal Structure/ Funding

The terms of the Revised Acquisition valued the entire existing issued and to be issued ordinary
share capital of Corus at approximately £6.2 billion ($12.04 billion), and the revised offer price of
608 pence.

Once the acquisition was completed, at the Board Meeting held on April 17, 2007, the Board
approved the following sources of funding Tata Steel's investment of USD 4.1 billion (about
Rs.177.5b) in its wholly-owned subsidiary Tata Steel Asia Holdings (Singapore) Ltd. (which
would in turn invest the same in Tata Steel UK which acquired Corus plc. U. K).

i) A Rights Issue of equity shares to the shareholders in the ratio of 1:5 at a price of Rs.300 per
share (Face Value of Rs.10 each). This would involve issue of equity shares at a face value of
Rs.1220m and provide Rs.36.55 b (USD 862 million)3.

ii) A simultaneous but un-linked Rights Issue of Convertible Preference Shares in the ratio of 1:7
having a coupon rate of 2% with conversion into equity shares after two years at a price in the
range of Rs.500 to Rs.600 per share as may be determined at the time of the issue. This issue would
provide a total amount of about Rs.43.50b (about $1000 million).

iii) A foreign issue of an equity-related instrument up to an amount of up to $500 million (about

Rs. 21b including the premium) in such form as may be considered appropriate. This issue would
be made on an ex-Rights basis and on terms as may be determined at the time of the issue subject
to approval of the shareholders.

The post-tax cost of this total financing package on completion was expected to be around 4.3%
per annum.

The long term financing pattern for the net acquisition consideration of Corus would be $12.9
billion and Tata Steel UK would be funded in the long term from the following sources:

On May 3, 2007, Tata Steel announced the refinancing of its GBP 3,620 million acquisition bridge
facility and revolving credit facility that had been provided by Credit Suisse, ABN AMRO and
Deutsche Bank to fund its acquisition of Corus Group. A syndicate led by Citigroup, ABN AMRO
and Standard Chartered Bank agreed to provide refinancing by way of non-recourse Facilities
totaling GBP 3,170 million (the "Refinancing Facilities"). This refinancing was expected to
provide significant benefits and flexibility over the terms of the earlier financing facility provided
by Credit Suisse, ABN AMRO and Deutsche Bank.

The Refinancing Facility comprised of a five year GBP 1670 million amortizing loan that would
be syndicated by the joint book runners to relationship banks of Tata Steel and Corus and a seven
year minimally amortizing term loan of GBP 1500 million that would be syndicated to institutional

17
investors and banks in the US, Europe and Asia. The balance amount of the acquisition bridge was
to be repaid by an additional equity contribution by Tata Steel / Tata Steel Asia.

At the Board Meeting of the Company held on July 30, 2007, it was decided to increase the
contribution from Tata Steel/Tata Steel Asia Holdings Pte Ltd. from U.S. $ 6.7 billion to about
U.S $ 7.4 billion. This increase would essentially be covered by increasing the amount of the
Rights Issue of 2% Convertible Preference Shares (announced earlier) from Rs 43.5b up to about
Rs 60b.

On August 6, 2007, as part of the long term financing plan, Tata Steel announced that it had priced
the issue of Foreign Currency Convertible Alternative Reference Securities (“CARS™”)
aggregating to US$ 725m with a green shoe option of US$150m. The CARS would be listed on
SGX (Singapore Exchange). The CARS would be convertible into either Qualifying Securities
(which may be in the form of depositary receipts with restricted rights of withdrawal representing
underlying ordinary shares with differential rights as to voting) or ordinary shares.

Long term Arrangement of funds by the Tata Steel Board

The CARS would be convertible at an initial conversion price of Rs.876.6225 per share, which
was at a premium of 35% to the Company's closing share price on the National Stock Exchange
of India Limited as on August 06, 2007. The CARS carried a 1% coupon and the effective YTM
was 5.15%. The outstanding CARS, if any, at maturity would be redeemable at a premium of
23.3419% of the principal amount. Citigroup acted as the sole global coordinator and bookrunner
to the offering with ABN AMRO Rothschild and Standard Chartered Bank acting as joint book
runners.

18
Details of Rights Issue of shares, convertible preference shares, and CARS

Rights Issue of Shares

Equity Shares in the ratio of one Equity Share for every five Equity Shares held at a price of Rs.300
per share (i.e. face value of Rs.10 each at a premium of Rs.290 per share); Issue Size is Rs. 36.54
billion.

Rights Issue of Convertible Preference Shares

The Company would issue CCPS of Rs 54.81b in the ratio of 1:7 to existing equity shareholders.
The six CCPS of the face value of Rs 100 each would be compulsorily and automatically converted
into one Equity Share fully paid up of Rs 10 each at a premium of Rs 590. The CCPS would be
compulsorily and automatically converted into Equity Shares fully paid up on September 01, 2009
without any application or any further act on the part of the CCPS holders. There would be no
redemption of the CCPS. On conversion of CCPS into Equity Shares, the Equity Share Capital
would increase to 822.1 m shares of Rs 10 each.

Convertible Alternative Reference Securities

The CARS carried a coupon rate of 1% paid semiannually in arrears on March 4 and September 4
except the last payment of interest, which would be paid on September 5, 2012. The CARS would
be issued in denominations of $100,000 each. Each CARS would have 4591.58 options.The
holders of CARS would have the right to convert their CARS at any time during the conversion
period. The conversion rights attached to the CARS might be exercised at the option of the holder
any time on or after September 4, 2011 and by 3 PM on August 6, 2012 or if such CARS had been
called for redemption by the issuer prior to maturity date then by 3 PM on the 7th day prior to the
date fixed for such redemption. The initial conversion price would be Rs 876.6625 per share at a
fixed exchange rate of Rs 40.25/$. The SEBI (Securities Exchange Board of India) floor price for
the same is Rs 691.83 per share.

Holding company format of Corus

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Impact of the Acquisition

1. Industry

As of 2003, L.N. Mittal’s vision of a few handful of players accounting for 80-100 million tonnes
(mt) of capacity each, seemed far-fetched, however within four years the dynamics changed. The
top five global steel players in 2007, accounted for more than 20 per cent of global production
(about 1.1 billion tonne). And Tata Steel, 56th in the pecking order, with Corus, ranked No. 9
brought the combined entity of Tata-Corus to No. 5 in the world steel sector.

The deal triggered a wave of reports on further consolidation. Arcelor Mittal and Posco planned
on cooperation. Nippon and Posco reportedly had a white knight agreement, by which they agreed
to come to each other’s rescue in the event of a predatory bid.

2. Otherwise

There was tremendous outpouring of nationalistic euphoria and economic patriotism in the Indian
press after this deal. During the early weeks of 2007, The Times of India ‘invited its readers to
discuss the new India poised for global supremacy‘. The Tata deal has fed an unmistakable
undertone of triumph as the country‘s status as the world‘s second fastest growing economy. For
the first time in 2006, overseas acquisitions by Indian firms exceeded the value of foreign
companies buying in India. PricewaterhouseCoopers Private Ltd. spoke on the importance of
corporate restructuring for India and noted that Tata Steel‘s acquisition of Corus was an
outstanding example of Indian corporate thinking.

What went wrong with the deal?

External

The Shadow of the Chinese Market: There was a flooding of cheaper Chinese steel into the
European markets which was responsible for distorting the global market conditions and putting
the UK steel makers under pressure. Tariffs couldn’t be raised as this would have resulted in
triggering off a trade war.

High Energy Costs: Energy intensive industries like steel mills were disproportionately hit by
high energy costs in the UK. The country’s green policies spilled the scope against heavy
manufacturing industries by green taxes, and by increasing the electricity costs significantly.

Financial Crisis: Decline accelerated after the 2008 financial crisis. This crisis muted the global
steel demand but caused the global oversupply of steel and at the same time the strong Britain

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pound hit manufacturing industries’ exports and production more commonly as the steel industry
was one of the most price-sensitive sectors

Market: Restrained performance of the construction sector, which is a main consumer of Steel,
resulted in the steel companies ending up in losses.

Internal

Lack of Control After Acquisition: From 2007 onwards, the British operations of Tata Steel
never made any money, and there was no visibility of its success. Clear success of a merger or
acquisition could be delivered only by taking control of the acquisition. If that doesn’t happen
immediately, it is bound to not have the expected results

Diseconomies of scale: in its strategy to become the world’s 5th largest steel manufacturer,Tata
steel paid a very high price, did not consider diseconomies of scale that could occur when a
business grew so large that the per-unit costs increased, and managing the larger work force
became difficult. As an entity grows and covers a larger geographical area or employs more people,
a principal agent problem arises, leading
to lower productivity and profitability. Tata is an old, successful steelmaker and its unwillingness
to change the leadership, culture, processes involved, after acquisition had brought more
complexity that affected the efficiency and the outcome of the acquisition.

Paying too much for the Acquisition: In an urge to make more deals, and bigger deals, like most
of its other acquisitions, Tata’s acquisition of Corus also did not create value as the cost of
acquisition was high. Tata paid much more than the acquisition was worth to Corus.

Did not achieve any kind of synergy: The combined entity did not realise Hard/Soft synergies
and also couldn’t save much by the way of process improvements and financial engineering. The
tax structure too, for the combined entity wasn’t lower than the blended tax rates of the individual
entities

All in all, the deal wasn’t successful as they delayed in implementing and restructuring
management structure. It did not recognise predictable issues that could have been anticipated.
These creeping changes and the uncertainty that lasted for months drained the value from its
acquisition. It failed to mend the various technical aspects as well as the different cultures.

21
Subsequent Performance

The Tata Corus deal was the largest private sector deal entered into by an Indian company out of
India. There was a hint of suspicion on how well the companies would integrate in the post
acquisition scenario since the culture and perspectives of the companies and their
employees/management were seemingly different from each other. Tata Steel hence formed a
seven-member integration committee to spearhead its union with Corus. The company also created
several task force teams to ensure integration of a specific set of activities in the two entities for
smoother transactions. But from steel perspective, the firm’s steel manufacturing capacity from 18
million tonne per annum to 10 mtpa.

Corus added over $6 billion in debt at Tata Steel and cost India’s largest private sector steel
company its financial health and leadership in the home market. The group's earnings ever since
the acquisition has yo-yoed between profit and loss. In 2007-08, the group registered a net profit
of Rs 12,350 crore. This fell 60 percent to Rs 4,951 crore in the next year. Also. Moody’s Investor
Services downgraded Tata Steel’s rating from Baa2 (investment grade) to Ba1 (speculative grade).

In 2006-07 i.e., before TATA acquired Corus, TATA’s PAT as a percentage of Revenue was
16.28%. The same, after acquisition, came down to 9.36% in 2007-08 and further to 3.35% in
2008-09.

The amount of PAT in 2006-07, 2007-08, 2008-09 were 4,177 crores, 12,350 crores and 4,951
crores respectively. As compared to 2006-07 the amount of PAT was very high in 2007-08 i.e. in
post-acquisition. However, in spite of increasing revenue in 2008-09 which was 1,47,595 as
compared to 1,32,110 in the year 2007-08, there was decline in PAT. The important factor
responsible for such a state of affairs was increase in finance/interest charges.

It was merely 411 crore in 2006-07, but

increased to 3,290 crore in 2007-08 and
further to 4085 crores in 2008-09.
Undoubtedly, such spurt in interest charges
was because for the acquisition of Corus
Tata Steel had borrowed huge funds from
outside.

22
In 2006-07 the EBITDTA margin was 30.80%,
which slipped to 14.08% in 2007-08 and further
to 13.00% in 2008-09.

This increase in asset-turnover suggests that, after

acquisition, capacity utilization of fixed assets has
increased in TATA bringing benefit of large scale
of production to it.

The pre-Corus EPS of TATA i.e., in the year 2006-

07 was 73.06 which turned out to be 162.62 and
58.99 in 2007-08 and 2008-09 respectively i.e., in
the post Corus years. This means that after
acquisition, TATA has shown an increase in the
EPS the main reason would have been increasing
PAT. And further, this could have been mainly due
to substantial increase in revenue and sales. It
shows a sign of encouragement for the
shareholders of both the companies. However, in
2008-09 EPS showed a decrease as PAT slided
down.

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The decrease in current ratio was due
to large cash outflow of the company
for acquiring Corus in 2006-07. Cash
and bank balances was 10887.96
crores which has decreased to 4231.86
crores and 6148.36 crores in 2007-08
and 2008- 09 respectively. Current
liability in the year 2006-07 was
5444.19 crores which has increased to
26360.74 crores 2007-08 and again to
23093.30 crores in 2008-09.

The debt-equity ratio has increased

from 0.84 in 2006-07 to 1.99 in 2007-
08 with a marginal slip in 2008-09 i.e.
to 1.65. The principal reason behind
such increase in Debt Equity Ratio is
increase in investment in debts by the
company for acquisition of Corus.

In 2006-07 the dividend payout ratio

was 26%. But it declined to as low as
11% in 2007-08 owing mainly to
decline in equity dividend per share
and increase in NP after tax
preferential dividend. In 2008-09 it has
again increased to 30%.

24
In 2006-07, the P/E Ratio of the
company under study was 6.95 which
decreased in 2007-08 and 2008-09 to
3.92 and 3.12 respectively. This ratio
highlights the EPS reflected by market
share. This decline in P/E ratio has
been because of decline in market price
of the share.

In 2006-07, ICR was 16.38 which

became substantially low in 2007-08
and 2008-09. It was 3.46 and 4.32 in
2007-08 and 2008-09 respectively. For
acquiring Corus TATA borrowed
funds from outside due to which
interest amount increased quite highly.

In 2006-07 (Pre Corus), the

inventory turnover ratio was 46 days
which came down to 37 days in 2007-
08 (Post-Corus) which means after
acquisition the inventory was utilized
more efficiently. However, in 2008-
09 inventory turnover ratio again
went up to 56 days mainly due to the
recession that pulled down the sales
and also there was an increase in the
stock lying with the company.

In 2006-07 (Pre-Corus), debtors

turnover was 21 says which has
increased to 28 days and 39 days in
2007-08 and 2008-09 (Post Corus)
respectively. Thus, there was an

25
increase in the amount of debtor in 2007-08 and 2008-09 as compared to 2006-07.

Tata Steel Group and Tata Steel Europe: The share of Tata Steel Europe's turnover as part of
the total turnover of the group had declined steadily from 2007-08, when it stood at 76.2 percent.
In 2014-15, the share was down to 57.3 percent. While Tata Steel group witnessed a 6 percent
growth in turnover over the period, Tata Steel Europe whereas saw a 20 percent decline in turnover.
Clearly, Tata Steel Europe has been a drag on the group.

Viability of the deal

Its’ safe to say that the acquisition was not cheap for Tata. The price paid represents a significantly
high approximately 50% premium over the closing mid-market share price of Corus on 4 October,
2006 and a premium of around 70% over the average closing market share price over the last year.
Also, the deal being an all cash one automatically makes it more expensive, as there is a significant
cash outflow from Tata Steel in the amount of £1.84 billion. Also, if we consider the customer
sentiment, it was in a similar direction as immediately after the acquisition announcement, Tata
Steel’s share price fell by 10.7 percent. But during 2007, benefits of the merger for Tata were
realized in manufacturing, wherein we see that benefits for Corus were gained through reductions
in taxes and shared services.

On whether the Tatas have over paid to acquire Corus, Mr. Muthuraman’s, Tata Steel MD
responded as follows:

“We had predetermined the value beyond which we do not pay and we stuck to it. Perceptions can
vary about the value of the assets. What analysis is seen is the present; they are not picking the
future perspective. If you recall, even in Tata’s embarked on the car project there were a lot of
apprehensions about. Tata motors venturing into passenger car segment. The industry is run by
long term views if organization also starts taking short term view we will all be hedge funds. There
will be no assets creation in the economy; the stock market has been harsh. You have to take a
total perspective of the future of the steel industry.”

“In terms of some numbers, at the price at which Tata Steel is acquiring Corus which is 608
pence/share, the enterprise value per tonne is roughly little more than USD 700-710 a tonne or so
and today if you want to create a new Greenfield capacity, going downstream as much as Corus
has in terms of tinplate capacities, in terms of galvanizing for automobile applications, in terms of
going downstream into construction solutions, in terms of going downstream into service sectors
and facilities required for ready to use end products. Such capacity anywhere in the world would
cost somewhere between USD 1200-1300 per tonne.

26
So in terms of EV per tonne its about $ 710 which is less than the industry average for transactions
which have taken place in the last 5 to 6 years. In terms of EBITDA multiple it is about 9 times on
the last 12 months 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 there is a good reason for it and before
any of you ask me I thought I must explain it upfront. It is very important that we have the right
utilization of the assets to bring the best out of the assets to create value which is why you are
going to have an EBITDA multiple which will be better than say 5 or 6 or 7 like that. So to that
extent it represents roughly an average of the industry EBITDA multiples of the last few
transactions of which some of them are higher and some of them are lower.

Valuation Analysis for the Deal

The valuation was done using FCFF and relative valuation methods. The FCFF valuation involved
assumptions used for projective future cash flows.

Assumptions

The sales growth and COGS as a percentage of Revenue is considered to be the historical average
of the past 10 years. The duration is taken longer as short term fluctuations should not deviate the
projections. The depreciation is averaged as a percentage of PPE. This is an approximation as the
capital expenditure projections are taken using the PPE growth. The tax rate is taken as 30% as an
indicator of corporate taxation in the UK. SG&A is taken as a proportion of Revenue for the last
five years. Taking a long duration in such aspects may not be ideal as there may be lower costs in
the recent years.

WACC

The WACC calculation is done using the deal financing numbers. The Debt to Equity ratio was
taken from the deal financing numbers. The Beta for Corus is taken from the Capital Line database
having the value of 2.41 and the risk-free rate is based on the average 10-year government bond
yield during the period 2006. The cost of debt is taken considering Tata Steel’s credit rating of
BBB which has a spread of 2.25%.

FCFF Valuation

The present value of the Standalone company Corus is estimated to be 6.182 billion USD. This
value should be added to the estimated synergies calculated by Tata Steel. The first bidding of Tata
Steel for Corus was about 9.2 billion USD and it was further countered. The final purchase price
was 11.3 billion USD.

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Relative Valuation

The relative valuation was done using comparative peer companies. The companies used were
CSN (who was the bidding rival for Tata steel), Nucor, Arcelor Mittal and POSCO. The relative
valuation matrices used were EV/EBITDA, P/E and EV/Ton. The values come to be very spatially
spread. The EV from Net Income comes out to be 5.69 billion USD and the EV from tonnage
capacity comes out to be 29.08 billion USD. Tonnage valuation is not exact as it involves capacity
of output and assumes a fixed industry cost of production per ton whereas the cost of production
in the UK is less than industry value.

Risks

● The risk that the supposed cost synergies of 350 million pounds might not get realised and
Tata Steel would end up paying a high premium without benefits
● The merger put thousands of jobs at risk due to cost cuts and there was a possibility of
backlash from the employees
● The possible slump in steel demand in UK as it was a mature market
● Exchange rate risk
● Huge interest costs due to the debt undertaken and the burden increasing if revenues not
increasing in the same proportion
● Cyclicality of the business and the possible losses due to the unforeseen financial recession

Learnings from the Project

● The financing was not a direct stock or cash financing but involved complex alternatives
like Rights, Convertibles, etc.
● The concepts of cross border acquisition risks involved which were studied in the cases
was applicable to the Tata Corus deal
● The projections of a positive deal NPV may make a deal attractive but the assumptions
need to always be verified in the process. The further performance of Corus post acquisition
has been reported in negative light as compared to the projections.
● Going into a bidding war with a competitor for acquiring a company may lead to shelling
out more than anticipated money and valuing unacceptably high price to the company to
maintain brand reputation and flow
● Once a deal seems positive, the numbers can be modified in a small way and showcase
them such that they can be made positive. This may lead to Hubris' motive of feeling
confident/overconfident that the company can be turned around.

28
References:

- Annual Report of Tata Steel, 2006-07, 2007-08 and 2008-09.

- Corus, Annual Report, 2006-07,

http://www.corusgroup.com/file_source/StaticFiles/Functions/Financial/2006_Annual_Report.pd
f

- Corus, Annual Riview, 2005, „Raising the Game‟

http://www.corusgroup.com/file_source/StaticFiles/Functions/Financial/2005_Annual_Review.p
df

-Broker reports, Earnings calls, investor presentation, press releases - Thomson Financial,
CLSA, etc.

-White papers, journals, newspaper articles

-https://www.bloombergquint.com/business/lessons-tata-steel-learnt-from-its-corus-acquisition-
or-not

-https://www.wsj.com/articles/SB117023684266393541

-Business Standard, October, 20, 2006, “Corus Accepts takeover bid by Tata Steel”

-https://www.ibef.org/industry/steel.aspx

-Chaudhary, C, May 18th 2007, „Effects of Consolidation on the Global Steel Market:
Implications of Cross Boarder M&A and Intra-Company Trade‟, Organisation for Economic
cooperation and development. http://www.oecd.org/dataoecd/51/57/38680802.pdf

-Bhaskaran, B. Prof & Hotchandani, S., 2006, Will the expansion strategies of Tata Steel
pay off?

-Goldstein S & Doyle, A, 31st Jan 2007, „Tata steel‟s $12.1 billion bid wins war for corus‟,

- Marketwatch, http://www.marketwatch.com/news/story/tata-steels-121-billion-
bid/story.aspx?guid=%7B883BBFDC-162E-48B8-8A05-5390D8AC7D82%7D

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