Tata Steel Acquisition of Corus

Prepared By: Abdurrahman Ozen Rajan Thakur

Trends in Global Steel Industry Growth After Decades of Stagnation and Low Profitability
World Crude Steel Production
Production Volume
1 400 1 200 1 000 80 0 60 0 40 0 20 0 0 5 5 6 6 7 7 8 8 9 9 0 0 0 0 5 0 5 0 5 0 5 0 5 0 5 6

Compound Annual Growth Rate
(Average % for 5 year periods)
20 0 18 0 16 0 14 0 12 0 10 0 8 0

(Million tons)

Production per Capita
(Kg / Capita)
19 1

1,24 4

1 2 1 0

8 6 4 2 0 25 5 0 5

6 6 7 0 5 0

7 8 8 9 9 0 0 06 5 0 5 0 5 0 5 * * 2006/200

6 0 5 5 6 6 7 7 8 8 9 9 0 0 0 0 5 0 5 0 5 0 5 0 5 0 5 6

Sources: IISI, World Steel in Figures 2007; Geographic Information Systems

Expected Trends in Global Steel Industry • Analysts View 2. The massive post-war infrastructure build in western countries led to sustained steel demand during the 30-year period between 1945 and 1975. “The coming decades would see similar infrastructure spending in emerging economies and steel demand would continue to

Effect of Demand on Global Steel Prices
90 0 80 0 70 0 60 0 50 0 40 0 30 0 20 0 10 0
US$ / ton

Supply Driven Privatization Cost Based

Demand Driven Consolidation Price Based
China + Global GDP

Asian Crisis Steel Crisis

Sep ’07 (USA)

37 0 Russian Crisis 20 8 0 1 0 2 0 0 0 5 4 3 HRC Europe* 0 6

38 4* *

0

8 9

9 9 9 9 9 9 4 3 2 1 0 China HRC Estimated 5 Costs (w/o General Expenses)

9 6

9 7

9 9 9 8 HRC US*

0 0

0 7 HRC CIS*

90 0 80 = 573 0 70 0 60 0 50 0 40 0 30 0 20 0 10 0 0

Source: CRU / WSD

* Constant dollars (July 2007) ** 2006 cost plus iron-ore price increase (9.5% abril 07)

US$ / ton

China has Been the Main Driver Behind Growth, Changing the Industry Structure
World Crude Steel Production
1975
Other Central & South America 11% North America 19% Central & South America Other 13% 4% 10% Western Europe 9% 11% CIS

2006
North America

3%

23%

22% U SSR

EU 25

16%

Japan

India

1% 5%

3% India 34% China

16%

China Japan

644 Million Tonnes

1,244 Million Tonnes
Source: IISI, World Steel in Figures 1976, 2007

Global Concentration Lagging Behind Other Metals, Suppliers and Key Customers
Industry Concentration, Top 5 Producers
81 % 66 % 49 % 72 % Top 7

40 %

38 % 28 % 20 %

Iron Ore
Sources:

Nicke l

Alumin a

Aluminu m

Coppe r

Z inc

Stee l

Automoti ve

Morgan Stanley Research, 16 Feb 2007

IISI, World Steel in Figures 2006

JD Power

The Other Driver Behind Growth & Profitability has been Industry Consolidation
Number of Steel Industry M & A’s
7 1 5 3 7 3

Amount
(US$ Billions) 6 8

2 4

2 8

2 004

2 005

2 006

2 004

2 005

2 006

Source: Bloomberg, Completed Deals

Impact Of Industry Consolidation will Become More Apparent in Coming Years
Tactic al Level

Strateg ic Level

• Scale economies and synergies • Better balanced steel inventories • Optimization of Cost / Production / Logistics • Global production / Local customer service • Optimal plant location

Tata Steel Background
• Tata Steel a part of the Tata group, one of the largest diversified business conglomerates in India. • In the mid- 1990s, Tata steel emerged as Asia’s first and India’s largest integrated steel producer in the private sector. • In February 2005, Tata steel acquisition the Singapore based steel manufacturer NatSteel, let the company gain access to major Asian markets and Australia. • Tata steel acquired the Thailand based Millennium Steel in December 2005. • Tata Steel generated net sales of 5 billion in the financial year 2006-07.

SWOT Analysis
Strengths :  Low Debt to equity ratio.  Lowest cost producer in world.  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 bidder.  Severstal Russian bidder.  No committed financers to support the deal .

Corus Background
• Hoogovens had good access to the sea for the supply of raw materials and export of finished goods. • The company was established at Ijmuiden, a town on the north sea coast with good access inland via the North Sea Canal. • On October 06, 1999, Hoogovens(38.3%) merged with British Steel Plc(61.7%) to form Corus Group Plc. • Philippe Varin(CEO) and Jim Leng chairman of Corus, both worked to revive the company’s business. • The company reduced debt by selling its

SWOT Analysis
Strengths :  World’s ninth largest and Europe’s second largest steel producer.  Wide range of products  Operating facilities spread in whole Europe Weakness  Corus was in bad shape because of high operational cost.  Section 201 tariff imposed by Bush administration in 2002 led to loss in Corus clientele. Opportunities  Consolidation trend in Steel Industry.  To get right price at a time when market is less volatile. Threats  Huge pension liability might have led to collapse of the deal.  Disagreement of Labor and government due to possibility of job cut.

The Highlights:

• On October 17, 2006 Tata steel made an offer of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion. • CSN(Companhia Siderúrgica Nacional) reacted quickly making a counter bid of 475 pence per share on November 17, 2006. • So an auction was initiated, after nine rounds of bidding on January 31, 2007 Tata emerged winner in the auction with its final bid of 608 pence per share for

Valuing the Acquisition
Method used Enterprise Value Multiple. Enterprise value (EV) represents a company's economic value -- the minimum amount someone would have to pay to buy it outright. EV = Mkt Cap. + Pref. Stcks + Min. interest + Long Term debt – Cash & cash Equivalent

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. Stcks + Min. interest + Long Term debt - Cash Equivalent = 3.5 billion + 0 + 26 million + 1308 million – 871 million =£ 3.963 billion.  EBITDA = £ 947 Million(From Con. Operations)

• 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

Why Enterprise Multiple ratio ???

Why Enterprise Multiple ratio ??? • EV/EBITDA is usually
inappropriate for comparisons of companies in different industries, as their capital expenditure requirements are different. • EV/EBITDA also strips out the effect of depreciation and amortization. These are non-cash items, and it is ultimately cash

FINANCING THE ACQUISITION
Mode Tata Steel UK - Non-recourse Debt Tata Steel Asia (Singapore SPV) Tata Steel Equity Contribution Cash Reserves External Commercial Borrowings Preference shares to Tata sons Right issue Convertible preference shares Foreign issue of Equity instruments Sub-total Grand Total Amount (In $ Billion) 6.14 2.66 4.9

Break-up of Tata Steel Equity contribution (In $ million)

700 500 640 862 1400 798 4900 13.7

SWOT Analysis
• Strengths 2. Corus takeover catapults Tata Steel from its current 65th place to No. 5 spot, with a combined capacity of 23.5 million. 3. Cost advantage of operating from India can be leveraged in Western markets and differentiation based on better technology from Corus can

SWOT Analysis
• Weakness
2. Corus EBITDA at 8% was much lower than that of Tata steel which was at 30% in the financial year 2006-07. 3. The merger requires high level of integration, for technology transfer and coordinating supply chains. 4. Where the Tata’s too keen??? The fact that Tata’s determination to acquire a British steel maker, symbol of Britain’s industrial power, was fuelled by patriotic passion against the old hegemonic order, and rechristening it

SWOT Analysis
• Opportunities 2. Chinese Steel plants dependence on imported raw material, limit their pricing power. 3. Corus strong research and technology development, would add to the competitive strength for Tata Steel. 4. The acquisition would open new markets and product segments for

SWOT Analysis
• Threats 2. Capacity additions by China, Russia and Brazil may outrun the demand growth and lead to subdued steel prices. 3. If the business performance of Corus declines, the company’s cash flows would reduce leading to a default on the loan taken

A Financial take on the Acquisition.
1. Valuation
Tata Steel is paying 7 times EBITDA of Corus enterprise value for 2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison, Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that Arcelor has much superior assets, wider market reach and is financially much stronger than Corus.

The price paid by Tata Steel looks almost obscenely high.

Reply to the criticism about the price paid being
• RatanTata chairman Tata group said, “ We have taken a view that we would not go beyond a point… We did not reach that point . Had we reached that point we would have walked away. Over bidding or not is

A Financial take on the Acquisition
2. Interest charges • Tata’s new debt amounting to $8 billion due to the acquisition, financed with Corus cash flows is expected to generate up to $640 million in annual interest charges (8% annual interest cost). • This amount combined with Corus existing interest debt will amount to approximately $725 million after the acquisition.

If the international steel prices decline moderately, Tata Steel would have to dip into its own cash flow or find other sources like an equity

• Key Ratios
2006 Debt / Equity Return on Equity 0.3 41.8 2007 0.7 36.5 2008E 1.8 22.1 2009E 1.6 24.8

If the projected synergies do not work to the tune expected, it may turn out to be a value destroying project