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TATA STEEL’S

ACQUISITION OF
CORUS
CASE STUDY
RATAN TATA, CHAIRMAN OF TATA STEEL, SAID:

 “This proposed acquisition represents a defining


moment for Tata Steel and is entirely consistent
with our strategy of growth through international
expansion. Corus and Tata Steel are companies
with long, proud histories. We have compatible
cultures of commitment to stakeholders and
complementary strengths in technology,
efficiency, product mix and geographical spread.
Together we will be even better equipped to
remain at the leading edge of the fast changing
steel industry.”
JIM LENG, CHAIRMAN OF
CORUS, SAID:
 “This offer from Tata Steel reflects the substantial value
created for Corus shareholders since the placing and open
offer and launch of our “Restoring Success” programme in
2003. In the middle of last year, my board agreed a
strategic way forward for Corus to seek access to low cost
production and high growth markets. Consistent with this,
the Company held talks with a number of parties from
Brazil, Russia and India. This transaction represents the
culmination of these talks. This combination with Tata, for
Corus shareholders and employees alike, represents the
right partner at the right time at the right price and on the
right terms. This creates a well balanced company,
strategically well placed to compete in an increasingly
competitive global environment.”
INTRODUCTION
 On January 31st 2007, India based Tata steel
acquired the Anglo Dutch steel company Corus
Group plc for US $ 13.7 billion .
 The merged entity, Tata-Corus employed
44000 people across 45 countries in the
world.
 It had the capacity to produce 28.1million
tons of steel per annum, making it the sixth
largest steel producer in the world as of early
2007
INTRODUCTION
 Tata Steel outbid the Brazilian steel
maker CSN final offer of 603 pence per
share by offering 608 pence per share to
acquire Corus.
 Tata Steel had first offered to pay 455
Pence per share of Corus , to close the
deal at US $ 7.6 Billion on October 17th
2006. CSN then offered 475 pence per
share of Corus on Nov 17th 2006
INTRODUCTION
 Finally , an auction was initiated on
January 31st 2007 , and after nine rounds
of bidding , Tata steel could finally clinch
the deal with its final bid 608 pence per
share, almost 34% higher than the first bid
of 455 pence per share.
 Many analysts and Industry experts felt
that the acquisition deal was rather
expensive for Tata Steel and this move
overvalue the steel industry world over.
PROFILE - TATA STEEL
 Tata steel is a part of the Tata Group,One
of the largest diversified business
conglomerates in India.

 Groups market capitalization was US $ 63


billion as of 2008.

 Group companies generated revenues of


US $ 70.8 billion in the financial year 2008-
09.
PROFILE - TATA STEEL
 Tata steel generated sales of 17452
crore in financial year 06-07.The
company’s profit in the same year was
Rs 4222.
 Tata steel operating margin were 40% in
the year 2007.

 The company produced around 5 million


tonnes of crude steel in 2007.
PROFILE - TATA STEEL

 Global presence in over 50 developed


European and fast growing Asian markets,
with manufacturing units in 26 countries.
 Ranked 56th producers in the world before
Acquisition and ranked 5th after acquisition,
with an annual crude steel production
capacity of 28 Million Tonnes Per Annum
(MTPA).
 Self sufficient in raw material – Iron Ore
100 % ,Coal- largely self sufficient.
 One of the lowest cost producers of steel in
the world.
 Strong retail and distribution network in
India and South East Asia.
PROFILE - CORUS
 Formed on 6th Oct 1999, through merger of 2

companies : British Steel and Koninklijke

Hoogovens
 Corus has manufacturing operations in many

countries with major plants located in the UK,

The Netherlands, Germany, France, Norway and

Belgium
 The company produced around 18 million tonnes

of crude steel in 2005.


PROFILE - CORUS
• Annual turnover of £9.1 bn , with 47,300
employees worldwide

• Major manufacturing sites in UK, Netherlands,


Germany, France and Belgium & sales
offices/service centres in over 40 countries
PROFILE - CORUS
 9th largest steel producer in the world and
the 2nd largest producer in Europe

 Consist of four divisions : Strip products, Long


products, Aluminum and Distribution, Building
system.
PROFILE - CORUS

 Supplier to many of the most demanding


markets worldwide including construction,
automotive, packaging, engineering

 Corus was acquired by Tata Steel in 2007


and is now part of Tata Steel Group, which
is the 6th largest global steel producer
BUSINESS CULTURES OF TATA &
CORUS
TATA STEEL CORUS
Continuous improvement Continuous improvement
program “ASPIRE” program “The Corus
Way”
Core Values : Core Values- Code of Ethics
Trusteeship Integrity
Integrity Creating Value in Steel
Respect for Individual Customer focus
Credibility Selective Growth
Excellence Respect for our people
World class governance World class governance
SPREAD OF MARKETS
Before the acquisition After the acquisition

Europe
India Asia
Asia (ex 8% 9% 37% UK
8%
23% India) 22% North
ROW America
69%
24% ROW
ACCESS TO NEW MARKET
Combined Entity has significant market presence in both emerging and developed
economies

Source :- Tata Steel FY 2005-06 Annual Report & Corus 2005 Annual Report
SWOT ANALYSIS OF TATA
STEEL:
 Strengths  Weakness
1. Lowest Cost 1. Corus was triple
Producer in the size of TATA
world steels in terms of
2. Experience of production
TATA group in 2. Quality of Steel
doing global was not of
acquisitions International
3. Low debt to standards
equity ratio
SWOT ANALYSIS OF TATA
STEEL
 Opportunities  Threats
1. To get exposed 1. Brazilian player
to the global CSN
steel market 2. Russian player
( will save time Severstal
and learning
space for them)
2. Consolidation
trend in Steel
Industry
SWOT ANALYSIS OF CORUS
 Strengths  Weakness
1. World’s ninth
largest and Europe’s
1. Corus was
second largest steel
producer bleeding because
2. Wide range of of high
products operational costs
3. Presence of
operating facilities 2. Low operating
spread in whole EU margin
SWOT ANALYSIS OF CORUS
 Opportunities  Threats
1. Consolidation 1. Huge pension
trend in Steel liability might
Industry have led to
2. To get right price collapse of the
at a time when deal
market is less 2. Disagreement of
volatile Labor and
government due
to possibility of
job cut
TOP TEN PLAYERS IN STEEL
INDUSTRY
S.NO. COMPANY CRUDE STEEL PRODUCTION (in
million tons)
1 Arcelor Mittal 109.7

2 Nippon steel 32.9

3 POSCO (South korea) 30.5

4 JFE Steel (Japan) 29.9

5 Tata Corus 27

6 Baosteel (China) 22.7


7 US Steel 19.3

8 Nucor 18.4
9 Riva (Italy) 17.5

10 Thyssenkrupp (Ger) 16.5


INDIA STEEL PRODUCTION/CONSUMPTION
2007

PRODUCTION CONSUMPTION PER CAPITA


(million tonnes) million tonne CONSUMPTION
INDIA 53 59 49 KG

CHINA 489 432 318 KG


REASONS FOR TATA STEEL TO BID
 To tap European Mature Market.
 Cost of acquisition is lower than setting up of
Green field plant & marketing and
distribution channel.
 TATA manufactures Low Value ,long and flat
steel products ,while Corus produce High
Value Stripped products.
REASONS FOR TATA STEEL TO
BID
 Helped TATA to feature in Top 10
players in world.
 Technology Benefit.
 Economic of scale.
 Corus holds number of patents and
R&D facilities.
REASONS FOR TATA STEEL TO
BID
 The powerful combination of low cost
upstream production in India with the high
end downstream processing facilities of
Corus will improve the competitiveness of
the European operations of Corus
significantly.
 The combination will also allow the cross-
fertilization of R & D capabilities in the
automotive, packaging and construction
sectors and there will be a transfer, from
Europe to India, of technology, best
practices and expertise of senior Corus
management.
STRUCTURING AND PRICING A
DEAL
 The enterprise value of Corus including debt
and other cost was estimated at US $ 13.7
billion

 Tata Steel decided to go in for an all cash


deal rather than opting for a share –swap
 As per the acquisition plan a special purpose
vehicle, a wholly owned subsidiary, called
Tata Steel UK would be set up by Tata Steel.
STRUCTURING AND PRICING A
DEAL
 The acquisition was proposed to be effected
under section 425 of the English Companies
Act 1985 and upon approval from the Corus
shareholders
 The acquisition was to be structured as a 100
percent leveraged buy out funded through
cash resources and loans raised by Tata Steel
and the SPV
HOW TATA FINANCED THE DEAL- COMBINED
GROUP STRUCTURE

Tata Steel
100 %

Tata Steel Asia Holding


Pvt. Ltd
100 %

Tata Steel UK Ltd.


100 %

Corus Group Plc


FINANCING THE ACQISITION
 To raise the require funds , Tata Steel opted
for for a mix of debt (US $6.14 Billion ) and
equity ( US $ 7.56)
 It was planned that the acquisition would be
completed through Tata Steel’s UK special
purpose vehicle (SPV) named Tata Steel UK
 Tata steel UK planned to raise US $6.14
Billion through a mix of high yield mezzanine
and long term debt funding . Most of these
loans were secured by the cash flows and
assets of Corus.
FINANCING THE ACQISITION
 To provide for immediate funding of the
acquisition , Tata Steel’s Singapore SPV
raised US $ 2.66 billion through bridge loans
 Banks like ABN Amro , Deutsche Bank , Lloyds
and Standard Chartered bank , agreed to
provide bridge loans to the company.
 Tata steel’s own contribution in the Corus
deal amounted to US $ 4.9 billion .
FINANCING PLAN OF TATA STEEL EQUITY
Financial just before
Acquisition TATA Steel Corus
2006-07 2006-07 31st
crores $ Mn Dec,2006

Turnover 17453 4078 18979

EBITDA 7288 1704 1846

PBT 6660 1440 610.35

PAT 4222 971 446

Net Profit 23% 23% 2.35 %


Margin

EPS 72.74 1.70 0.41


TISCO NET SALES & PAT
In Rs-crores

YEAR NET SALES PAT OPM


2004-05 14490 3474 41%
2005-06 15132 3506 38.9%

2006-07 17453 4222 39.6%

2007-08 19654 4687 41.9%

2008-09 24348 5202 37.7%

2009-10 25022 5046 38 %


TISCO(CONSOLIDATED) NET SALES & PAT
In Rs-crores

YEAR NET SALES OPERATING PAT OPM


PROFIT
2007-08 131536 13645 12350 14.1%

2008-09 147329 13862 4951 12.6

2009-10 102393 (2120) 9.1%


5 YR. FINANCIAL
PERFORMANCE OF CORUS
Category Unit FY`02 FY`03 FY`04 FY`05 FY`06

Production `000 Mt 17.1 19.4 19.5 18.7 18.8

Revenue $ Mn 11456 10018 12165 10845 12845

EBIDTA $ Mn 512 305 1251 1142 1846

EBIDTA % 4.47 % 3.04% 10.28% 10.53 % 14.37 %


Margin

PBT $ Mn - 644 - 321 766 649 610.35

Net Profit $ Mn - 741 - 388 593 512 446

Net Profit % - 6.47 - 3.87 4.87 4.72 3.47 %


Margin
TISCO’S SALES & PAT
30000

25000 24348

19654
20000
17452
15132
15000 14489
sales
10000 PAT
4687 5202
5000 3474 3506 4222

0
2004-05 2005-06 2006-07 2007-08 2008-09
KEY FINANCIAL RATIOS
2009 2008 2007 2006 2005

EPS 69.70 63.85 72.74 59.91 42.18

Dividend / 16 16 15.5 13 13
share

OPM % 37.68 41.94 39.61 38.88 41.1

Debt/equity 1.34 1.08 .69 .25 .38

RNOW 19.87 20.42 31.19 36.44 50.27


EARNING ESTIMATES
2010/2011

2009 2010 2011

PROFIT 5202 5046 5872


EPS 42 72 85
PE 38 22 18
RATIO
SHARE HOLDING PATTERN
share holding pattern

20.55 20.83

foreign
Domestic
Institutions

58.16
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)

Enterprise Multiple = EV/EBITDA


VALUING THE ACQUISITION
EV = Mkt Cap. + Pref. Stocks + Min. interest + Long
Term debt - Cash Equivalent
= 3.5 billion + 0 + 26 million + 1600 million – 871
million
=£ 4.255 billion. 
EBITDA = £ 947 Million(From Con. Operations)

Enterprise Multiple= EV/EBITDA


= 4.255/.947
= 4.4931 X
WHY ENTERPRISE MULTIPLE RATIO ???

 EV/EBITDA is not affected by the capital structure of


a company;
 It allows fair comparison of companies with different
capital structures.
 We have a transnational comparison in our case and
EV/EBITDA ignores the distorting effects of
individual countries taxation policies.
PEER COMPARISON
Peer Comparison for FY 2006

Ratio’s Corus CSN Severstal Nucor

EV/EBITDA 4.5 X 6.29 X 18.98 X 9.14 X

EV/TON 538 2263 3221 864

Price/Book 1.34X 0.90 X 4.76 X 1.72 X


Value

P/E Ratio 14.96X 4.69 X 43.5 X 15.13 X

EPS 0.41$ 2.12 $ 1.27 $ 3.06 $


TATA STEEL BEFORE & AFTER…
2006-07 2007-08 2008-09

EBITDA/Turnover 31.14% 14.08 % 12.55 %

PBT (In crores Rs) 6313 16371 6743

PAT(In crores Rs) 4165 12321 4849.24

PBT/Turnover 24.61 % 12.39 % 7.43 %

Interest Coverage 16.35 3.46 4.32


Ratio
EPS 64.66 177.18 66

Debt /Equity 0.71 1.99 1.65

P/E 6.95 3.91 3.12


A FINANCIAL TAKE ON THE
ACQUISITION.
1. Valuation
• TATA Steel Paid 7 Times EBITDA of Corus Enterprise Value
• Also,9 times EBITDA for 12 Months ended 30th September 2006

Comparing with Arcelor - Mittal deal-


• Mittal Steel Acquired at an EBITDA of 4.5 times,
• The point is Arcelor has much superior assets, wider market
reach and financially stronger than Corus

The price paid by Tata Steel looks almost obscenely


high.
A FINANCIAL TAKE ON THE
ACQUISITION
2. Interest charges
 New Debt of $ 8 bn @ 8% annual
interest cost i.e. $ 640 mn
 Corus’s existing interest debt amounts
to $ 725 mn.
Galvanized
Hot Roiled Rebars
Sheets
Coils / wire,
Cold Rolled
Galvanized
Sheets
Hot Roiled Roads
Rebars wire
Leading Position Coils / Sheets
Sheets
Coils / wire,
Cold Rolled
Sheets Roads wire
Coils / Sheets
Leading Position
Advanced high- strength
Hot Roiled Steel Superior Automotive
Corus Coils / Rail Steel Rods for Tyre cord
Leading Position Sheets Structural Sections
AdvancedSteels
Packaging high- strength
Tin Plate
Corus Steel Superior Automotive
Hot Roiled Rail Steel Rods for Tyre cord
Coils / Structural Sections
Leading Position Sheets Packaging Steels Tin Plate
 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 charges of $400
million on an annual basis implies that the
combined entity’s interest obligation will
amount to approximately $725 million after
the acquisition.
BACKGROUND NOTE-CORUS
 The history of Corus can be traced back to
the early 20th century when it was founded
by the Government of Netherlands in The
Hauge on September 20,1918.
 On October 1999 the company merged with
British Steel to form Corus Group, the
world’s third largest Steel producer during
that time.
 In 2006, Corus reported an annual turn over
of pound 9 billion. The company had four
divisions-Almunium,Distribution & Building
products,Long products& Strip products.
 The debate whether Tata Steel has overpaid
for acquiring Corus is most likely to be
certain, since just based on the numbers
alone it turns out that at the end of the
bidding conflict with CSN Tata ended up
paying approximately 68% above the average
price of Corus’shares.
NONRECOURSE DEBT OR A
NONRECOURSE LOAN
 Nonrecourse debt or a nonrecourse loan is a
secured loan (debt) that is secured by a pledge of
collateral, typically real property, but for which the
borrower is not personally liable.
 If the borrower defaults, the lender/issuer can seize the
collateral, but the lender's recovery is limited to the
collateral.
 If the property is insufficient to cover the outstanding loan
balance (for example, if real estate prices have dropped),
the difference between the value of the collateral and the
loan value becomes a loss for the lender.
 Thus, non-recourse debt is typically limited to 50% or 60%
loan-to-value ratios, so that the property itself provides
"overcollateralization" of the loan.
 Quasi-Equity: A specialized form of private
equity, characterized chiefly by use of
subordinated debt, or preferred stock with
an equity kicker
 Subordinated debt has a lower priority. Because
subordinated debt is repayable after other debts have
been paid, they are more risky for the lender of the
money.
 Subordinated loans typically have a higher rate of return
than senior debt due to the increased inherent risk.
 In leveraged buyouts, mezzanine capital is used in conjunction
with other securities to fund the purchase price of the company
being acquired. Typically, mezzanine capital will be used to fill a
financing gap between less expensive forms of financing (e.g.,
senior loans, second lien loan, high yield financings) and equity.
Often, a financial sponsor will exhaust other sources of capital
before turning to mezzanine capital.
 Financial sponsors will seek to use mezzanine capital in a
leveraged buyout in order to reduce the amount of the capital
invested by the private equity firm. Because mezzanine lenders
typically have a lower target cost of capital than the private
equity investor, using mezzanine capital can potentially enhance
the private equity firm's investment returns. Additionally,
middle market companies may be unable to access the
high yield market due to high minimum size requirements,
creating a need for flexible, private mezzanine capital.
 During the year, the Company completed the
long term financing programme for the Corus
acquisition.
 Of the total Enterprise Value of USD 14.2 billion,
at the close of the Corus acquisition process on
April 2, 2007, the financing included around USD
10.5 billion as bridge funding, the balance being
applied out of Tata Steel’s own cash and
borrowings.
 Despite very volatile credit markets globally, the
company raised around USD 6.2 billion of term
debt with an average life of around 5 years at
very competitive terms.
 This debt being non - recourse in nature was
determined based on the cash flow servicing
capability of our European operations and
will be serviced by the Tata Steel UK (Corus)
cash flows.
 The syndication of the above debt was
completed during the year with more than 25
banks and institutions participating in the
process.
 On the equity side, Tata Steel raised around USD
2.27 billion (Rs. 9,120 crores)of equity and
convertible preference shares on a rights basis.
 The Company further raised around USD 875
million in Convertible Alternate Reference
Securities (CARS) which is a 5 years convertible
instrument with a coupon of 1% and a conversion
premium of 35% to the prevailing market price in
August 2007.
 As a result of the above, your Company raised
around USD 10 billion during the year and
completed the long term fi nancing for the Corus
acquisition
TATA STEEL PERFORMANCE
HIGHLIGHTS 2010
 Tata steel group results were enhanced by
dramatic turnaround in the performance TS
Europe , which reported a positive EBIDTA of
Rs 2303 crores in H2 FY10 compared to an
EBIDTA loss in H1 FY10 of Rs 3655 crores
MODE AMOUNT (in US $ Break-up of Tata
Billion) Steel Equity
Contribution in US
Million
Tata Steel UK 6.14
Tata Steel Singapore 2.66
Tata steel Equity 4.9
contribution
Cash reserve 700
External commercial 500
borrowing
Preference shares 640
to Tata sons
Rights issue……………. 862
Convertible 1400
Preference shares
Foreign issue 798
Sub Total 4900
Grand Total 13.7
ENTERPRISE MULTIPLE

 1) It's useful for transnational comparisons


because it ignores the distorting effects of
individual countries' taxation policies.
 2) It's used to find attractive takeover
candidates. Enterprise value is a better
metric than market cap for takeovers. It
takes into account the debt which the
acquirer will have to assume. Therefore, a
company with a low enterprise multiple can
be viewed as a good takeover candidate.
 Keep in mind that enterprise multiples can
vary depending on the industry. Therefore,
it's important to compare the multiple to
other companies or to the industry in
general. Expect higher enterprise multiples
in high growth industries (like biotech) and
lower multiples in industries with slow
growth (like railways).
STEEL
 Steel is an alloy of iron and carbon
 Important engineering and construction
material in the world
 Used in every aspect of our lives
 Steel is made via one of two basic routes:

 Integrated (blast furnace and basic oxygen


furnace).
 Electric arc furnace (EAF).
 The integrated route uses raw materials
(that is, iron ore, limestone and coke) and
scrap to create steel.
 The EAF method uses scrap as its principal
input.
 Of the steel produced in 2005, 65.4% was
produced via the integrated route, 31.7% via
EAF and 2.9% via the other methods.
MANUFACTURING PROCESS
 At a steel mill, the crude steel production
process turns molten steel into ingots,
blooms, billets or slabs. These are called
semi-finished products.
 Typically, it takes 1.5 tons of iron ore and
about 450kg of coke to produce a ton of pig
iron,
 Finished steel products are forged from semi-
finished products

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