Session III - Tata-Corus

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7/28/2019 Session III - Tata-Corus

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Small Fish

Swallowsthe Big Fish

Acquisition

ofCorus

Tata Steel

“We think we started on sound andstraightforward business principles,considering the interests of theshareholders our own and the health andwelfare of the employees, the surefoundation of our success.”

-Jamsetji Nuservanji Tata, Founder

“The welfare of the labouring class mustbe one of the first cares of the employer.”– Sir Dorab Tata

It was the first time that the raw

materials of India did not go out andreturn as finished articles to be sold in thecountry. Above all, it was purely Swadeshienterprise financed by Swadeshi moneyand managed by Swadeshi brains.”

- Sir Dorab Tata describing the first shareissue in 1907

Tata SteelPerformanceHighlights 2006-07

Consolidated Turnover (excluding Corus) up by 23%at USD 6,311 million

• Consolidated EBITDA (excluding Corus) up by 20% at USD1,815 million

• Consolidated Profit After Tax (excluding Corus) up by 12% atUSD 961 million

• Highest ever Dividend: 130% + 25% special dividend

• Saleable Steel Production up by 8% at 4.93 million tonnes

• G blast furnace crossed 2 million tonnes production

• Highest ever annual production at HSM (3.24 Mtonnes) andCRM (1.5 Mtonnes)

• In-house upgradation of E blast furnace completed

Commissioning of 4’ Precision and 3’ Commercial

Tube Mill in Jamshedpur

• Gross Steel sales up by 8% at 4.79 million tonnes

• Sales to Automotive sector up by 29% at 0.86 million tonnes

• Global Supplier Approval received from Honda Engg. Services(Honda Car, Japan) for CRCA

• Sales of Branded Products up by 13% at 0.99 million tonnes

• Turnover of Branded Products up by 20% at Rs. 4,604 crores

(USD 1,059 million) – crossed USD 1 billion for the first time

• Consolidation of NatSteel Asia equity holding in Xiamen, Chinaand Vietnam

• Tata Steel (Thailand) integration process completes oneyear

Tata Steel Performance

Corporate Sustainable Responsibility at Tata

Globalization at Tata Steel

Tata Steel‟s Growth Strategy

Tata Steel

Acquisition of Corus: by

Tata SteelCorusCreated from the merger of British Steel andHoogovens

Corus was Europe's second largest steelproducer with

Revenues GBP 9.2 billion (in 2005) &

Crude steel production 18.2 million tons(primarily in U.K. and Netherlands)

Ninth-largest steel maker worldwide

Activities- 3 main divisions:∙ Strip products,

∙ Distribution and building systems division,

∙ Global network of sales & services offices

• It opened the bid for its 100% stake late in

• Tata (India) & Companhia SiderurgicaNacional (CSN) emerged as most powerfulbidder

Performance of Corus (2000-05)

Mergers

Acquisitions

Takeovers

Merger• A strategy through which two firms agree to

integrate their operations on a relatively co-equalbasis

Acquisition• A strategy through which one firm buys a

controlling, or 100% interest in another firm withthe intent of making the acquired firm asubsidiary business within its portfolio

Takeover• A special type of acquisition when the target firm

did not solicit the acquiring firm‟s bid for outrightownership

Mergers & Acquisitions

Cost new productdevelopment/increased

speed to market

Increased

diversification

Increased

market power

Avoiding excessive

competitionOvercomingentry barriers

Learning and

developing new

capabilities

Lower risk

compared to

developing newproducts

Reasonsfor

M&A Process

AnalysisDue

Diligence

Post Merge

Integration

Target

Identification Negotiation Deal

Closing

Date Line

Initially Corus agreed 455p a

share offer from India's Tata Steelon 20th October 2006, valuing the group at£4.3bn

But Standard Life, the largest investor inCorus (7.9% stake): terms were too low

Sir Anthony Bamford (Britain's leadingindustrialist): Tata's first bid was too lowand that it would damage Britain'smanufacturing 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 anindicative bid of 475p a share

Corus reported on November 29th a60% surge in third-quarter profits onthe back of booming Europeandemand for steel

Tata Steel on December 11th uppedits offer to 500p a share, valuingCorus at £4.7bn

CSN on the same day, raised its terms to 515p,valuing Corus at £4.9bn

The Corus board promptly recommended both therevised offers to its shareholders

Tata won the battle and acquired Corus on January31st 2007 upping their bid to 608p per share,valuing Corus at £6.7 bn ($11.3bn)

Corus's chairman Jim Leng became the group'sdeputy chairman.

Whereas the Brazilians CSN final offer in an auction

by the U.K.'s Takeover Panel was 603 pence

Financing of Corus Acquisition

Financing Plan of Tata Steel Equity

Corus Group

(in UK & The

Tata Steel -

Jamshedpur

NatSteel -

Singapore

Millennium

Steel -

Thailand

Tata Steel - Corus:Capacity before acqusition

(in M.Ton./annum)

Corus Gr.(in

UK & Nl)

Jharkhand

Jamshedpur

TS- Orissa TS-

Chattisgarh

NatSteel -

Singapore

Millennium

Steel -

Thailand

Tata Steel-Corus: Projected Capacity

(inM.Ton./annum)

Effect in Share market for both Tata & Corus

Shares of Tata felt more than 10 per cent inMumbai on 31st Jan 2007 following theconclusion of the auction, as some analystssaid the deal was expensive and could

strain Tata finances at least in the shortterm whereas,

Corus shares jumped 38p or 6.8 per cent inLondon 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)

The Acquisition was made by Tata SteelU.K.,

A wholly-owned indirect subsidiary of TataSteel, recently incorporated in the UK forthe purpose of completing the acquisition

Acquisition was effected by means of ascheme of arrangement:

∙ Under Section 425 of the (English)Companies Act 1985; subject to High Courtof Justice in England and Wales and

∙ Corus' shareholders approval

Total Global Production (1131.8 Mton)

Other Companies,

Arcelor Mittal

(Global), 120 Nippon Steel

(Japan), 32

Tata Steel

(India), 28.2

JFE (Japan), 29.9

POSCO (South

Korea), 30.5

Tata Steel leapfrogged from 56th to 5th position world wide after aquisition

Benefits from the deal

Enhanced scale positioned the combined

group as the fifth largest steel company inthe 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 theEuropean operations of Corus significantly

Financial Performance –Consolidated

(excluding Corus)

(FY 2006-07 vs FY 2005-06)

2005-06 2006-07

Rs.crores USDMillion Rs.crores USDMillion

22,272 5,123 Turnover 27,437 6,311

6,591 1,516 EBITDA 7,888 1,815

32% 32% EBITDA Margin 31% 31%

5,515 1,269 Profit before Tax 6,313 1,452

3,735 859 Net Profit 4,177 961

67.62 1.56 EPS (Rs per share) 73.06 1.68

∙ The cross-fertilisation of research anddevelopment capabilities

∙ A transfer, from Europe to India, of technology, best practices and expertise of senior Corus management

∙ Tata Steel will retain access to low cost rawmaterials, Slab for the enlarged group and

∙ Exposure to high growth in emergingmarkets, whilst gaining price stability indeveloped markets

Group Ambition (Tata & Corus)

Group Ambition (Tata & Corus) Tata Steel & Corus: a compelling vision in steel

Global player with a balanced presence indeveloped 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 EastAsia

Current: EBITDA of 13% ; 25 million tonnes: # 6By 2012: EBITDA of 25% : 40 million tonnes: Potential #2

Enhanced Product Portfolio

Strong High Value Added Product Portfolio straddling Automotive

Construction Spaces

Access to New Markets

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 isentirely consistent with our strategy of growth through internationalexpansion”

Mr. Ratan added

“Corus and Tata Steel are companies

with long, proud histories. We havecompatible cultures of commitment tostakeholders and complementary

strengths in technology, efficiency,product mix and geographical spread.Together we will be even betterequipped to remain at the leadingedge of the fast changing steelindustry.”

Ji L Ch i f C id

Jim Leng, Chairman of Corus, said

“This offer from Tata Steel reflects thesubstantial value created for Corusshareholders since the placing and

open offer and launch of our „Restoring Success‟ programme in2003” .

Ratan Tata said at opening speech on31st January 2007

“I b li h hi ill b h fi i

“I believe that this will be the first step inensuring that the Indian industry can in factstep outside the shores of India in an

international market place and in fact acquititself as a global player”

MD Tata Steel Mr. Muthuraman commented:

∙ “It brings the capacity of nearly 19 milliontonne per annum immediately and

∙ It gives us access to very matured anddeveloped markets of Europe

∙ Corus has a very highly developed R&Dcapability, which India in general lags”

M th dd d

Muthuraman added

“In terms of EBITDA multiple it is about 9times on the last one year EBITDA for theperiod ended 30 September 2006, which Imust admit is a little higher than theindustry average of the last 5 to 6 years but

it is roughly representation of last unevenfigured years.”

Mr. Tata said

“This is another step in Tata Steel's journeyto what it wants to become in the next 10 to15 years.”

In response to questions

In response to questionsabout possible job cuts atCorus, Mr Muthuraman said

(Employees by region: see ingraph)

“This is not about cutting jobs. The company has to be

made more competitive so jobs can be secured."

When completed, the deal

became India's biggest-everforeign takeover andestablish the country as anew force in the fast-consolidating steel industry.

The acquisition immediately made

Tata the fifth-biggest steelmaker andallowed the company to cut costs by$350m a year.

Jim Leng, chairman of Corus, said: "Tata

and Corus are stronger together and will beable to compete effectively in anincreasingly global environment.

"This combination creates a strong androbust platform for growth that will benefitall stakeholders."

Scope of the Project

Scope of the Project Steel Industry – At a glance

Tata Steel – market position /competitiveness CSN - 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

STEEL INDUSTRY

STEEL INDUSTRYCHARACTERISTICS

Cyclical nature in steel industry is countered by

- Economies of scale

- Movement of steel from surplus market toshortage market

- Fragmented nature of industry –

- Top 5 companies having 20 % market share

- Low bargaining power of steel producers due toprice of iron ore

- High bargaining power of buyers

Global Steel output(in million tonnes)

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 6.8South 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)Worldproduction 1,028.8 1,120.7 8.9

Global steel ranking

Company Capacity (in milliontonnes)

Arcelor - Mittal 110.0

Nippon Steel 32.0

Posco 30.5

JEF Steel 30.0

Tata Steel - Corus 27.7

Bao Steel China 23.0

US Steel 19.0

Nucor 18.5

Riva 17.5

Thyssen Krupp 16.5

Steel Industry – At a glance

Indian Scenario

• After liberalization, there has been no shortages of iron andsteel 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 hasstaged 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 demandparticularly by the demand for steel in China.

Indian Scenario

•Steel industry was delicensed and decontrolled in 1991& 1992 respectively.•Today, India is the 7th largest crude steel producer of steel in the world.•In 2005-06, production of Finished (Carbon) Steel was44.544 million tonnes.•Production of Pig Iron in 2005-06 was 4.695 Million

Tonnes.•The share of Main Producers (i.e SAIL, 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.

Steel Industry in India

Steel Production in India

(in mmt)

Category 2002-03 2003

-04 2004-05 2005

-06 2006-07(April-Nov'

Pig Iron 5.28 3.76 3.22 4.69 3.074

FinishedCarbon Steel

33.6 36.9 40.0 44.5 30.689

(Source: Joint Plant Committee)

Steel Imports - India

Year Qty. (In mmt) 2001-2002 1.271 2002-2003 1.510 2003-2004 1.540

2004-2005 2.109 2005-2006 (Prov.) 3.765

2006-07 (Apr-Nov, 2006)

(Prov. estimated)

Steel Exports - India

(Qty. in Million Tonnes) Finished (Carbon)

SteelPig Iron

2002-2003 4.506 0.629 2003-2004 4.835 0.518 2004-2005 4.381 0.393 2005-2006 4.350 0.300

2006-2007(April-Nov06) (estimated)

3.150 0.200

Steel Exports India

Indian Steel – At a Glance….

1947 : Steel production 1.25 million tonne

Present capacity : 44.5 million tonnes.

Indian Steel At a Glance….

Source: Deustche Bank Research

India’s Growth vis à vis World

India’s Growth vis-à-vis World

Indian Steel – Productivity &

Labour Productivity in

India: 144 tonnes / labour/ yr

West Europe: 600 tonnes

• Rising Import Demands because of

- Dynamic Growth

- Demand for high quality products

• Share of Steel demand:

- Construction Industry : 43%

- Mechanical Engg. :32%

- Automotive : 5%

Performance

Indian Steel – Growth Vs

Factors Holding back the

Growth:- Power Supply (India islikely to be the world’s 4th largest

energy consumer by 2010 after the US, China and Japan).

- Raw material Supply(Iron ore, Coal, Steel scrap)

- Inefficient TransportSystem

India’s increase :

World Increase: 27%

Indian Steel Growth Vs

Impediment

India and the World

Growth

India’s Steel output expected to rise +6% p.a

compared to around 4% rise in global steel outputs.

India’s share of global crude steel output is forecast to rise to just under 4% in the next ten years. This is still

comparatively tiny compared to China’s share of 41%.

Technology

Increased use of continuous casting technology – 38% in mid-90s to 66%

However, in India 6% of crude steel is still made using theoutdated open-hearth process (EU-25: 0.3%) – so, still ahuge potential for restructuring.

India and the World

Demand Condition

In India demand is being driven up by mammoth infrastructureprojects, like the construction of dams, ports, power plants,railways and motorways.

In addition, the key industrial sectors (such as construction,automotive and shipbuilding) are experiencing rapid growth.

With salaries and wages rising, consumers are becoming more

discerning with regard to their cars, household appliances andthe like, which is also boosting steel demand.

Indian Steel Industry – Tata Steel

The TATAs' first steel plant under construction in Jamshedpur in 1911.

Tata Steel – India’s largest private sector steel

company

capacity : 5.3 mmtpa

TATA STEEL- A GLANCE

TATA STEEL A GLANCE

Established in 1907 - Asia first and India‟s largest

private sector steel company – one of the lowest cost

producers – EVA+

Competitive edge – captive raw material resources and 5MMTPA plant at Jamshedpur – 8 MMTPA in 2008

Natsteel, Asia and Millenium Steel, Thailand in its fold – 8manufacturing 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, 6

MMTPA in Orissa, 12 MMTPA in Jharkhand – overseas projectin Iran and Bangladesh

Steel products targeted at quality conscious auto sector andbooming construction industry – emerging as a leader in wire

business

TATA STEEL - PRODUCTS

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 )

Tata Steel growth plans

Tata Steel has committed itself to attainingglobal scale operations

Output exceeding 30 million tonnes and a strong

regional presence Tata Steel making a total estimated investment

of Rs. 70,000 crores in the next decade,ingreenfield projects and other strategic

acquisition Tata Steel proposes to establish three greenfield

facilities in Orissa, Chhattisgarh and Jharkhand,

with an aggregate capacity of 23 million tonnes.

TATA STEEL – FINANCIAL STATISTICS

2005-06 2004-05

REVENUES (Cr) 20491 16181

PBT(Cr)

5515 5442PAT(Cr) 3721 3571

EBITDA MARGIN 40.19 % 42.48 %

PBT MARGIN

34.04 % 36.17 %EPS(Rs) 63.35 62.77

DIVIDEND 23.4 % 23.61 %

Corus overview

CSN History & Growth

CSN –History & Growth

Companhia Siderúrgica Nacional was incorporated in 1941

Initially focused on producing coke, pig iron castings and longproducts

Three major expansions were undertaken at the PresidenteVargas Steelworks during the 1970s and 1980s.

The first, completed in 1974, increased installed annualproduction capacity to 1.6 million tons of crude steel.

The second, completed in 1977, raised capacity to 2.4 milliontons of crude steel.

The third, completed in 1989, increased capacity to 4.5 milliontons of crude steel.

privatized in 1993 and early 1994, through which the Braziliangovernment sold its 91% interest in company

CSN’ t t f b i

CSN’s strategy for business

Mission is to increase value for theshareholders

Maintaining position as one of theworld's lowest-cost steel producers

Maintain a high EBITDA margin.

Strengthen position as a globalplayer

CSN i t l

CSN in steel

Fully-integrated manufacturingfacilities

Second largest steel producer in

Brazil Crude steel capacity 5.6 million

tonnes

Rolled product capacity is 5.1 milliontons

CSN li f St l

CSN policy for Steel

Implement a carefully craftedglobalization strategy. This may includethe acquisition or construction of steeloperations, steel-related businesses or

distribution or service centers outsideBrazil, as well as the association withother companies engaged in suchventures

Emphasize a wide range of value-addedproducts, mostly galvanized, pre-paintedand tin-coated.

CSN P d t

CSN Product range

Produce a broad line of steelproducts

Hot- and Cold-rolled

Galvanized and Tin mill products

Process flow chart -CSN

Process flow chart CSN

CSN M k t t t

CSN Market structure

In 2004 sold steel products to customersin Brazil and 61 other countries.

in 2002 Our domestic steel sales, as a

percentage of total sales volume were65% and operating revenues were70%,,

In 2003 the above figures were 59% and61%,respectively

In 2004 it was 71% and 73%,respectively,

CSN E ports markets

CSN Exports markets

The three principal export marketsfor exports of products (%of our

export sales volume in 2004) North America 44%,

Europe 32%

Asia11%

Tata Steel & CSN

Both bidders have presence inemerging economies.

Both have access to cheap sources of

iron ore. CSN may have an edgebecause it owns one of the largestiron ore mine in the world.

Both are among the most efficientproducers globally.

Sales - Tata Steel,CSN and

Operating rev enue s(US m$)

23832078 2169

2000 2001 2002 2003 2004

Operating rev enue s million pounds

2004 2005

Profitability CSN Vs TATA

ySteel

8001000

2000 2001 2002 2003 2004

Adj. EBITDA inmillions of US$

CORUS BUYOUT-

STATEGY

Tata Steel, CSN both planned a leveragedbuy-out

Raising debt on the security of future cash

flows from Corus. Tata Steel's financing arrangements no

recourse

CSN ,part of the new credit facilities arewith recourse .

Can CSN shareholders be comfortableabout that exposure

Stock price movement

Situation 1: Corus decides

to sell Reasons for decision: Total debt of corus is 1.6bn GBP

Corus needs supply of raw material at lower cost

Though Corus has revenues of $18.06bn, itsprofit was just $626mn(Tata‟s revenue was $4.84bn & profit $ 824mn)

Corus facilities were relatively old with high costof production

Employee cost is 15%( Tata steel- 9%)

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 longand flat steel products while corusproduces high value stripped products

A diversified product mix will reduce risks

while higher end products will add tobottomline.

Situation 2: Tata Steel decides

to bid

Corus holds a no. of patents and R & D facility.

Cost of acquisition is lower than

setting up a green field plant andmarketing and distribution channels

Tata is known for efficient handlingof labour and it aims at reducingemployee cost and improvingproductivity at Corus

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 anextra 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

TATA-CORUS: STRATEGIC FIT

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 businessesthrough wider geographical reach.

A presence in mature markets would also provide Tata Steel anopportunity 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 brandedproducts.

Corus is also very strong in research and technology development,which would add to the competitive strength for Tata Steel infuture. Both companies can learn from each other and achievebetter efficiencies by adopting the best practices

Tata Steel - Corus : Presentcapacity

(in million tonnes per annum)

Corus Group (in UKand The Netherlands)

Tata Steel -Jamshedpur

NatSteel - Singapore 2

Millennium Steel -Thailand

Aggregate presentcapacity

Tata Steel - Corus : Projectedcapacity

(in million tonnes per annum)

Corus Group (in UKand The Netherlands)

Tata Steel -

Jamshedpur

Tata Steel - Jharkhand 12

Tata Steel - Orissa 6

Tata Steel - Chattisgarh 5

NatSteel - Singapore 2

Millennium Steel -Thailand

Aggregate projected

capacity

Funding Scenarios- Need to both create

and protect share holder value

Equity- $ 4.1 billion- (Options)

(i) Borrowings by Tata Steel- Dilute EPS( 1.4%FY 08); Funding domestic greenfield ventures

(II) Preferential share issue by tata steel to tatasons- Also EPS unfriendly( 13.1% FY 08)

(iii) $2.3-$2.4 billion cash reserves of tatabalance- $1.7-$1.8 billion- Dilution of TCS

shares in LSE

Debt:-Senior debt, junk bonds etc- 8 billion

Impact on Tata steel‟s FY „‟08 P & L with $1.7 b pref issue to TATA

sonsAddnl 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. In crores)

5,802.5

0.40.4

(13.1)

Source: CLSA

Valuation

Based on replacement value:At current rates-1100-1300$/ton---$22 billion(15

Actual amount agreed ………….$12.1billion

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.

Financing the deal

Leveraged buyout: Loans of $8 billion are arranged for acquisition.

The current EBIDTA of Corus is sufficient to paythe annual interest of the loan

Around $2.5bn will come from cash reserves of TATA steel

TATA sold 0.84% of TCS stake

Financiers for the deal- ABN Amro, DeutscheBank

Increased debt obligations will create more creditrisk for Corus

Brokerage house First Global estimates that a $50 fall inglobal steel prices could lead to a $414-million loss from the

acquisition in FY08 there is a $ 75 fall, the losses could climbto $ 846 million.

Valuation Contd

Tata Steel is paying 7 times EBITDA of Corus for 2005 and ahigher 9 times EBITDA for 12 months ended 30 September2006. In comparison, Mittal Steel acquired Arcelor at anEBITDA 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 high.

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.(Long way off??)

Assuming 7 percent interest rate, interest andprincipal outgo requires annual fund of $1.5 bwhich looks tough for cash flow from Corus

Comments as an Investment

Banker

Alternatives used to mitigateexternal debt financing and risk:

- Partial settlement by cash and

partial settlement throughconvertible/non convertibledebentures

Use of share swap ???

Legal issues

Needed approval from EU

Approval of Share holders of Corus as perUK companies Act

Use of subsidiaries to structure the deal

-Avoidance of FIPB and RBI approval byavoiding share swap

Corus pension liabililites-

-British Steel Pension Scheme

-Corus Engg Steel Pension Scheme-126mGBP

Problemsin

Integration

Acquisitions

in Achieving Success

difficulties

Inadequate

evaluation of target Large or

extraordinary debt

Inability to

achieve synergy

Too much

diversification

Managers overly

focused on

acquisitions

Too large

Post acquisition issues

Digesting large deals and create share

Digesting large deals and create shareholder value will be a concern

UK steel unions want job guarantee.British trade unions launched protest ongrounds of potential layoffs.

The biggest challenge one would face ishow to integrate these two companies,how to integrate these two cultures, how

to work with new type of management,how to work in the matured marketverses working in developing market.

Post Merger Integration Issues

For the Tatas, the Corus acquisition is only half the battlewon

Robert Bruner, dean of the Darden School of Business,

University of Virginia, says, "When integration gets boggeddown, bad things happen—all stemming from the 'me‘

issues."

Issues are complex because it is a mammoth cross borer deal

Even more complex because Corus itself is the result of across-border merger.

Post Merger Integration Issues….

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 Steeland Corus, a "light-handed integration― will make more sense,

wherein the Tatas bring in some changes, but don't do a complete

overhaul of how Corus is run – says Prof. Venkiteswaran of IIM-A

Employees loathe uncertainty about their fate in the company.Phanish Puranam, professor, London Business School, says,"Productivity drops, competition takes away business and soon the

value of the deal is gone even before integration starts."

So, Tatas should not view the acquired company as a loser. It makessense for the Tatas to allow the existing management to continue asbefore. Some level of planned restructuring can come in later.

Post Merger Integration Issues….

Tetley, the Tata's previous UK buy, ran into cultural and racialobstacles because of concerns that British employees would resenthaving managers from a former British colony.

Tatas to learn from their Tetley acquisition and maybe use some of the managers who handled that integration

In the initial volatile phase, competitors may try to snatch awaygood managers and customers from Corus

The Tatas need to identify the key people at Corus and ways to keepthem as headhunters try to snatch good managers in such vulnerable

situations - Tatas have put two Corus people in the Tata Board

Post acquisition issues

ICRA forecasts slow down in global steel growth in2007 - a significant drop to 5.2 per cent in 2007from a healthy 8.9 per cent in 2006

The Tata Steel share's had declined by over 10 percent on the announcement of the Tata`s acquiringCorus on apprehensions of the deal being "over-valued“. Reviving the company‟s value would bechallenge

Acquiring synergies necessitates include improvingCorus operating margins, controlling costs & adopting the best practices of both sides

Conclusion

ANY QUESTIONS ?

Session III - Tata-Corus

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