Post on 30-Oct-2014
transcript
Group 5
Case Facts
• Tata acquired Corus, which is four times larger than its size and the largest steel producer in the U.K . The deal , which creates the world’s fifth- largest steel maker , is India’s largest ever foreign takeover and follows Mittal steel’s $31 billion acquisition of rival Arcelor in the same year .
• Tata acquired Corus on the 2nd April 2007 for a price of $12 billion . The price per share was 608 pence ( Rs 484 ), which is 33.6% higher than the first offer which was 455 pence.
About The Deal
TATA Acquired CORUS on 2nd April 2007
The deal price was US $ 12.11 Billion
On 17 Oct, 2006 TATA’s bidded at 455 pence per share and price per share was 390 pence at that time
TATA Steel, the winner of the auction for CORUS declares a bid of 608 Pence per share
TATA Surpassed the final bid from Brazilian steel maker ‘COMPANHIA SIDERURGICA NACIONAL’ (CSN) of 603 pence per share
The combined entity has become the world’s fifth largest steelmaker after the deal.
Rationale behind Acquisition
Consistent with Tata Steel's objective of growth and globalization.
Creates the 5th largest steel producer in the world.
Corus is an ideal combination of high-quality developed and low-cost high-growth markets and much broader distribution network.
There were opportunities for significant synergies between Tata Steel and Corus.
There was a considerable culture fit attributed to the Anglo-Saxon background of Corus and India's colonial past.
Corporate Strategy
To develop its carbon steel business
Look beyond western Europe
Globalization
Deliver cost competitive steel to high- end product customers
Play an active consolidator role in the steel industry
“light touch” integration strategy
Tata Steel pre-merger profile
• Tata Steel a part of the Tata group, one of the largest diversified business conglomerates in India.
• Founded in 1907,by Jamshedji Nusserwanji Tata
• 102 yrs in steel bazaar• 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 acquired the Singapore based steel
manufacturer NatSteel, that let the company gain access to major Asian markets and Australia.
• Tata steel acquired the Thailand based Millennium Steel in December 2005.
World’s 56th largest capacity of 30 million presence in 26 nations
SWOT Analysis of Tata Steel
-Low Cost productio
n.-Easy
access to raw
material.- Low Debt
Equity Ratio.
- Quality of Steel was not of International
standards.-Non availability of latest R&D facility
- To become a World leader in low cost and
high quality steel products. - To
Compete with
other big global players
SWOT
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
diversified product mix
◦ reduces risks
◦ higher end products will add to bottom line
Reasons for Tata Steel to Bid(contd.)
• Economic of scale
• Will help TATA to feature in Top 10 players in world
• Technology Benefit
o Corus holds number of patents and R&D facilities.
Corus Pre merger profile
Corus Group plc was formed on 6th October 1999, through the merger of two companies, British Steel and Koninklijke Hoogovens
World’s 6th largest
2nd in Europe, 1st in UK
Presence in 50 nations
◦ Corus has manufacturing operations in many countries with major plants located in the UK, The Netherlands, Germany, France, Norway and Belgium
Supplier to many of the most demanding markets worldwide including construction, automotive, packaging, engineering
40,000 people worldwide
SWOT Analysis
World’s ninth largest and
Europe’s second largest
steel producer.
- Wide range of products of
high technology.
- High operational Cost.- Lack of Access to raw
material
- To merge with a company to eliminate duplication and
remove overlaps in marketing, accounting etc.
- To get access to raw material and growth markets
through merger.
- Increasing losses
resulting to winding up of
company-
SWOT
Reasons For Corus For Accepting Bids
To extend its Global reach through TATA.
To get access to Indian Ore reserves, as well as market for steel.
To get access to low cost raw materials.
Saturated market of Europe.
Decline in market share and profit.
Strategies Behind this Merger
1. Growth through international expansion.
2. Capture the European customers in the automobile and aerospace industries
3. Capture the Indian automobile market by supplying high grades of steel.
4. Add more high technology products.
Funding for the deal
Routed through Tata Steel’s UK Special Purpose Vehicle(SPV) named Tata Steel UK
Debt equity ratio was 1.9:1
Equity◦ $ 4.1 billion
Debt◦ $ 8 billion through junk bonds◦ Senior term loans from banks
ABN Amro bank Deutche Bank CSFB
• Immediate takeover was required.• Share Swap deal would have been less attractive to the Corus shareholders.• Share Swap would have meant FDI and that brings a lot of regulatory hassles which might not have been accepted by Corus shareholders. • Share Swap would have diluted Tata Steel’s Equity base which was not in favour of Tata shareholders.• And moreover cost of equity at around 15% is higher than that of debt of around 8%, so paying in cash brings down the cost of acquisition.
WHY CASH DEAL????
Integration efforts
Post Acquisition Strategies
•Tata steel's Continuous Improvement Program ‘Aspire’ with the core values :Trusteeship, Integrity, respect for individual, credibility and excellence.
•Corus's Continuous Improvement Program ‘The Corus Way’ with the core values : code of ethics, integrity, creating value in steel, customer focus, selective growth and respect for our people.
•As the core values of the two companies were same so Tata used ‘Light Handed Integration Approach’.
•Top management of the company remained same.
Legal compliances in the Deal
DEALING DISCLOSURE REQUIREMENTS Under the provisions of Rule 8.3 of the City Code, if any person is, or
becomes, “interested” (directly or indirectly) in one per cent or more
of any class of “relevant securities” of Corus, all the dealings must be
publicly disclosed by no later than 3.30 p.m. (London time) on the
London business day following the date of the relevant transaction.
This requirement will continue until the date on which the Scheme
becomes effective, lapses or is otherwise withdrawn or on which the
“offer period” otherwise ends.
Under the provisions of Rule 8.1 of the City Code, all “dealings” in
“relevant securities” of Corus by Tata Steel, Tata Steel UK, CSN, CSN
Acquisitions or Corus, or by any of their respective “associates”, must
be disclosed by no later than 12.00 noon (London time) on the London
business day following the date of the relevant transaction.
EFFECT ON CONVERTIBLE BONDHOLDERSOn 4 December 2006, a meeting of the holders of the
Dutch Bonds was held at which a proposal to amend the terms and conditions of the Dutch Bonds so that they would be redeemed early (at or about the Effective Date), was passed. That early redemption proposal is conditional upon the Scheme Effective Date being on or before 28 February 2007.
MANAGEMENT, EMPLOYEES AND LOCATIONSTata Steel intends that the existing contractual and statutory
employment and pension rights of all directors and employees of Corus Group will be fully safeguarded upon completion of the Revised Acquisition.
Valuation of the Deal In 2005, Corus annual prod. was 18mt. & that of Tata was 5mt.
The Enterprise Value was placed at $10 billion including the outstanding debt.
The price to earning ratio was higher than what they paid for Arcelor.
In case of Arcelor, the acquisition turned out to be $840 per tonne as compared to $750 per tonne for Corus assets even though EV/EBITDA was higher for Corus at 7.6 as against 5.4 in case of Mittal.
EBITDA = Revenue- Expenses( Excluding tax, interest, depreciation and amortization)
Enterprise Multiple = EV/EBITDA
Logic for the Valuation The strategic objective of the deal was to bring to Tata
Steel 19 million tonne capacity at once.
It also gives the company access to the European markets.
Corus has high R&D capabilities.
Corus had multi-locational plants and was not a fully integrated steel company.
5 Yr. Financial performance of Tata Steel
Category Unit FY`02 FY`03 FY`04 FY`05 FY`06
Production `000 Mt 3,636 3,941 4,089 4,109 4,552
Revenue $ Mn1583 2150 2755 3532 3884
EBIDTA $ Mn283 516 840 1378 1401
EBIDTA Margin
% 20% 27% 34% 42% 40%
PBT $ Mn52 277 616 1178 1187
Net Profit $ Mn43 222 404 773 794
Net Profit Margin
% 3% 12% 16% 24% 23%
EVA $ Mn
-96 34 156 528 529
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 Margin
% 4.47 % 3.04% 10.28% 10.53 % 14.37 %
PBT $ Mn - 644 - 321 766 649 610.35
Net Profit $ Mn - 741 - 388 593 512 446
Net Profit Margin
% - 6.47 - 3.87 4.87 4.72 3.47 %
5 Yr. Financial performance of Corus
2006-07 31st Dec,2006
Turnover 4546 18979
EBITDA 1704 1846
PBT 1440 610.35
PAT 971 446
Net Profit Margin
23% 2.35 %
EPS 1.70 0.41
Dividend 254 134
TATA Steel
Corus
Financial just before Acquisition
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 Ratio
16.35 3.46 4.32
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 Acquisition2. Interest charges
◦ New Debt of $ 8 bn @ 8% annual interest cost i.e. $ 640 mn
◦ Corus’s existing interest debt amounts to $ 725 mn.
Benefits of the Deal
Augmented its crude steel capacity to 27 mtpa
The combined entity forms the 5th largest Steel company
The merged entity has brought Tata Steel to the world platform
Provided Tata Steel access to new markets and presence across the steel value chain
Much broader distribution network
Synergies from the Deal
Tata was one of the lowest cost steel producers and Corus was fighting to keep its productions cost under control
Tata had a strong retail and distribution network in India and south east Asia. Hence there would be a powerful combination of high quality developed and low cost high growth markets
Technology transfer and cross –fertilization of R&D capabilities There was a strong culture fits between the two organizations both
of which highly emphasized on continuous improvement and ethics Economies of Scale Increase in profitability Backward integration for Corus and Forward integration for Tata
Steel
•High value paid.
•Corus’ EBITDA was at 8% which was much lower as compared to Tata Steel’s 30%.
•Debt of US $ 6.14 was raised against the cash flows of Corus. It was a risky proposition.
•Tata’s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was maintaining earlier.
•Fast consumption of Tata Steel’s captive iron ore reserves as production capacity increased from 5.3 million ( estimated for 50 years at this capacity) to 27 million tons of steel per annum.
PITFALLS OF THE DEAL
The Road Ahead
•Integration has to be fast and efficient.
•Increasing reach to joint entity to 4 continents and 45 countries including high value market of Europe.
•Increasing the EBITDA to 25% for joint entity by executing Tata steel’s brownfield and greenfield projects well in time.
•Increasing the capacity of the company beyond 50 million tons by 2015 so as to become one of 3 top steel producers in the world.
Critical Analysis
Swot analysis of Tata Corus
Strengths :•Easy Access to quality raw material.•New technology for producing high value products.•Reach in 4 continents and 45 countries.• Economies of Scale and production.
Weakness :• Cost of production per unit bound to increase.•High Debt equity ratio.•High dependability on the growth of market. •A lot of stress on the cash flows of combined entity.
Opportunities :• To become global player in steel industry.•Takeover more companies successfully.•Increase in production capacity beyond 56 mn tons by 2015
Threats :•Cultural Diversifications are not easy to integrate.•Markets should continue to grow.•Rising cost of raw material.•Rising terrorism and political unrest among nations.
If TATA steel were to create, from scratch, 19 million tonnes of steel making capacity comparable in quality to what Corus possesses, It would end up investing 70% to 85% more than it is paying now.
Besides, setting up a new factory, a 3 to 5 years project if everything goes well, has great execution risk.
With Corus in its fold, Tata steel can confidently target becoming one of the top 3 steel makers globally by 2015 . the company would have an aggregate capacity beyond 50 million tones per annum, if all the planned Greenfield capacities go on stream by then.
We can conclude that if the acquisitions well planned , executed and the necessary precautions taken for the deal a company can achieve its strategic objectives and thus ensure its growth through acquisition.
A FINAL WORD ON THIS DEAL
“ I believe this will be the first step in showing that Indian industry can step outside the shores of India in an international market place and acquit itself as a global player”
- Ratan Tata