A Caselet on Tata Corus-Acquisiion

8/13/2019 A Caselet on Tata Corus-Acquisiion

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TATA & CORUS

(A CASEOFACQUISITION)


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COMPANYS PROFILE

Founded in 1907,byJamsetji Nusserwanji Tata.

Tata company listed on BSE and NSE and employsabout 82700 (2007) people.

started with a production capacity of 1,00,000 tones hastransformed into a global giant .

TATA Steel


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Its revenue in 2005-2006 was 22000 Crores. (5 billion US$.

Its revenues in year 2011-12 is now Rs 1,18,754 Croresincluding the South Asian and UK/European operations.

It has a main steel plant located at Jamshedpur.

The Company also has three Greenfield steel projects in

the states of Jharkhand, Orissa and Chhattisgarh.


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Corus is Europe's second largest steel producer.

Corus group was formed on 6thOctober 1999.

Company has four divisions: Strip product , Long product, Aluminum and Distribution and Building system.

CORUS Steel


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RATAN TATAS VISION

We asp ire to be the global steel indus try

benchmark for

Value Creat ion and Corporate Cit izensh ip


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CHALLENGES

1. FINANCIAL ASPECTS.

High debt to finance the purchase.

2. NON FINANCIAL ASPECTS Cultural differences

Structures and Compensation models

Foreign political Environment.


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THE DEAL


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ABOUT THE DEAL

TATA Acquired CORUS on 2ndApril 2007 which is 4 timeslarger than its size.

The deal price was $ 12 Billion.

TATA Steel,the winner of the auction for CORUS declaresa bid of 608 Pence per share.


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In 2005 when the deal was started theprice per share was 455 pence.

TATA Surpassed the final bid from Brazilian steel maker

COMPANHIA SIDERURGICA NACIONAL (CSN) of 603pence per share.

The combined entity has become the worlds fifth largest

steelmaker after the deal.


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For this deal TATA has finance only 4 Billion $ frominternal company resources.

TATA Have secured funding commitments from itsadvisors.

These advisors were Deutshe bank, ABN Amro and

Standard Chartered.


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IMPORTANCE OF DEAL

The initial motive behind the deal was not CORUSrevenue size but rather its market value.

To compete on global scale because then TATA was justat 56thrank in steel production.

CORUS holds a number of Patents and R & D facility.

FOR TATA


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Acquiring Corus will give Tata access to Europeancustomers of steel.

Acquisition cost will be lower then setting up new greenfield plants and marketing channel.


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To extend its Global reach through TATA.

To get access to Indian Ore reserves, as well as virgin

market for steel.

To get access to low cost materials.

Total Debt of Corus was GBP 1.6bn

FOR CORUS


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Saturated market of Europe.

Better facilities and lower cost of production

Employee cost was 15 % (TATA- 9%)

Profit margin was 3.4% (TATA- 17%)


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PROCESS OF DEAL

Sep 20, 06 : CORUS uses the strategy to work with low cost producer.

Oct 06, 06 : Initial offer by TATA is considered to be too low.

Oct 17, 06: TATA kept its offer to 455 pence per share.

Oct 20, 06 : CORUS accepts the offer of 4.3 billion.

Oct 23, 06 : Brazilian Steel Group CSN counter-offer to TATAsoffer. Oct 27, 06 : CORUS criticized by JCB for acceptance of TATAsoffer.

Nov 18, 06 : The CSN approaches Corus With an offer of 475 pence per share

Nov 27, 06 : Board of Corus decides to give more time for shareholders to decide

whether it issue forward a formal offer.

Dec 18, 06 : Tata increases its original bid for Corus 500 pence per share, then CSNmade its counter bid at 515 pence per share in cash

Jan 31, 07 : Tata agreed to offer Corus investors 608 pence per share in cash

Apr 02, 07 : Tata steel manages to win acquisition to CSN and has the full voting

support from Corus shareholders


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Major Acquisitions

Target Buyer Value ($ bn) Year

Arcelor Mittal Steel 31 2006

NKK Corp Kawasaki Steel 14.1 2001

LMM Holdings Ispat Intl 13.3 2004

Corus TATA 12.0 2006

Krupp AG Thyssen 8.0 1997

Dofasco Arcelor 5.2 2005

Intl Steel Mittal Steel 4.8 2005


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GLOBAL STEEL RANKING

COMPANY CAPACITY in

(m il l ion tones)

1. Arcelor-Mittal

2. Nippon steel

3. Posco

4. JEF steel

5. Tata steelCorus

110.0

32.0

30.5

30.0

27.7


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POSTACQUISITION

New entity will be run by one of Tatas steel

subsidiaries.

Seven members committee.

Share price of TATA On the date of announcement536.60

On the date of Acquisition- 464.90

Todays price- 440


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Tata Steel- Corus : Projected capacity

(in million tones per annum)

Corus Group (in UK and Netherlands) 19

Tata Steel- Jamshedpur 10

Tata Steel- Jharkhand 12

Tata Steel- Orissa 6

Tata Steel- Chattisgarh 5

Tata Steel- Singapore 2

Millennium Steel- Thailand 1.7

Aggregate projected capacity 55.7


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LESSONSFROMTHECASE

Tatas vision of becoming global player in steel got realized.

(What price to pay for this dream?)

Due to high price paid for the acquisition, the debt burden

on Tata Steel went up substantially. It reduced theprofitability of Tata Steel.

Though Corus had large assets, the margins earned by the

plant were substantially lower than Tata Steel Plant. (It is

not how much assets you have counts, but what theseassets can earn for you counts!).

Separate figures for European operations are not being

reported by TISCO in its balance sheet.


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LESSONSFROMTHECASE

However the reported figures for 2010-11 are following:

Item reported TISCO Indian Total for the

Operations Group*

--------------------------------------------------------------------------------

Total revenue 29236 (24.6%) 1,18,753

EBITDA 12223 (72.0%) 16976

Net Profit 6686 (75.5%) 8856

--------------------------------------------------------------------------------Figures in Rs Crores.

*Includes South Asian and UK/European Operations.


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LESSONSFROMTHECASE

The latest figures for the half year of 2011-12 are

following:

Item reported TISCO Indian For European

Operations Operations

------------------------------------------------------------------------------

Total revenue 16072 41,695

EBITDA 12223 2412*

Net Profit 6686 N.A.

------------------------------------------------------------------------------Figures in Rs Crores.

* Includes settlement of Rs 685 Cr received for settlement

from Teeside Cast Products.


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LESSONSFROMTHECASE

It can thus be seen from the figures that, European

operations (Corus) though are 3-4 times larger in

producing only 1/5thof the EBITDA.

TISCO is not reporting separately the net profit figuresfor the European/UK operations. There is likelihood of

losses after the interest and depreciation figures are

taken in.

This poses the question that, was the huge investment

put in for acquisition for Corus good for TISCO. If thesame investment was put for something else, may be it

would have produced much better profits for TISCO.


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LESSONS FROM THE CASE

The first lesson that is evident is that, it is not the size of

operations that matters, but the net profit achieved that

matters.

The second lesson is that, it does not matter what

assets you hold. What matters is that, what these assetscan do for you. The valuation needs to be on the basis

of the assets earning capacity. The asset that is

producing loss has little value.

Tatas possibly paid too much for the acquisition. They

could have allowed the Brazilian company to acquire

Corus and looked for the next opportunity available.

Paying too much is one of main reasons for failure of

the M&As.


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A Caselet on Tata Corus-Acquisiion

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