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TATA STEEL’S ACQUISITION OF CORUS CASE STUDY
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Page 1: Tata Corus

TATA STEEL’S ACQUISITION OF

CORUS CASE STUDY

Page 2: Tata Corus

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.”

Page 3: Tata Corus

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.”

Page 4: Tata Corus

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

Page 5: Tata Corus

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

Page 6: Tata Corus

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.

Page 7: Tata Corus

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.

Page 8: Tata Corus

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.

Page 9: Tata Corus

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).

Page 10: Tata Corus

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.

Page 11: Tata Corus

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.

Page 12: Tata Corus

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

Page 13: Tata Corus

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.

Page 14: Tata Corus

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

Page 15: Tata Corus

BUSINESS CULTURES OF TATA & CORUS

TATA STEEL Continuous

improvement program “ASPIRE”

Core Values :

Trusteeship

Integrity

Respect for Individual

Credibility

Excellence

World class governance

CORUS Continuous

improvement program “The Corus Way”

Core Values- Code of Ethics

Integrity

Creating Value in Steel

Customer focus

Selective Growth

Respect for our people

World class governance

Page 16: Tata Corus

SPREAD OF MARKETS

69%

23%

8%

Before the acquisition

IndiaAsia (ex India)ROW

37%

24%22%

8%9%

After the ac-quisition

EuropeAsiaUKNorth AmericaROW

Page 17: Tata Corus

ACCESS TO NEW MARKETCombined Entity has significant market presence in both emerging and developed economies

Source :- Tata Steel FY 2005-06 Annual Report & Corus 2005 Annual Report

Page 18: Tata Corus

SWOT ANALYSIS OF TATA STEEL: Strengths1. Lowest Cost

Producer in world

2. Experience of TATA group in doing global acquisitions

3. Low debt to equity ratio

Weakness1. Corus was

triple the size of TATA steels in terms of production

2. Quality of Steel was not of International standards

Page 19: Tata Corus

SWOT ANALYSIS OF TATA STEEL Opportunities 1. To get exposed

to the global steel market ( will save time and learning space for them)

2. Consolidation trend in Steel Industry

Threats 1. Brazilian player

CSN 2. Russian player

Severstal

Page 20: Tata Corus

SWOT ANALYSIS OF CORUS Strengths1. World’s ninth

largest and Europe’s second largest steel producer

2. Wide range of products

3. Presence of operating facilities spread in whole EU

Weakness

1. Corus was bleeding because of high operational costs

2. Low operating margin

Page 21: Tata Corus

SWOT ANALYSIS OF CORUS Opportunities 1. Consolidation

trend in Steel Industry

2. To get right price at a time when market is less volatile

Threats 1. Huge pension

liability might have led to collapse of the deal

2. Disagreement of Labor and government due to possibility of job cut

Page 22: Tata Corus

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

Page 23: Tata Corus

INDIA STEEL PRODUCTION/CONSUMPTION 2007

PRODUCTION(million tonnes)

CONSUMPTIONmillion tonne

PER CAPITA CONSUMPTION

INDIA 53 59 49 KG

CHINA 489 432 318 KG

Page 24: Tata Corus

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.

Page 25: Tata Corus

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.

Page 26: Tata Corus

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.

Page 27: Tata Corus

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.

Page 28: Tata Corus

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

Page 29: Tata Corus

HOW TATA FINANCED THE DEAL- COMBINED GROUP STRUCTURE

Tata Steel

Tata Steel Asia Holding Pvt. Ltd

Tata Steel UK Ltd.

Corus Group Plc

100 %

100 %

100 %

Page 30: Tata Corus

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.

Page 31: Tata 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 .

Page 32: Tata Corus
Page 33: Tata Corus

FINANCING PLAN OF TATA STEEL EQUITY

Page 34: Tata Corus

2006-07 crores

2006-07 $ Mn

31st Dec,2006

Turnover 17453 4078 18979

EBITDA 7288 1704 1846

PBT 6660 1440 610.35

PAT 4222 971 446

Net Profit Margin

23% 23% 2.35 %

EPS 72.74 1.70 0.41

TATA Steel

Corus

Financial just before Acquisition

Page 35: Tata Corus

TISCO NET SALES & PAT

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 %

In Rs-crores

Page 36: Tata Corus

TISCO(CONSOLIDATED) NET SALES & PAT

YEAR NET SALES

OPERATING PROFIT

PAT OPM

2007-08 131536 13645 12350 14.1%

2008-09 147329 13862 4951 12.6

2009-10 102393 (2120) 9.1%

In Rs-crores

Page 37: Tata 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 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

Page 38: Tata Corus

TISCO’S SALES & PAT

2004-05 2005-06 2006-07 2007-08 2008-090

5000

10000

15000

20000

25000

30000

14489 1513217452

19654

24348

3474 3506 4222 4687 5202

salesPAT

Page 39: Tata Corus

KEY FINANCIAL RATIOS2009 2008 2007 2006 2005

EPS 69.70 63.85 72.74 59.91 42.18

Dividend / share

16 16 15.5 13 13

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

Page 40: Tata Corus

EARNING ESTIMATES 2010/2011

2009 2010 2011

PROFIT 5202 5046 5872EPS 42 72 85PE RATIO

38 22 18

Page 41: Tata Corus

SHARE HOLDING PATTERN

20.83

58.16

20.55

share holding pattern

foreign DomesticInstitutions

Page 42: Tata Corus

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

Page 43: Tata Corus

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

Page 44: Tata Corus

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.

Page 45: Tata Corus

PEER COMPARISON

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 Value

1.34X 0.90 X 4.76 X 1.72 X

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

EPS 0.41$ 2.12 $ 1.27 $ 3.06 $

Peer Comparison for FY 2006

Page 46: Tata Corus

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

Page 47: Tata Corus

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.

Page 48: Tata Corus

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.

Page 49: Tata Corus

Hot Roiled Coils / Sheets

Galvanized SheetsCold Rolled Coils / Sheets

Rebars wire,

Roads wireLeading Position

Hot Roiled Coils / Sheets

Advanced high- strength Steel Superior Automotive Steel Rods for Tyre cord Structural Sections Packaging Steels Tin Plate

RailCorus

Leading Position

Leading Position

CorusLeading Position

Hot Roiled Coils / Sheets

Galvanized SheetsCold Rolled Coils / Sheets

Rebars wire,

Roads wire

Hot Roiled Coils / Sheets

Advanced high- strength Steel Superior Automotive Steel Rods for Tyre cord Structural Sections Packaging Steels Tin Plate

Rail

Page 50: Tata Corus

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.

Page 51: Tata Corus

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.

Page 52: Tata Corus

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.

Page 53: Tata Corus
Page 54: Tata Corus

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.

Page 55: Tata Corus

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.

Page 56: Tata Corus

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.

Page 57: Tata Corus

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.

Page 58: Tata Corus

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.

Page 59: Tata Corus

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

Page 60: Tata Corus

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

Page 61: Tata Corus
Page 62: Tata Corus

MODE AMOUNT (in US $ Billion)

Break-up of Tata Steel Equity Contribution in US Million

Tata Steel UK 6.14

Tata Steel Singapore

2.66

Tata steel Equity contribution

4.9

Cash reserve 700

External commercial borrowing

500

Preference shares to Tata sons

640

Rights issue…………….

862

Convertible Preference shares

1400

Foreign issue 798

Sub Total 4900

Grand Total 13.7

Page 63: Tata Corus

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.

Page 64: Tata Corus

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).

Page 65: Tata Corus

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).

Page 66: Tata Corus

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.

Page 67: Tata Corus

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

Page 68: Tata Corus

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