Tata Corus

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CASE STUDY

This proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with our strategy of growth through international expansion. orus 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.

This offer from Tata Steel reflects the substantial value created for orus 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 orus to seek access to low cost production and high growth markets. onsistent with this, the ompany 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 orus 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.

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

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

, 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. Finally

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. companies generated revenues of US $ 70.8 billion in the financial year 200809.

Group

Tata

steel generated sales of 17452 crore in financial year 06-07.The companys 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.

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.

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.

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

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.

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

TATA STEELContinuous improvement program ASPIRE Core Values : Trusteeship Integrity Respect for Individual Credibility Excellence World class governance

CORUSContinuous 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

Before the acquisition

After the acquisitionEurope

8% 23% 69%

India Asia (ex India) ROW

8%

9% 37%

Asia UK

22%

24%

Nort America ROW

Combined Entity has significant market presence in both emerging and developed economies

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

Strengths 1.

Weakness 1.

2.

3.

Lowest Cost Producer in world Experience of TATA group in doing global acquisitions Low debt to equity ratio

2.

Corus was triple the size of TATA steels in terms of production Quality of Steel was not of International standards

Opportunities 1.

Threats 1.

2.

To get exposed to the global steel market ( will save time and learning space for them) Consolidation trend in Steel Industry

2.

Brazilian player CSN Russian player Severstal

Strengths1.

Weakness

2.

3.

Worlds ninth largest and Europes second largest steel producer Wide range of products Presence of operating facilities spread in whole EU

1.

Corus was bleeding because of high operational costs Low operating margin

2.

Opportunities 1.

Threats 1.

2.

Consolidation trend in Steel Industry To get right price at a time when market is less volatile

2.

Huge pension liability might have led to collapse of the deal isagreement of Labor and government due to possibility of job cut

S.NO. 1 2 3 4 5 6 7 8 9 10

COMPANY Arcelor Mittal Nippon steel POSCO (South korea) JFE Steel (Japan) Tata Corus Baosteel (China) US Steel Nucor Riva (Italy) Thyssenkrupp (Ger)

CRUDE STEEL PRODUCTION (in million tons) 109.7 32.9 30.5 29.9 27 22.7 19.3 18.4 17.5 16.5

PRODUCTION (million tonnes) INDIA CHINA 53 489

CONSUMPTION million tonne 59 432

PER CAPITA CONSUMPTION 49 KG 318 KG

To

tap European Mature Market. of acquisition is lower than setting up of

Cost

Green field plant & marketing and distribution channel. TATA

manufactures Low Value ,long and flat

steel products ,while Corus produce High Value Stripped products.

Helped

TATA to feature in Top 10

players in world. Technology Economic Corus

Benefit.

of scale.

holds number of patents and

R&D facilities.

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 crossfertilization of R & 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. The

The

enterprise value of Corus including debt and other cost was estimated at US $ 13.7 billion

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. Tata

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 The

Tata Steel100 %

Tata Steel Asia Holding Pvt. Ltd100 %

Tata Steel UK Ltd.100 %

Corus Group Plc

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 Steels 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. To

provide for immediate funding of the acquisition , Tata Steels Singapore SPV raised US $ 2.66 billion through bridge loans Banks like ABN Amro , eutsche Bank , Lloyds and Standard Chartered bank , agreed to provide bridge loans to the company. Tata steels own contribution in the Corus deal amounted to US $ 4.9 billion . To

Financial just before AcquisitionTATA Steel2006-07 crores Turnover EBITDA PBT PAT Net Profit Margin EPS 17453 7288 6660 4222 23% 72.74 2006-07 $ Mn 4078 1704 1440 971 23% 1.70

Corus31st Dec,2006 18979 1846 610.35 446 2.35 % 0.41

In Rs-crores YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 NET SALES 14490 15132 17453 19654 24348 25022 PAT 3474 3506 4222 4687 5202 5046 OPM 41% 38.9% 39.6% 41.9% 37.7% 38 %

In Rs-crores YEAR 2007-08 2008-09 2009-10 NET SALES 131536 147329 102393 OPERATING PROFIT 13645 13862 PAT 12350 4951 (2120) OPM 14.1% 12.6 9.1%

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 EBIDTA EBIDTA Margin PBT Net Profit Net Profit Margin

$ Mn $ Mn %

11456 512 4.47 %

10018 305 3.04%

12165 1251 10.28%

10845 1142 10.53 %

12845 1846 14.37 %

$ Mn $ Mn %

-644 -741 - 6.47

-321 -388 - 3.87

766 593 4.87

649 512 4.72

610.35 446 3.47 %

30000 25000 20000 15000 10000 5000 0 2004-05 2005-06 2006-07 2007-08 2008-09 3474 3506 4222 4687 5202 14489 15132 sales PAT 19654 17452 24348

2009 EPS Dividend / share 69.70 16

2008 63.85 16

2007 72.74 15.5

2006 59.91 13

2005 42.18 13

OPM %

37.68

41.94 1.0820.42

39.61 .6931.19

38.88 .2536.44

41.1 .3850.27

Debt/equity 1.34RNOW 19.87

2009

2010

2011

PROFIT 5202 EPS 42 PE RATIO 38

5046 72 22

5872 85 18

share holding pattern

20.55

20.83

foreign omestic Institutions 58.16

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

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

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 for FY 2006

RatiosEV/EBITDA EV/TON Price/Book Value P/E Ratio EPS

Corus4.5 X 538 1.34X 14.96X 0.41$

CSN 6.29 X 2263 0.90 X 4.69 X 2.12 $

Severstal 18.98 X 3221 4.76 X 43.5 X 1.27 $

Nucor 9.14 X 864 1.72 X 15.13 X 3.06 $

2006-07

2007-08

2008-09

EBITDA/Turnover PBT (In crores Rs) PAT(In crores Rs) PBT/Turnover Interest Coverage Ratio EPS Debt /Equity P/E

31.14% 6313 4165 24.61 % 16.35 64.66 0.71 6.95

14.08 % 16371 12321 12.39 % 3.46 177.18 1.99 3.91

12.55 % 6743 4849.24 7.43 % 4.32 66 1.65 3.12

1.

ValuationTATA 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.

2.

Interest charges

New Debt of $ 8 bn @ 8% annual interest cost i.e. $ 640 mn Coruss existing interest debt amounts to $ 725 mn.

Galvanized Hot Roiled Rebars Sheets Coils / wire, Ro Cold Rolled Coils Sheets ads wire Galvanized Hot Rebars / Sheets Leading Position Roiled Sheets Coils / wire, Ro Cold Rolled Coils Sheets ads wire / Sheets Leading Position Hot Roiled Coils / Sheets Hot Roiled Coils / Sheets Advanced high- strength Steel Superior Automotive Steel Rods for Tyre cord Structural Sections Advanced high- Tin Plate Packaging Steels strength Steel Superior Automotive Steel Rods for Tyre cord Structural Sections Packaging Steels Tin Plate

Corus Leading Position Corus

Rail

Rail

Leading Position

Tatas

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 entitys interest obligation will amount to approximately $725 million after the acquisition.

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 worlds 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

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 Corusshares.

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 Steels 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.

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. This

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 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 $ Billion)

Break-up of Tata Steel Equity Contribution in US Million

Tata Steel UK Tata Steel Singapore Tata steel Equity contribution Cash reserve External commercial borrowing Preference shares to Tata sons Rights issue. Convertible Preference shares Foreign issue Sub Total Grand Total

6.14 2.66 4.9 700 500 640 862 1400 798 4900 13.7

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. 1)

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

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).

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. The

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 semifinished products At

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