Tata - Corus Deal .. Done

8/8/2019 Tata - Corus Deal .. Done

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TATA & CORUS

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S TEEL INDUSTRY BACKGROUND

As per IISI the demand for steel would be around

4.9% (1.32 bn tonnes)in 2010. But would decrease

in 2010-2015 to 4.2% (1.62bn tonnes)

China is the highest producer of steel in the

world

In 2006, motor vehicle sales fell 2.6%, while

production was down 2.8%.

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VISION T VISION T ATA ATA SS TEELTEEL

´We aspire to be the global steel´We aspire to be the global steelindustry benchmark forindustry benchmark for

Value Creation and CorporateValue Creation and Corporate

Citizenshipµ Citizenshipµ

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T ATA S TEEL B ACKGROUND

Tata Steel a part of the Tata group, one of the largest

diversified business conglomerates in India.

Founded in 1907,by Jamshedji Nusserwanji Tata.

Started with a production capacity of 1,00,000 tones, has transformed into a

global giantIn February 2005, Tata steel acquired the Singapore based steel

manufacturer NatSteel.

Tata steel acquired the Thailand based Millennium Steel in December 2005.

Tata Steel generated net sales of Rs.175 billion in the financial year 2006-

07.

The company¶s profit before tax in the same year was Rs. 64.14 billion while

its profit after tax was Rs. 42.22 billion.5



SWOT A NALYSIS OF T ATA S TEEL

-Low Cost production.-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 leaderin low cost and high quality

steel products.

- To Compete with otherbig global players

SWOT

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SWOT A NALYSIS

World·s ninth largest and Europe·ssecond largest steel producer.

- Wide range of products of hightechnology.

- High operational Cost.- Lack of Access to raw material

- To merge with a company toeliminate duplication and removeoverlaps in marketing, accounting

etc.- To get access to raw material andgrowth markets through merger.

- Increasing losses resulting towinding up of company

SWOT

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R EASONS FOR T ATA S TEEL TO B ID

Tata is looking at manufacture finished products in mature markets of Europe

At present manufactures low value long and flat steel products while

Corus produces high value stripped products

A diversified product mix will reduce risks while higher end products

will add to bottom line

Corus holds a number of patents and R&D facility

Cot of acquisition is lower than setting up a green field plant and

marketing and distribution channels

Tata is know for efficient handling of labour and its aims at reducing

employees cost and improving productivity at Corus

It had already expanded its capacity in India

It will move from 55th

in the world to 5th

in production of steel globally.

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ACCESS TO NEW MARKET

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Tata debt of Corus is 1.6 bn GBP

Corus needs supply of raw material at lower cost

Though Corus had revenue of $18.06 bn, its profit was

just $626 mn (Tata's revenue was $4.84 bn & profit

$824mn)

Corus facilities were relatively old with high cost of production

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

REASONS FOR CORUS FOR ACCEPTING BIDS

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April 2Wins the

bid

Oct 6offer of 455

pence per share

Oct 23 BrazilianSteel Group CSN

Dec 18Tata bid @500 pence

/shareBrazilian counter bid at

515pence per in cash

Jan 31Tata offers Corus

investors 608 penceper share in cash

Nov 18battle over

Corus intensifies

Oct 20Corus acceptedterms of £ 4.3

billion

20072006

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Immediate takeover was required.

Share Swap deal would have been less attractive to the Corus

shareholders.

Share Swap would have meant 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 favor 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????

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DEAL STRUCTURE : L EVERAGE BUY OUT (LBO )DEAL STRUCTURE : L EVERAGE BUY OUT (LBO )

Equity (Tata Steel) USD 4.1 bn

Debt USD 6.14 bn long-term debt froma consortium of banks raised US $ 2.66bn through bridge loans.

Existing Debt USD 0.85 bn

TATA Steel Ltd

TATA Steel Asia

Holdings(Singapore)

TATA Steel UK

Corus Group UK

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FINANCING THE DEAL

Equity contribution by Tata Steel to Tata Steel UK via Singapore of $4.1 bI nternal generation- $1.267 bExternal commercial borrowings- $0.5 bProceeds from rights issue- $1.888 bForeign equity offering- $0.445 b

N on-recourse debt financing by bank consortium (at Tata Steel UK) of $6.143 b

Five-year amortizing loan of $3.236 bSeven-year minimally amortizing term loan of $2.907 b

B ridge financing in Tata Steel Asia Holdings (Singapore) of $2.662 b

Credit Suisse leaded, joined by A BN AMRO and Deutsche B ank in theconsortium.

Of the $ 8 billion of financing , Credit Suisse provided 45% and A BN AMRO and Deutsche provided 27.5% each.

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PAT as a percentage of revenue (post Corus ) ² 9.34%

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Tata was one of the lowest cost steel producers & Corus was fighting

to keep its productions costs under control .

Tata had a strong retail and distribution network in India and SE 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 fit 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.22



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.

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.

High Debt equity ratio.High dependability on the growth of market. A lot of stress on the cash flows of combined

entity.

To become global player in steel industry.Takeover more companies successfully.

Increase in production capacity beyond 56mn tons by 2015

- Cultural Diversifications are not easy tointegrate.

Markets should continue to grow.Rising cost of raw material.

Rising terrorism and political unrest amongnations.

SWOT

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High value paid. Approximately 7.7 times its Enterprise Value.

Enterprise value =common equity at market value+ debt at market value+ minority interest at market value, if any+ preferred equity at market value

± cash and cash-equivalents.

Corus¶ EBITDA was at 8% which was much lower as compared to Tata Steel¶s30%.

Debt of US $ 8 bn was raised against the cash flows of Corus. It was a riskyproposition.

Tata¶s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it wasmaintaining earlier.

Fast consumption of Tata Steel¶s captive iron ore reserves as production capacityincreased from 5.3 million ( estimated for 50 years at this capacity) to 27 milliontons of steel per annum.

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Increasing reach to joint entity to 4 continents and 45 countriesincluding 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 by2015 so as to become one of 3 top steel producers in the world.

The global demand for steel remained weak even in the secondquarter of financial year 2009-10. However, the prices of raw materialsfor making steel fell in the year 2009. The Benchmark price for coalfell to US$ 120 per tonne in 2009 from US$ 300 per tonne in 2008.

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If TATA steel were to create, from scratch, 19 million tonnes of steelmaking capacity comparable in quality to what Corus possesses, Itwould 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 everythinggoes well, has great execution risk.

With Corus in its fold, Tata steel can confidently target becoming oneof the top 3 steel makers globally by 2015 . the company would havean aggregate capacity beyond 50 million tones per annum, if all theplanned Greenfield capacities go on stream by then.

We can conclude that if the acquisitions are well planned , executedand the necessary precautions taken for the deal a company canachieve its strategic objectives and thus ensure its growth throughacquisition. 26



´ I believe this will be the first step in

showing that Indian industry can stepoutside the shores of India in aninternational market place and acquititself as a global playerµ

- Ratan Tata

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Tata - Corus Deal .. Done

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