Tata Steel -Corus Case Study

8/3/2019 Tata Steel -Corus Case Study

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Case study

Acquisition of Corus by Tata

SteelBhargav Pandya


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The Mega Deal

Tata steels takeover ofAnglo-Dutch steel giantCorus is a major milestonein the history of Indian

business.

The $13.7 billion deal,corporate Indias biggesttakeover to date, reaffirms

the arrival of India as a bigplayer in the globalizationgame.


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MEN OF STEEL: From left: Tata chief B Mutharaman, chairman RatanTata, Corus chairman James Leng and chief executive Philippe Varin

Source: thisismoney.co.uk


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Highlights of theAcquisition

Tata Steel acquired Corus, which wasfour times its size and the largest steelproducer in the U.K.The acquisition has propelled Tata Steel

into the big league. From being in thefifty-sixth position in the world , Tata Steel,along with Corus and other subsidiaries,is now the fifth largest steel maker by

capacity, with an annual capacity of 28million tonnes, and output of 24 milliontonnes.It is, so far, Indias largest ever trans-

border acquisition.


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Highlights of theAcquisition

It is a classic case of a leveragedbuyout with over 70 per cent of theUS$13.7 billion tag being financed

through debt.Over the five years prior to Corus

acquisition by Tata Steel Indian

companies had made globalacquisitions for over $10 billion; theTata bid exceeded all of them put

together.


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The Victory

On 31 January 2007, Tata steel Limited acquiredthe Anglo-Dutch steel producer Corus forUS$12.90 billion.

Before this victory, however, Tata Steel had tolock horns with another suitor, the BraziliansCompanhia Siderurgica Nacional (CSN) in ninerounds of bidding.

Initially, on 5 October 2006, Tata Steel had offereda much lower price of 455 pence per sharevaluing the deal at US$7.6 billion. However, in theauction that was held on 31 January 2007, itmade a final offer of 608 pence share to pip CSNwhose final offer was just a shade lower being at603 pence per share.


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History of TATA Steel

Tata Steel is a part of the Tata Group, one ofthe largest diversified businessconglomerates in India.

In 1907, Jamshedji Tata established Tatasteel at Sakchi in West Bengal.

With the liberalization in the Indian economyin early 1990s, Tata Steels business grewrapidly to become the Asias first and Indiaslargest integrated steel producer in the

private sector. In February 2005, Tata Steel acquired the

Singapore-based steel manufacturerNatSteel Limited.

Tata Steels Indian operations generated netsales of Rs 17,552 crore in the financial year


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History of Corus

The history of Corus can be traced to the early20th century when Koniklijke Hoogovens wasfounded by the Government of Netherlands on20 September 1918.

After several acquisitions over the decades,Hoogovens had become one of the majorplayers in the European steel industry.

One of the major achievements on thebusiness front in 1998 was Hoogovensselection as the only long-term European

supplier to Boeing.


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History of Corus

On 6 October 1999, Hoogovensmerged with British Steel plc to formCorus Group Plc, the worlds third

largest steel producer during that time.

However, the merger did not succeed.

In 2006, corus reported an annualturnover of 9.7 billion pound but with amuch lower PBT of 313 million pound.


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History of the deal

CSN and Corus had planned an all-shares in 2002, but the deal eventuallybroke up.With dwindling profitability in 2006, Corus

had, by September 2006, decided to joinhands with a low-cost steel producer. On5 October 2006, Tata Steel made an offer.Of 455 pence a share in cash for the

entire shareholding of Corus whichtranslated into a total deal value ofUS$7.6 billion.Corus positively responded to the offer on

20 October 2006. Agereeing to thetakeover by Tata Steel at that price.


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History of the deal

CSN and Corus had planned an all-shares in 2002, but the deal eventuallybroke up.With dwindling profitability in 2006,

Corus had, by September 2006, decidedto join hands with a low-cost steelproducer. On 5 October 2006, Tata Steelmade an offer.

Of 455 pence a share in cash for theentire shareholding of Corus whichtranslated into a total deal value ofUS$7.6 billion.

Corus positively responded to the offeron 20 October 2006. Agereeing to the


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History of the deal

On 18 November 2006, CSN made acounter bid for acquiring Corus with aprice of 475 pence per share.In the light of offers and counter offers

from Tata Steel and CSN, the TakeoverPanel, the United Kingdoms watchdog onmergers and acquisitions set the deadlineof 30 January 2007, for both the

companies to make their final offer. Thepanel also stipulated that if no outrightwinner emerged, an auction would beconducted.Even by 30 January 2007, none of thecompanies had declared their final offer.


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History of the deal

The Takeover Panel then asked for anauction to be held at 4:30 p.m GMT on31 January 2007.

After nine rounds of bidding on 31January, Tata steel emerged the

winner in the auction with its finalbid of 608 pence per share.


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Industry Scenario

Global steel industry overview

The global crude steel production in 2007 was1344 million tonnes, showing an increase of

100 million tonnes over the 2006 level of 1244million tonnes.Top six crude steel-producing nations


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Industry Scenario

Indian steel industry review In the decade leading to 2007, Indian steel

industry had experienced a robust growth indemand, fuelled particularly by the demand for

steel in China.Production Consumption

FY08 FY07 Percentageof Change

FY08 FY07 Percentageof Change

Flat Products

Long Products

20

28

19

26

5

8

21

29

18

26

16

12

Total 48 45 7 50 44 14

Source: Tata Steel Annual Report 2007

(Figures in Million Tonnes)


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Industry Scenario

Fragmented nature of global steelindustry

Only 17 per cent of the total world

production in 2007 was contributed bytop five companies of the world.

This indicates that the global steel

industry is highly fragmented.


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Top ten Global Steelmakers


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Funding of the Corus-TATA deal

Tata Steel Ltd

Tata Steel Asia Holding Pte. Ltd(100%)

Tata Steel UK Ltd(100%)

Corus Group Plc(100%)


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Rationale behind theacquisition

Tata Steels compelling need to globalizeTo have production capacities in the exportmarketsTo avail many synergies between Tata and

Corus- Tata Steel is the lowest cost producer ofsteel in the world, Corus is a player with a largepresence in value added steel segmentTo avail strong distribution network of Corus in

Europe

Post acquisition Tata would be able to supplysemi-finished steel to Corus for converting intohigh value added productsJoint procurement of raw materials


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The Flip Side

Outcome and effects on Tata Steels performance

Corus EBITDA at 8 per cent was much lower than that of TataSteel

Valuation and funding of the deal

Significant equity dilution of Tata Steel post Corussacquisition

Tata Steel would no longer remain as the lowest-costproducer in the world

Corus itself did not have access to any iron ore or coalreserves

In the first two years, the potential synergies might be lower


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The Road Ahead


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Epilogue

On 11 May 2009, The Times of India,Mumbai reported as follows:

London: In a candid admission,perhaps for the first time, Ratan Tatahas said his two mega acquisitions-Anglo Dutch steelmaker Corus and

British marquee Jaguar Land Rover-were done at an inopportune timeand his company might have gone toofar too fast.

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Tata Steel -Corus Case Study

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