The Tata Corus Merger

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Copyright 2008 London Business School. All rights reserved. No part of this case study may be reproduced, stored in aretrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without writtenpermission of London Business school.

This case was prepared by Dr Narender L Ahuja, Professor, International Management Institute, New Delhi, India as a basisfor classroom discussion rather than to illustrate either effective or ineffective handling of a management situation. The casestudy was supported by the Aditya Birla India Centre at London Business School.

ecch: 310-277-1Dr Narender Lal Ahuja London Business School REF: CS-10-001

Date: 2008

The Tata Corus MergerA Visionary Deal or a Winners Curse?

Tata Steel had been declared the winner in a heated battle for the Corus Group, toppingan offer from CSN (Companhia Siderurgica Nacional) group of Brazil. The final price paidfor the company was 30% more than the initial bid which led to financial analysts beingunanimously negative about the deal. As a result Tata Steel share prices plunged as muchas 9% after the deal.

The Corus acquisition by Tata Steel was India's biggest foreign takeover ever. Winning thebid however was just the beginning of the real challenge to make the marriage work.

Would the acquisition of Corus create more wealth for the Tata shareholders? Was it avisionary deal or merely destined to prove the Winners Curse?

Background

The Tata Iron and Steel Company (name later changed to Tata Steel) was established bySir Jamsetji Tata in 1907. By 2006 it was India's largest integrated private sector steelcompany. Though domestically the company had seen significant growth in the 100 years,

it ranked a poor number 56 globally in terms of steel output. In order to enhance its marketshare in the global market TATA steel made several smaller foreign acquisitions, includingSingapore's NatSteel and Thailand's Millennium Steel.


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London Business School ecch:

Copyright 2008 London Business School 3

Rationale

Tata Steel was India's largest integrated private sector steel company but globally rankednumber 56 in terms of steel output. The company was aware of the consolidation takingplace in the global industry and desperately needed Corus to enhance its globalcompetitiveness.

The Corus buy would instantly catapult Tata Steel to the position of 5th largest steelproducer in the world, and provide access to the latest technology and strategic Europeanmarkets as Corus had plants in Britain, Germany, France, the Netherlands and Belgium.Tata also expected to benefit from reduced production costs due to large volume,combined R&D operations and broader product range. Corus buy would also dovetail with

Tata Steels efforts to move up the value chain, as the former had built a reputation as anestablished supplier to the aviation and auto industries.Brazils CSN and other suitors were also trying hard to acquire Corus which meant thatacquisition was the only alternative.

On 17thOctober 2006 Tata Steel declared that it had made a non-binding offer to acquire100% stake in UK-based Corus Group at a bid price of 455 pence a share, valuing Corusequity at $8 billion. At that time, nearly 49% of Corus was owned by British shareholders,11% by North American shareholders, 10% by Dutch shareholders and another 30% byshareholders in Germany, France, Belgium and other countries.

At first, it had appeared that Tata would get Corus unopposed as the bid had receivedfavourable initial response from the Corus Board. The Corus board had unanimouslyaccepted Tata Steel's takeover proposal and had even recommended it for shareholders'approval. However, things changed soon after CSN entered the fray, making a morecompetitive offer than Tata.

The bidding process continued for three months with CSN countering each successivemove by Tata with a higher bid for the equity of Corus. For example, when Tata raisedtheir bid to $9.2 billion for Corus equity in early December 2006, CSN countered it with$9.6 billion within hours of the Tatas offer.

When months of takeover battle could not determine the winner, UKs Takeover Panel

announced that it would hold an auction with a maximum of nine rounds to decide thewinner. The auction took place on 30th January 2007. The relevant excerpts of theTakeover Panels statement on auction procedure are given in Exhibit-1.

On the auction eve, Ratan Tata along with Tata Steel managing director B Muthuramanwere monitoring the Corus auction taking place thousands of miles away in London. TheTata Sons director Arun Gandhi, their investment bankers and advisers were in Londonrepresenting Tata Steel.


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The nine-round auction called by the UK Takeover Panel to decide the winner between thetwo contestants began at 1630 hrs GMT (2200 hrs IST) on 30th January 2007 in London.Both companies were asked to send bids through email or fax by 0230 hrs GMT next day.

CSN was bidding from its adviser Lazard's office in London while the Tata Steel team washoused in and bidding from the offices of its lawyers Herbert Smith. Reportedly, HerbertSmith's London office had been video-linked to the Tata headquarters in Mumbai.

The nine-round bidding began at 1630 hrs and initially neither party seemed to be in a rushto come up with a bid. It seemed the two suitors Tata and CSN were delaying their bids togive minimum possible response time to the other, and to keep the price as low aspossible. As per the guidelines issued by the UK Takeover Panel, each contestants bidhad to be higher than the other bidder by at least 5 pence. As a result, more the number ofbidding rounds, the higher the price they would have to quote.

However the bidding gradually warmed up and by 1900 hrs GMT three rounds of auctionprocess had been completed, and neither party was willing to withdraw. The twocontestants were required not to publicly announce the increased bids lodged during theauction procedure.

After several hours and rounds of auction, Tata was declared the winner when CSNreportedly backed out. Tata agreed to pay $12.9 billion for Corus. The relevant excerpts ofthe Takeover Panels announcement on the outcome of the auction process are given inExhibit-2.

Valuation & Due Diligence

Tatas original bid for Corus had been at 455 pence a share in mid -October 2006, valuingCoruss equity at $8 billion. But as a result of the bitter fight with CSN of Brazil, Tata finallypaid a price of $12.9 billion in an all-cash deal, raising doubts that the acquisition wouldlikely turn out to be a winners curse. Within weeks of the acquisition announcement, TataSteel had lost over $1 billion in market capitalization, as the market reacted negatively tothe high price paid.

The wealth-accretion advantages of the deal, if any, would accrue in the long term.Immediately, it meant raising huge amounts of debt and equity to finance the deal. BothMoodys Investors Service and Standard & Poors said they might lower Tatas debt ratingwhich meant that debt financing would likely neither be easy nor cheap.

To finance the Corus buy, Tata Steel embarked upon what was perhaps the biggest fund-raising exercise by an Indian company. It raised funds through a number of sources.


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These included a rights issue of equity shares, rights issue of convertible preferenceshares and long-term debt including foreign currency structured issues.

Tata Steel and its fully owned subsidiaries Tata Steel UK and Tata Steel Asia Singaporewere involved in the unprecedented fund raising exercise by an Indian company. TataSteel UK was also the SPV for the Corus takeover. The whopping about $13 billion wasplanned to have been raised as shown in Table-1.

Company Source Amount

$ MillionTata Steel Internal generation 700Tata Steel External commercial borrowings 500Tata Steel Preferential issue of equity shares to Tata Sons @

Rs 499.7 per share640

Tata Steel Rights issue of equity shares to its shareholders @Rs 300 per share 862

Tata Steel Rights issue of convertible preference shares 1,000Tata Steel ADR/GDR EQUITY ISSUE 500Tata Steel UK Non-recourse debt raised from a consortium of

banks6,140

Tata Steel AsiaSingapore

Bridge finance 2,660

Total 13,002Source: Table developed on the basis of information from Business Line dated April 18, 2007.

Convertible preference shares were planned to have a coupon rate of 2 per cent withconversion into equity shares after two years at a price of about Rs 550 per share.

Tata Steel had to make several changes in the original financing plan in view of thechanging capital market conditions. The size of Rights issue of convertible preferenceshares was enhanced to Rs. 6,000 crore instead of previous Rs. 4,350 crore. The size ofADR/GDR EQUITY ISSUE (CARS issue as detailed below) was raised to $875 millioninstead of $500 million planned earlier to exploit the favourable market response.

Tata Sons (Tata Steels holding/parent company) played a crucial role in ensuring thesuccess of both the Rights issues of equity shares and the Convertible preference sharesby agreeing to take up any unsubscribed portion of the issues.

To part-finance the Corus acquisition, Tata Steel Ltd made a Foreign Currency ConvertibleAlternative Reference Securities (CARS) issue worth $725-million in August 2007, alongwith a green shoe option $150-million. The issue had been reportedly subscribed by overtwo times and the company raised a total of $875 million through the CARS issue includingthe green shoe option.

CARS was a convertible security which would be convertible into either ordinary shares orother Qualifying Securities (such as depositary receipts) representing underlying ordinary


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shares with differential voting rights. CARS, which would be listed on an overseas stockexchange, carried a one per cent coupon interest with the effective YTM (yield to maturity)of 5.15 per cent.

CARS were convertible at a conversion price of Rs 876.62 per share, which would be at apremium of 35 per cent to the companys closing share price on the National StockExchange on August 6, 2007. The outstanding CARS at maturity, if any, would beredeemed at a premium of 23.34 per cent of the principal amount. [Business Line, Aug 8,2007]

By early April 2007, Tata Steel had completed the $12.9 billion (Rs 52,700 crore)acquisition of Corus Group plc at a price of 608 pence per ordinary share in cash. Theenlarged company would have a crude steel production of 27 million tonnes in 2007 andwould be the world's fifth largest steel producer with 84,000 employees across fourcontinents.

Post Merger Integration

Soon after completing the Corus acquisition in April 2007, Tata Steel formed a high-powerseven-member Strategy & Integration committee, headed by Chairman Ratan Tatahimself, to spearhead the Tata-Corus union. In addition to Ratan Tata, the committee hadthree senior leaders from each of the two uniting companies. Working at full swing andusing a combination of top-down and bottom-up approach, the committee identified anumber of projects to achieve the objectives and manage the cultural and organizationaldifferences. By May 2007, a roadmap had been drawn up and the overall synergy charterwas ready. Tata decided that the Corus' top management would continue with theenlarged Group and the Corus Board of Directors was reconstituted to includerepresentatives of Tata Steel. At the same time, in a spirit of partnership, an invitation wasextended to some senior members of Corus to join the Tata Steel board, making theexchange mutual to further augment the integration process.

There were concerns also that Tata Steel could have problems in the power sharingprocess at the senior and mid-level managements due to cultural differences between thetwo companies. However, Tata management believed that Corus was a company whichshared their values and management systems.

Tata Steel did not want to engage in any hostile takeover bid. Ratan Tata had categoricallydeclared that he would not go in for acquisitions or partnerships if the value system of thetarget company or its management grossly differed from that of the Tata group.


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Deriving Synergies

Tata Steel management emphasized many advantages of the deal such as a combinedcapacity of 27 million tonnes per annum, catapulting it to the position of 5th largest steelproducer in the world from number 56 earlier.

Also there were other synergies between the two companies; Corus was a large player invalue-added services while Tata Steel was one of the lowest cost producers of steel in theworld. Tata Steel also had a relative cost advantage because it owned iron-ore mineswhich Corus did not. A merger would complement their respective strengths.

According to Tata Steel Annual Report of 2007-08 the expected synergies and efficiencies

had already started flowing in and would bring in annual benefits of USD 450 million perannum by year 2010. Importantly, cultural differences between the two companies hadbeen taken care of and the two merged entities were working under their jointmanagement. Tata Steels earnings per share had improved after the merger. There weresome concerns over the lower return of capital employed and EBIDTA margins in 2007-08which seemed to have declined. As debt would be repaid over the years, the EBIDTAmargin as well as return of capital employed were likely to improve, but would need to becarefully watched.

According to Ratan Tata, post-merger the immediate focus would be on extractingsynergies from Corus. He felt that there was scope to make Corus a competitive steelcompany by inculcating the creativity and cost-consciousness in Corus as had been

generated in Tata Steel.

Reaction of the Stock Markets after the Acquisition

Analysts were quick to point out that the average overall return on equity for the combinedentity would take a severe beating due to the negative impact of the high price paid for theCorus shares.

Before the acquisition, Tata Steel had planned and announced several Greenfield andBrownfield projects in India to expand domestic production capacity. Investors also fearedthat the acquisition could adversely affect such already announced projects due tostressed financial position as a result of the diversion of resources to pay for theacquisition.

Further, there was concern about the increasing financial risk, as Tata Steel went on adebt-raising spree to finance a major part of the cost of acquisition. It had earlier


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announced a long-term plan of keeping its debt-equity ratio at 1:1, which would nowescalateat least in the immediate future. But the company was confident that the debt-equity ratio would be brought down to the target levels within two years of consolidation.

Postscript

"The Tata-Corus on-going merger will provide $130 million savings this year till March2008. After three years, the integration will lead to $400 million yearly savings to thecompany," Muthuraman, Tata Steel MD.[http://www.tata.com/company/Media]

Post-merger the Tata-Corus combined entity emerged as the second-most geographicallydiversified steel company by revenues.

Both Ratan Tata and Muthuraman had been confident that demand for steel productswould continue to witness a strong growth for several years post merger. Ratan Tatasummed up his justification for the merger when he said, "We believe history will say wedid the right thing."


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Exhibit-1

THE PANEL ON TAKEOVERS AND MERGERS

10 PATERNOSTER SQUARE LONDONStatement 2007/3 dated 26 Jan 2007

OFFERS BYTATA STEEL UK LIMITED (TATA)

ANDCSN ACQUISITIONS LIMITED (CSN)

FORCORUS GROUP PLC (CORUS)

On 20 October 2006, Tata announced a cash offer of 455p per share for Corus, such offer to beimplemented by way of a scheme of arrangement. The Tata scheme document was posted on 10November. On 10 December, Tata announced a revised offer for Corus of 500p per share. On 11

December, CSN announced a firm intention to make a cash offer for Corus of 515p per share andthat it proposed that, subject to the satisfaction of a pre-condition, its offer should also beimplemented by way of a scheme of arrangement. On 19 December, the Panel Executiveannounced that it had ruled that the last date for Tata and CSN to announce revised offers forCorus was 30 January 2007.

On the basis that neither bidder has declared its offer final, such that either offer may be increasedor otherwise revised, a competitive situation continues to exist for the purposes of Rule 32.5 of theTakeover Code (the Code). In order to provide an orderly framework for the resolution of thiscompetitive situation, and in accordance with Rule 32.5, the Panel Executive has, after discussionswith the parties, established an auction procedure which, assuming a competitive situationcontinues to exist is expected to commence at 4.30pm (London time) on 30 January.

The auction procedure will consist of a maximum of nine rounds, comprising up to eight roundsin which each bidder is able to lodge a fixed price bid in cash followed by, if the auctionprocedure has not by then concluded, a final round.

In the final round each bidder is able to lodge either a fixed price bid in cash or a cash bidcalculated by reference to a formula pursuant to which an bidder can lodge a bid at a specifiedamount in cash more than the other bidder.

It is expected that the increased bids (if any) lodged during the auction procedure will not bepublicly announced by any of the parties.

Assuming, as is currently expected, that the auction procedure has completed by 2.30am(London time) on 31 January, the Panel Executive expects to make an announcement by no

later than 3.00am (London time) on 31 January setting out the prices of the offers to beannounced by each bidder following the conclusion of the auction procedure. Each of theparties has agreed to the terms of the auction procedure and this announcement.

26 January 2007Source:http://www.thetakeoverpanel.org.uk/new/
http://www.thetakeoverpanel.org.uk/new/http://www.thetakeoverpanel.org.uk/new/


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Exhibit-2

THE PANEL ON TAKEOVERS AND MERGERS

10 PATERNOSTER SQUARE LONDON

Statement 2007/4 dated 31 Jan 2007

OFFERS BYTATA STEEL UK LIMITED (TATA)

ANDCSN ACQUISITIONS LIMITED (CSN)

FORCORUS GROUP PLC (CORUS)

On 26 January, the Panel Executive announced that it had established an auction procedure which

commenced at 4.30pm (London time) on 30 January. This auction procedure has now completedand the prices of the revised offers which the bidders are required to announce under Rule 2.5 ofthe Code are as follows:

(a) Tata608p in cash for each ordinary share of 50p each in the capital of Corus; and

(b) CSN603p in cash for each ordinary share of 50p each in the capital of Corus.

31 January 2007

Source:http://www.thetakeoverpanel.org.uk/new/
http://www.thetakeoverpanel.org.uk/new/http://www.thetakeoverpanel.org.uk/new/


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Appendix: Excerpts from Tata Steel Annual Report 2007-08


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Bibliography

Apte, PG, International Finance: A Business Perspective, New Delhi: Tata McGraw-Hill.Business Line, The Hindu, Aug 2007, various issues.

Business World, Feb. 2007.Eiteman, D, Stonehill, A and Moffet M, Multinational Business Finance, Addison WesleyPublishing.

Financial Times, British daily web edition, January 31, 2007.http://www.indiaonestop.com/economy.http://www.managementparadise.com/forums/articles/14071.http://www.rbi.org.http://www.tata.com/company/Media.http://www.thetakeoverpanel.org.uk/new/.Madura, Jeff, International Financial Management, South-Western College Publishing,

U.S.A.Press Trust of India, Mumbai January 31, 2007.

Tata Steel Annual Reports, 2006-07 & 2007-08.The Financial Express, Mumbai, October 18, 2006.Weston, J Fred, Mergers and Takeovers - Theory and Practice, McGraw-Hill.
http://www.managementparadise.com/forums/articles/14071http://www.rbi.org/http://www.tata.com/company/Mediahttp://www.thetakeoverpanel.org.uk/new/http://www.thetakeoverpanel.org.uk/new/http://www.tata.com/company/Mediahttp://www.rbi.org/http://www.managementparadise.com/forums/articles/14071

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The Tata Corus Merger

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