IES Management college & Research Centre

TATA- CORUS

Team MembersSamir Madia- 67Vineet Saraf – 86Romeel Shah- 92Sachin Shingare- 101Ashish Upadhyaya- 116

Profile - Tata Steel • Vision – “We aspire to be the global steel industry benchmark for

Value Creation and Corporate Citizenship”.

• 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 30 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.

Profile - Corus• 2nd largest European steel producer

• Annual turnover of £12bn (~£2.5bn in Wales), with 42,000

employees worldwide

• Major manufacturing sites in UK, Netherlands, Germany, France

and Belgium & sales offices/service centres in over 40 countries

• 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

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.

• Helped TATA to feature in Top 10 players in world.

• Technology Benefit.

• Economic of scale.

• Corus holds number of patents and R&D facilities.

Reasons for Corus to be sold

• A chance to Bail out of Debt and Financial stress.

• Access to cheap high quality Iron ore from India.

• Corus had high cost of production.

• Though Corus had revenues of $18.06 bn ,its profit was

just $626 mn (TATA’s revenue was $ 4.84 bn and profit

$824 mn)

Race to win Corus…• Oct 17th, - TATA steel offered 455pence per share.

• Oct 20th - Corus board accepted term of £ 4.3 bn takeover (455 pence

per share).

• Nov 3rd - Russian steel giant Severstal announces officially that it will not

make a bid for Corus .

• Nov 18th- Brazilian group CSN approached the board with bid of 475

pence per share.

• Dec 18th- TATA increased the original bid to 500 pence per share at

same time CSN counter bid at 515 pence per share.

• Jan 31st- TATA steel wins auction(608 p/share against CSN’s last bid of

603 p/share).

• April 2nd- The deal became effective i.e. TATA won the race.

5 Yr. Financial performance of Tata Steel

Category Unit FY`02 FY`03 FY`04 FY`05 FY`06

Production `000 Mt3,636 3,941 4,089 4,109 4,552

Revenue $ Mn1583 2150 2755 3532 3884

EBIDTA $ Mn283 516 840 1378 1401

EBIDTA Margin

%20% 27% 34% 42% 40%

PBT $ Mn52 277 616 1178 1187

Net Profit $ Mn43 222 404 773 794

Net Profit Margin

%3% 12% 16% 24% 23%

EVA $ Mn

-96 34 156 528 529

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

2006-07 31st Dec,2006

Turnover 4546 18979

EBITDA 1704 1846

PBT 1440 610.35

PAT 971 446

Net Profit Margin 23% 2.35 %

EPS 1.70 0.41

Dividend 254 134

TATA Steel Corus

Financial just before Acquisition

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 %

Financing Plan of Tata Steel Equity

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

Valuing the AcquisitionEV = 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

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.

Peer Comparison Peer Comparison for FY 2006

Profit before Tax of Peers Pre & Post Acquisition

Year CSN CORUS Nucor Severstal

2006 987 610.35 2693.818 2112.429

2007 2161 - 2253.315 2654.455

2008 2941 - 2790.470 2587.959

(USD mn )

Particulars 2006-07 2007 -08

Risk Free Rate 8.00% 5.27%

Market premium 6.50% 9.00%

Assumed Beta 1.12 1.5

Cost Of equity 15.28% 18.77%

Equity % 37.00% 35.00%

Cost Of Debt 8.00% 8.00%

Tax Rate 34.00% 25.00%

After tax cost of debt 5.28% 6.00%

Debt % 63.00% 65.00%

WACC 8.98% 10.4695%

Capital Employed 42074.75 92161.62

Net Profit 4165.61 12321.76

Total Weighted Cost 3778.313 9648.861

EVA 387.297 2672.9

Figures In Cr.EVA Calculation Pre & Post Acquisition

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

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.

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.

After Acquisition Analysis

• Aggregate crude steel production capacity of around 28.1 million

tonnes.

• Global Player with a balanced presence in developed European

and fast growing Asian Markets.

• Greenfield and Brownfield developments.

• May 07 EBITDA of 13 %, 25 mn tonnes of production ,Ranked 5 th

• 2012 EBITDA of 25 %,40 mn tonnes of production, Ranked 2nd

• The group is growing aggressively and targets 50 mn tonne

capacity by 2015.

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

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

Ratan Tata’s View

Ratan Tata chairman Tata group said,

“ We have taken a view that we would not go beyond a point… We did not reach that point .Had we reached that point we would have walked away. Over bidding or not is subjective when it comes to judgment calls”.

What's your view on the acquisition ???

Right Time ??

Right Partner ??

Right Terms ??

Our view on the deal

• Tata Steel's acquisition of Corus was a bold

and smart move. Complementarities in scale,

market geography, financials, technology and

raw materials offered a strong rationale for

the deal.

Our view on the deal

We believe that the acquisition of Corus has

been timely. Given the rising momentum of

consolidation in the industry and rising

valuations of steel companies, had Tata Steel

not acted when it did, the opportunity could

have been lost forever.

1995 2007 CAGR( up to 06)

Sales 21.1 155.1 15.1 %

EBITDA 6.4 26.5 16.1%

PAT 2.2 12.3 20.5

Market Cap 16.3 127.9 26.1

Capacity (mt) 54 136 4.7

(US $ Billion)

Global Industry Average and CAGR

THANK YOU