Small Fish

Swallows
the Big Fish
Acquisition
Tata Steel
 “We think we started on sound and
straightforward business principles,
considering the interests of the shareholders
our own and the health and welfare of the
employees, the sure foundation of our
success.”
-Jamsetji Nuservanji Tata, Founder

 “The welfare of the labouring class must be

one of the first cares of the employer.” – Sir
Dorab Tata

 It was the first time that the raw materials

of India did not go out and return as finished
articles to be sold in the country. Above all,
it was purely Swadeshi enterprise financed
by Swadeshi money and managed by
Swadeshi brains.”
- Sir Dorab Tata describing the first share
issue in 1907
 Tata SteelPerformance
Highlights 2006-07
 Consolidated Turnover (excluding Corus) up by 23%
at USD 6,311 million

• Consolidated EBITDA (excluding Corus) up by 20% at USD

1,815 million

• Consolidated Profit After Tax (excluding Corus) up by 12% at

USD 961 million

• Highest ever Dividend: 130% + 25% special dividend

• Saleable Steel Production up by 8% at 4.93 million tonnes

• G blast furnace crossed 2 million tonnes production

• Highest ever annual production at HSM (3.24 Mtonnes) and

CRM (1.5 Mtonnes)

• In-house upgradation of E blast furnace completed

 Commissioning of 4’ Precision and 3’ Commercial
Tube Mill in Jamshedpur

• Gross Steel sales up by 8% at 4.79 million tonnes

• Sales to Automotive sector up by 29% at 0.86 million tonnes

• Global Supplier Approval received from Honda Engg. Services

(Honda Car, Japan) for CRCA

• Sales of Branded Products up by 13% at 0.99 million tonnes

• Turnover of Branded Products up by 20% at Rs. 4,604 crores

(USD 1,059 million) – crossed USD 1 billion for the first time

• Consolidation of NatSteel Asia equity holding in Xiamen, China

and Vietnam

• Tata Steel (Thailand) integration process completes one

year
Tata Steel Performance
Tata Steel Performance
Tata Steel Performance
Corporate Sustainable Responsibility at Tata
Globalization at Tata Steel
Tata Steel’s Growth Strategy
Tata Steel
Tata Steel Performance
 Acquisition of
Corus Corus: by
Tata Steel
Created from the merger of British Steel and

Hoogovens

Corus was Europe's second largest steel

producer with

 Revenues GBP 9.2 billion (in 2005) &

Crude steel production 18.2 million tons

(primarily in U.K. and Netherlands)
 Ninth-largest steel maker worldwide

 Activities- 3 main divisions:

∙ Strip products,
∙ Distribution and building systems division,
∙ Global network of sales & services offices

• It opened the bid for its 100% stake late in 2006

• Tata (India) & Companhia Siderurgica Nacional ( CSN)

emerged as most powerful bidder
 Performance of
Corus (2000-05)
 Mergers
Acquisitions
Takeovers
 Merger
• A strategy through which two firms agree to integrate
their operations on a relatively co-equal basis
 Acquisition
• A strategy through which one firm buys a controlling, or
100% interest in another firm with the intent of making
the acquired firm a subsidiary business within its
portfolio
 Takeover
• A special type of acquisition when the target firm did not
solicit the acquiring firm’s bid for outright ownership
 Reasons
for
Cost new product
Increased
market power
M&A development/increased
speed to market

Increased
Mergers & Acquisitions diversification

Avoiding excessive
Overcoming competition
entry barriers

Lower risk Learning and

compared to developing new
developing new capabilities
products
 M&A Process

Analysis
Target Negotiation Deal Post Merger
Due
Identification Closing Integration
Diligence
Date Line
 Initially Corus agreed 455p a

share offer from India's Tata Steel

on 20th October 2006, valuing the group at
£4.3bn

 But Standard Life, the largest investor in

Corus (7.9% stake): terms were too low

 Sir Anthony Bamford (Britain's leading

industrialist): Tata's first bid was too low
and that it would damage Britain's
manufacturing industry
 Tata was advised by ABN Amro,
Deutsche Bank and NM Rothschild,
while

 CSN's advisers were Goldman Sachs,

Lazard and UBS

 Corus was advised by Credit Suisse,

JP Morgan Cazenove and HSBC
 CSN announced on November 17th an
indicative bid of 475p a share

 Corus reported on November 29th a

60% surge in third-quarter profits on
the back of booming European
demand for steel

 Tata Steel on December 11th upped

its offer to 500p a share, valuing
Corus at £4.7bn
 CSN on the same day, raised its terms to 515p,
valuing Corus at £4.9bn

 The Corus board promptly recommended both the

revised offers to its shareholders

 Tata won the battle and acquired Corus on January

31st 2007 upping their bid to 608p per share,
valuing Corus at £6.7 bn ($11.3bn)

 Corus's chairman Jim Leng became the group's

deputy chairman.

 Whereas the Brazilians CSN final offer in an auction

by the U.K.'s Takeover Panel was 603 pence
Financing of Corus Acquisition
Financing Plan of Tata Steel Equity
Effect in Share market for both Tata & Corus

Shares of Tata felt more than 10 per cent in

Mumbai on 31st Jan 2007 following the
conclusion of the auction, as some analysts
said the deal was expensive and could strain
Tata finances at least in the short term
whereas,

Corus shares jumped 38p or 6.8 per cent in

London trading to 601p on the same day.
Bid battle’s effect on Corus share price
(From 5th Oct 06-31st Dec 07)
Share Price of Tata Steel
(From bid starting in Oct 06 to acquisition & after)
 The Acquisition was made by Tata Steel
U.K.,
A wholly-owned indirect subsidiary of Tata
Steel, recently incorporated in the UK for
the purpose of completing the acquisition

 Acquisition was effected by means of a

scheme of arrangement:

∙ Under Section 425 of the (English)

Companies Act 1985; subject to High Court
of Justice in England and Wales and
∙ Corus' shareholders approval
Tata Steel leapfrogged from 56th to 5th
position world wide after aquisition
Benefits from the deal
 Enhanced scale positioned the combined
group as the fifth largest steel company in
the world by production,

 The powerful combination of

low cost upstream production in India with
high end downstream processing facilities of
Corus

∙ Will improve the competitiveness of the

European operations of Corus significantly
 Financial Performance –Consolidated
(excluding Corus)
(FY 2006-07 vs FY 2005-06)

2005-06 2006-07

Rs.crores USDMillion Rs.crores USDMillion

22,272 5,123 Turnover 27,437 6,311

6,591 1,516 EBITDA 7,888 1,815

32% 32% EBITDA Margin 31% 31%

5,515 1,269 Profit before Tax 6,313 1,452

3,735 859 Net Profit 4,177 961

67.62 1.56 EPS (Rs per share) 73.06 1.68

 Financial Performance – Pro-forma
Consolidated with Corus
(Jan-March 2007 vs Jan-March 2006)

Jan-March 06 Jan-March 07

Rs.crores USD Million Rs.crores USD Million

25,411 5,845 Turnover 31,296 7,199

2,672 615 EBITDA * 4,231 973

11% 11% EBITDA Margin 14% 14%

1,750 403 Profit before Tax 2,464 567

1,198 276 Net Profit 1,717 395

Raw Material Self-sufficiency
∙ The cross-fertilisation of research and
development capabilities

∙ A transfer, from Europe to India, of

technology, best practices and expertise of
senior Corus management

∙ Tata Steel will retain access to low cost raw

materials, Slab for the enlarged group and

∙ Exposure to high growth in emerging

markets, whilst gaining price stability in
developed markets
 Group Ambition (Tata & Corus)
 Tata Steel & Corus: a compelling vision in steel
 Global player with a balanced presence in
developed European and fast growing Asian
markets
 Strong positions in construction, automotive and
packaging market sectors
 Significant raw material security & greenfield /
brownfield developments
 Lowest cost position in Europe and South East
Asia

Current: EBITDA of 13% ; 25 million tonnes: # 6

By 2012: EBITDA of 25% : 40 million tonnes: Potential #2
 Enhanced Product Portfolio
Strong High Value Added Product Portfolio straddling Automotive
and
Construction Spaces
 Access to New Markets
Combined entity has significant presence in both
emerging and developed economies
Strong Cultural Fit
Strategic Integration
Significant identified Synergies
Statements
On its first bid in October chairman of
Tata Steel Ratan Tata said “This
proposed acquisition represents a
defining moment for Tata Steel and is
entirely consistent with our strategy of
growth through international
expansion”
 Mr. Ratan added
“Corus 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.”
 Jim Leng, Chairman of Corus, said

“This offer from Tata Steel reflects the

substantial value created for Corus
shareholders since the placing and
open offer and launch of our
‘Restoring Success’ programme in
2003”.

Ratan Tata said at opening speech on

31st January 2007
 “I believe that this will be the first step in
ensuring that the Indian industry can in fact
step outside the shores of India in an
international market place and in fact acquit
itself as a global player”

MD Tata Steel Mr. Muthuraman commented:

∙ “It brings the capacity of nearly 19 million

tonne per annum immediately and
∙ It gives us access to very matured and
developed markets of Europe
∙ Corus has a very highly developed R&D
capability, which India in general lags”
 Muthuraman added
“In terms of EBITDA multiple it is about 9
times on the last one year EBITDA for the
period ended 30 September 2006, which I
must admit is a little higher than the
industry average of the last 5 to 6 years but
it is roughly representation of last uneven
figured years.”

Mr. Tata said

“This is another step in Tata Steel's journey
to what it wants to become in the next 10 to
15 years.”
 In response to questions
about possible job cuts at
Corus, Mr Muthuraman said
(Employees by region: see in
graph)
“This is not about cutting
jobs. The company has to be
made more competitive so
jobs can be secured."

 When completed, the deal

became India's biggest-ever
foreign takeover and
establish the country as a
new force in the fast-
consolidating steel industry.
 The acquisition immediately made
Tata the fifth-biggest steelmaker and
allowed the company to cut costs by
$350m a year.

 Jim Leng, chairman of Corus, said: "Tata

and Corus are stronger together and will be
able to compete effectively in an
increasingly global environment.

 "This combination creates a strong and

robust platform for growth that will benefit
all stakeholders."
 Scope of the Project
 Steel Industry – At a glance
 Tata Steel – market position /

competitiveness
 CSN - Overview

 Analysis:

• Drivers for the acquisition

• Attractiveness
• Strategic fit
• Valuation Vs Cost of acquisition
• Mode of Funding
• Legal and cultural aspects
• Post merger integration issues
 STEEL INDUSTRY
CHARACTERISTICS
 Cyclical nature in steel industry is countered by
- Economies of scale
- Movement of steel from surplus market to
shortage market
- Fragmented nature of industry –
- Top 5 companies having 20 % market share
- Low bargaining power of steel producers due to
price of iron ore
- High bargaining power of buyers
 Global Steel output
(in million tonnes) Global steel ranking

Country 2005 2006 % change Company Capacity (in million

tonnes)
China 355.8 418.8 17.7
Arcelor - Mittal 110.0
Japan 112.5 116.2 3.3
Nippon Steel 32.0
US 94.9 98.5 3.8
Posco 30.5
Russia 66.1 70.6 6.8
South Korea JEF Steel 30.0
47.8 48.4 1.3
Tata Steel - Corus 27.7
Germany 44.5 47.2 6.1
Bao Steel China 23.0
India 40.9 44.0 7.6
US Steel 19.0
Ukraine 38.6 40.8 5.7
Nucor 18.5
Italy 29.4 31.6 7.5
Brazil 31.6 30.9 (2.2) Riva 17.5

World Thyssen Krupp 16.5

production 1,028.8 1,120.7 8.9
Steel Industry – At a glance
 Indian Scenario

•After liberalization, there has been no shortages of iron and

steel materials in the country.
•Apparent consumption of finished (carbon) steel increased
from 14.84 Million Tonnes in 1991-92 to 39.185 million tonnes
(Provisional) in 2005-06.
•Steel industry that was facing a recession for some time has
staged a turnaround since the beginning of 2002.
•Demand has started showing an uptrend on account of
infrastructure boom..
•The steel industry is buoyant due to strong growth in demand
particularly by the demand for steel in China.
Steel Industry in India
•Steel industry was delicensed and decontrolled in 1991
& 1992 respectively.
•Today, India is the 7th largest crude steel producer of
steel in the world.
•In 2005-06, production of Finished (Carbon) Steel was
44.544 million tonnes.
•Production of Pig Iron in 2005-06 was 4.695 Million
Tonnes.
•The share of Main Producers (i.e SAIL, RINL and TSL)
and secondary producers in the total production of
Finished (Carbon) steel was 36% and 64% respectively
during the period of April-November, 2006.
 Steel Production in India
(in mmt)

Category 2002 2003 2004 2005 2006-07

-03 -04 -05 -06 (April-Nov' 06)

Pig Iron 5.28 3.76 3.22 4.69 3.074

Finished 33.6 36.9 40.0 44.5 30.689

Carbon Steel

(Source: Joint Plant Committee)

 Steel Imports - India
Year Qty. (In mmt)

2001-2002 1.271

2002-2003 1.510

2003-2004 1.540

2004-2005 2.109

2005-2006 (Prov.) 3.765

2.500
2006-07 (Apr-Nov, 2006)
(Prov. estimated)
 Steel Exports - India
(Qty. in Million Tonnes)
Finished (Carbon)
Pig Iron
Steel
2002-2003 4.506 0.629

2003-2004 4.835 0.518

2004-2005 4.381 0.393

2005-2006 4.350 0.300

3.150 0.200
2006-2007(April-Nov
06) (estimated)
 Indian Steel – At a Glance….
1947 : Steel production 1.25 million tonne

Present capacity : 44.5 million tonnes.

Source: Deustche Bank Research

India’s Growth vis-à-vis World
Indian Steel – Productivity &
Performance

Labour Productivity in
India: 144 tonnes / labour/ yr
West Europe: 600 tonnes

• Rising Import Demands because of

- Dynamic Growth
- Demand for high quality products

• Share of Steel demand:

- Construction Industry : 43%
- Mechanical Engg. :32%
- Automotive : 5%
Indian Steel – Growth Vs
Impediment
India’s increase :
25%

World Increase: 27%

Factors Holding back the
Growth:
- Power Supply (India is
likely to be the world’s 4th
largest energy consumer by
2010 after the US, China and
Japan).
- Raw material Supply
(Iron ore, Coal, Steel scrap)
- Inefficient Transport
System
 India and the World
Growth
India’s Steel output expected to rise +6% p.a
compared to around 4% rise in global steel outputs.

India’s share of global crude steel output is forecast to rise

to just under 4% in the next ten years. This is still
comparatively tiny compared to China’s share of 41%.

Technology
Increased use of continuous casting technology
– 38% in mid-90s to 66%

However, in India 6% of crude steel is still made using the

outdated open-hearth process (EU-25: 0.3%) – so, still a
huge potential for restructuring.
 Demand Condition

In India demand is being driven up by mammoth infrastructure

projects, like the construction of dams, ports, power plants,
railways and motorways.

In addition, the key industrial sectors (such as construction,

automotive and shipbuilding) are experiencing rapid growth.

With salaries and wages rising, consumers are becoming more

discerning with regard to their cars, household appliances and
the like, which is also boosting steel demand.
Indian Steel Industry – Tata Steel
Tata Steel – India’s largest private sector steel
company
capacity : 5.3 mmtpa

The TATAs' first steel plant under construction in Jamshedpur in 1911.

 TATA STEEL- A GLANCE
 Established in 1907 - Asia first and India’s largest
private sector steel company – one of the lowest cost
producers – EVA+

 Competitive edge – captive raw material resources and 5

MMTPA plant at Jamshedpur – 8 MMTPA in 2008

 Natsteel, Asia and Millenium Steel, Thailand in its fold – 8

manufacturing facilities in S E Asia and pacific rim countries –
5th largest steel producer with acquisition of Corus – prospected
output 56 MMTPA in 2015

 Future green field projects – 5 MMTPA in Chattisgarh, 6 MMTPA

in Orissa, 12 MMTPA in Jharkhand – overseas project in Iran
and Bangladesh

 Steel products targeted at quality conscious auto sector and

booming construction industry – emerging as a leader in wire
business
 TATA STEEL - PRODUCTS
 Hot and cold rolled coils and sheets
 Galvanized sheets
 Tubes & wire rods
 Construction rebars
 Rings and bearings
 Tata Steelium ( world’s first branded cold rolled steel )
 Tata Shaktee ( Galvanized corrugated sheets )
 Tata Tiscon ( re – bars )
 Tata Agrico ( hand tools and implements )
 Tata Wiron ( Galvanized wire products )
 Tata Pipes ( pipes for construction )
 Tata structure ( contemporary structural material )
 Steel Junction ( India’s first retail steel store )
 Tata Steel growth plans
 Tata Steel has committed itself to attaining
global scale operations
 Output exceeding 30 million tonnes and a strong
regional presence
 Tata Steel making a total estimated investment
of Rs. 70,000 crores in the next decade,in
greenfield projects and other strategic acquisition
 Tata Steel proposes to establish three greenfield
facilities in Orissa, Chhattisgarh and Jharkhand,
with an aggregate capacity of 23 million tonnes.
 TATA STEEL – FINANCIAL STATISTICS

2005-06 2004-05
REVENUES (Cr) 20491 16181
PBT(Cr) 5515 5442
PAT(Cr) 3721 3571
EBITDA MARGIN 40.19 % 42.48 %
PBT MARGIN 34.04 % 36.17 %
EPS(Rs) 63.35 62.77
DIVIDEND 23.4 % 23.61 %
Corus overview
 CSN –History & Growth
 Companhia Siderúrgica Nacional was incorporated in 1941
 Initially focused on producing coke, pig iron castings and long
products
 Three major expansions were undertaken at the Presidente
Vargas Steelworks during the 1970s and 1980s.
 The first, completed in 1974, increased installed annual
production capacity to 1.6 million tons of crude steel.
 The second, completed in 1977, raised capacity to 2.4 million
tons of crude steel.
 The third, completed in 1989, increased capacity to 4.5 million
tons of crude steel.
 privatized in 1993 and early 1994, through which the Brazilian
government sold its 91% interest in company
CSN’s strategy for business

 Mission is to increase value for the

shareholders
 Maintaining position as one of the
world's lowest-cost steel producers
 Maintain a high EBITDA margin.
 Strengthen position as a global
player
 CSN in steel
 Fully-integrated manufacturing
facilities
 Second largest steel producer in
Brazil
 Crude steel capacity 5.6 million
tonnes
 Rolled product capacity is 5.1 million
tons
 CSN policy for Steel
 Implement a carefully crafted
globalization strategy. This may include
the acquisition or construction of steel
operations, steel-related businesses or
distribution or service centers outside
Brazil, as well as the association with
other companies engaged in such
ventures
 Emphasize a wide range of value-added
products, mostly galvanized, pre-painted
and tin-coated.
 CSN Product range
 Produce a broad line of steel
products
 Slabs
 Hot- and Cold-rolled
 Galvanized and Tin mill products
Process flow chart -CSN
CSN products / market share
 CSN Market structure
 In 2004 sold steel products to customers
in Brazil and 61 other countries.
 in 2002 Our domestic steel sales, as a
percentage of total sales volume were
65% and operating revenues were70%,,
 In 2003 the above figures were 59% and
61%,respectively
 In 2004 it was 71% and 73%,
respectively,
 CSN Exports markets

 The three principal export markets

for exports of products (%of our
export sales volume in 2004)
 North America 44%,
 Europe 32%
 Asia11%
 Tata Steel & CSN
 Both bidders have presence in
emerging economies.
 Both have access to cheap sources of
iron ore. CSN may have an edge
because it owns one of the largest
iron ore mine in the world.
 Both are among the most efficient
producers globally.
Sales - Tata Steel,CSN and
Corus
Profitability CSN Vs TATA
Steel
CORUS BUYOUT-STATEGY

 Tata Steel, CSN both planned a leveraged

buy-out
 Raising debt on the security of future cash
flows from Corus.
 Tata Steel's financing arrangements no
recourse
 CSN ,part of the new credit facilities are with
recourse .
 Can CSN shareholders be comfortable about
that exposure
Stock price movement
 Situation 1: Corus decides
to sell
 Reasons for decision:
 Total debt of corus is 1.6bn GBP
 Corus needs supply of raw material at lower cost
 Though Corus has revenues of $18.06bn, its
profit was just $626mn(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%)
Situation 2: Tata Steel decides
to bid
 Reasons:
 Tata is looking to 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
bottomline.
Situation 2: Tata Steel decides
to bid
 Corus holds a no. of patents and R &
D facility.
 Cost of acquisition is lower than
setting up a green field plant and
marketing and distribution channels
 Tata is known for efficient handling
of labour and it aims at reducing
employee cost and improving
productivity at Corus
 Situation 3:
CSN decides to bid
 Reasons:
 There was an abortive merger with corus
3 years ago. It had offered $3.5bn.
 CSN has a 3.8% stake in corus since 2002
 Every 10p increase in bid gets CSN an
extra 3mn GBP
 CSN also looking for producing finished
steel products in Europe
 CSN is paid 1% of the offer price as an
“incentive remuneration” from Corus
Situation 4: Takeover panel
intervenes
 The UK Takeover panel set the following
rules for bidding:
 Of the maximum nine rounds 8 will be for
the suitors to table a fixed price bid in
cash
 In the event of competitive situation
continuing a final round would be held to
give chance to the bidders to outbid the
other within a ceiling that has already
been informed to the panel
 There has to be a difference of 5p for each
round of the bid between the 2 suitors
 TATA-CORUS: STRATEGIC FIT
 Corus, being the second largest steelmaker in Europe,
would provide Tata Steel access to some of the largest
steel buyers
 The acquisition would open new markets and product segments for
Tata Steel, which would help the company to de-risk its businesses
through wider geographical reach.
 A presence in mature markets would also provide Tata Steel an
opportunity to go further up the value chain as demand for
specialized and high value-added products in these markets is high
 The market reach of Corus would also help in seeking longer-term
deals with buyers and to explore opportunities for pushing branded
products.
 Corus is also very strong in research and technology development,
which would add to the competitive strength for Tata Steel in future.
Both companies can learn from each other and achieve better
efficiencies by adopting the best practices
 Tata Steel - Corus : Present Tata Steel - Corus : Projected
capacity capacity
(in million tonnes per annum) (in million tonnes per annum)
Corus Group (in UK 19
Corus Group (in UK 19 and The Netherlands)
and The Netherlands) Tata Steel - 10
Tata Steel - 5 Jamshedpur
Jamshedpur Tata Steel - Jharkhand 12
NatSteel - Singapore 2
Tata Steel - Orissa 6

Millennium Steel - 1.7 Tata Steel - 5

Thailand Chattisgarh

Aggregate present 27.7 NatSteel - Singapore 2

capacity Millennium Steel - 1.7
Thailand
Aggregate projected 55.7
capacity
Funding Scenarios- Need to both create
and protect share holder value
Equity- $ 4.1 billion- (Options)

(i) Borrowings by Tata Steel- Dilute EPS( 1.4%

FY 08); Funding domestic greenfield ventures

(II) Preferential share issue by tata steel to tata

sons- Also EPS unfriendly( 13.1% FY 08)

(iii) $2.3-$2.4 billion cash reserves of tata

balance- $1.7-$1.8 billion- Dilution of TCS
shares in LSE

 Debt:-Senior debt, junk bonds etc- 8 billion

Impact on Tata steel’s FY ‘’08 P &
L with $1.7 b pref issue to TATA
sons
Addnl debt on B/s 5,802.5
Net D/E at FY’07 end(%) 0.4
Net D/E at FY’08 end(%) 0.4
Price for equity issue(Rs) 500
Equity dilution (%) 25.1
Interest/loss of other Income (814)
Tata Steel’s share in SPV profits 618.2
Synergy gains 450.0
Net increase in PAT 374.3
Increase in EPS(%) (13.1)
Net debt/equity post dilution(%) 0.39
FY’ 08 ROE without considering Corus acquisition(%) 22.10
FY’ 08 ROE with Corus acqn(%) 17.30

(Fig –Rs. In crores)

Source: CLSA
 Valuation
 Based on replacement value:
At current rates-1100-1300$/ton---$22 billion(15
yrs)
Actual amount agreed ………….$12.1billion
Based on DCF :
PV @ 8% would take around 15 years
E:\term4\M & A\project\corus valuation.xls
Hence financially does not appear attractive in the
near term.
 Financing the deal
 Leveraged buyout:
 Loans of $8 billion are arranged for acquisition.
The current EBIDTA of Corus is sufficient to pay
the annual interest of the loan
 Around $2.5bn will come from cash reserves of
TATA steel
 TATA sold 0.84% of TCS stake
 Financiers for the deal- ABN Amro, Deutsche
Bank
 Increased debt obligations will create more credit
risk for Corus
 Brokerage house First Global estimates that a $50 fall in
global steel prices could lead to a $414-million loss from the
acquisition in FY08 there is a $ 75 fall, the losses could climb
to $ 846 million.
 Valuation Contd.
Leverage, Corus currently - low net debt-equity ratio of
0.25 times. So, while Corus has room on its balance sheet
to take on more debt, it may come under pressure on debt
servicing, if steel prices head in the wrong direction

 Key for improving profitability: export of low-cost slabs

from India Corus’s profitability. But currently, Tata Steel
does not have spare slab capacity — its Jamshedpur plant
of almost 5 million tonnes (mt) is operating at full tilt. It
now has to get its greenfield expansions in Orissa,
Chhattisgarh and Jharkhand up and running in double quick
time. But analysts expect these to be commissioned not
before 2010

 Need for steel up cycle to stay intact

 Valuation Contd

 Tata Steel is paying 7 times EBITDA of Corus for 2005 and a

higher 9 times EBITDA for 12 months ended 30 September
2006. In comparison, Mittal Steel acquired Arcelor at an
EBITDA multiple of around 4.5.

 Considering the fact that Arcelor has much superior assets,

wider market reach and is financially much stronger than
Corus, the price paid by Tata Steel looks almost high.
 Valuation Contd

 Manufacturing assets donot deserve such

high price as UK plants of Corus

 Target EBITA margins by Tata Steel -25 per cent

once it starts supplying crude steel to Corus.
(Long way off??)

 Assuming 7 percent interest rate, interest and

principal outgo requires annual fund of $1.5 b which
looks tough for cash flow from Corus
Comments as an Investment
Banker
 Alternatives used to mitigate
external debt financing and risk:
 - Partial settlement by cash and
partial settlement through
convertible/non convertible
debentures
 Use of share swap ???
 Legal issues
Needed approval from EU
Approval of Share holders of Corus as per UK
companies Act
Use of subsidiaries to structure the deal
-Avoidance of FIPB and RBI approval by
avoiding share swap
Corus pension liabililites-
-British Steel Pension Scheme
-Corus Engg Steel Pension Scheme-126m
GBP
 Problems
Integration in Too large
difficulties
Achieving Success

Managers overly
focused on
Acquisitions acquisitions

Too much
diversification

Inadequate
evaluation of target Large or Inability to
extraordinary debt achieve synergy
 Post acquisition issues
 Digesting large deals and create share
holder value will be a concern
 UK steel unions want job guarantee.
British trade unions launched protest on
grounds of potential layoffs.
 The biggest challenge one would face is
how to integrate these two companies,
how to integrate these two cultures, how
to work with new type of management,
how to work in the matured market
verses working in developing market.
 Post Merger Integration Issues

For the Tatas, the Corus acquisition is only half the battle
won

Robert Bruner, dean of the Darden School of Business,

University of Virginia, says, "When integration gets bogged
down, bad things happen—all stemming from the 'me‘
issues."

Issues are complex because it is a mammoth cross borer

deal

Even more complex because Corus itself is the result of a

cross-border merger.
 Post Merger Integration Issues….
 An estimate suggests that 70% of all failed M&As are because of
cultural issues

Considering that there aren't too many overlaps between Tata Steel
and Corus, a "light-handed integration“ will make more sense,
wherein the Tatas bring in some changes, but don't do a complete
overhaul of how Corus is run – says Prof. Venkiteswaran of IIM-A

 Employees loathe uncertainty about their fate in the company.

Phanish Puranam, professor, London Business School, says,
"Productivity drops, competition takes away business and soon the
value of the deal is gone even before integration starts."

So, Tatas should not view the acquired company as a loser. It makes
sense for the Tatas to allow the existing management to continue as
before. Some level of planned restructuring can come in later.
 Post Merger Integration Issues….

Tetley, the Tata's previous UK buy, ran into cultural and racial
obstacles because of concerns that British employees would resent
having managers from a former British colony.

Tatas to learn from their Tetley acquisition and maybe use some of
the managers who handled that integration

In the initial volatile phase, competitors may try to snatch away
good managers and customers from Corus

The Tatas need to identify the key people at Corus and ways to keep
them as headhunters try to snatch good managers in such vulnerable
situations - Tatas have put two Corus people in the Tata Board
 Post acquisition issues

 ICRA forecasts slow down in global steel growth in

2007 - a significant drop to 5.2 per cent in 2007
from a healthy 8.9 per cent in 2006
 The Tata Steel share's had declined by over 10 per
cent on the announcement of the Tata`s acquiring
Corus on apprehensions of the deal being "over-
valued“. Reviving the company’s value would be
challenge
 Acquiring synergies necessitates include improving
Corus operating margins, controlling costs &
adopting the best practices of both sides
Conclusion
ANY QUESTIONS ?