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Abstract:

On January 31, 2007, Tata Steel Limited (Tata


Steel), one of the leading steel producers in
India, acquired the Anglo Dutch steel
producer Corus Group Plc (Corus) for US$
12.11 billion (€ 8.5 billion). The process of
acquisition concluded only after nine rounds
of bidding against the other bidder for Corus -
the Brazil based Companhia Siderurgica
Nacional (CSN).

This acquisition was the biggest overseas


acquisition by an Indian company. Tata Steel
emerged as the fifth largest steel producer in
the world after the acquisition. The acquisition
gave Tata Steel access to Corus' strong
distribution network in Europe.

Corus' expertise in making the grades of steel used in automobiles and in aerospace could
be used to boost Tata Steel's supplies to the Indian automobile market. Corus in turn was
expected to benefit from Tata Steel's expertise in low cost manufacturing of steel.
However, some financial experts claimed that the price paid by Tata Steel (608 pence per
share of Corus) for the acquisition was too high.

Corus had been facing tough times and had reported a substantial decline in profit after
tax in the year 2006. Analysts asked whether the deal would really bring any substantial
benefits to Tata Steel. Moreover, since the acquisition was done through an all cash deal,
analysts said that the acquisition would be a financial burden for Tata Steel.

Issues:

» Gain an in-depth knowledge about various corporate valuation techniques.

» Critically examine the rationale behind the acquisition of Corus by Tata Steel.

» Understand the advantages and disadvantages of cross-border acquisitions.

» Understand the need for growth through acquisitions in foreign countries.

» Study the regulations governing mergers & acquisitions in the case of a cross-border
acquisition.

» Get insights into the consolidation trends in the Indian and global steel industries.

Contents:
Page No.
Introduction 1
Background Note 2
Tata Steel Vs CSN: The Bidding War 4
Financing the Acquisition 5
The Integration Efforts 7
The Synergies 8
The Pitfalls 9
The Road Ahead 10
Exhibits

"The financials for this deal [require] high performance levels, perfect post-deal
execution and sustained high steel prices. It is a risky game and will be okay for Tata as
long as the economy is growing and no major bumps occur. If [these bumps] do occur,
they can become a challenge, and I am reminded of the high leverage days of the mid-
1980s."1

- Vivek Gupta, Managing Director, AT Kearney (India), in February 2007.

"Indian steel companies are on a consolidation mode. The Tata-Corus deal has set many
records. So far, the only $1 billion-plus deal was done by ONGC, and it's the first
milestone for India Inc, with the Tata deal crossing $10 billion mark. It's a landmark
deal since an Indian company has taken over an international company three times its
size."2

- S. Mukherji, Managing Director, ICICI Securities, in February 2007.

Introduction

On January 31, 2007, India based Tata Steel


Limited (Tata Steel) acquired the Anglo Dutch
steel company, Corus Group Plc (Corus) for
US$ 13.70 billion3. The merged entity, Tata-
Corus, employed 84,000 people across 45
countries in the world. It had the capacity to
produce 27 million tons of steel per annum,
making it the fifth largest steel producer in the
world as of early 2007 (Refer Exhibit I for the
top ten players in the steel industry after the
merger). Commenting on the acquisition,
Ratan Tata, Chairman, Tata & Sons, said,
"Together, we are a well balanced company,
strategically well placed to compete at the
leading edge of a rapidly changing global steel
industry."4
Tata Steel outbid the Brazilian steelmaker Companhia Siderurgica Nacional's (CSN) final
offer of 603 pence per share by offering 608 pence per share to acquire Corus.

Tata Steel had first offered to pay 455 pence


per share of Corus, to close the deal at US$
7.6 billion on October 17, 2006. CSN then
offered 475 pence per share of Corus on
November 17, 2006.

Finally, an auction5 was initiated on January


31, 2007, and after nine rounds of bidding,
Steel could finally clinch the deal with its final
bid 608 pence per share, almost 34% higher
than the first bid of 455 pence per share of
Corus.

Many analysts and industry experts felt that


the acquisition deal was rather expensive for
Tata Steel and this move would overvalue the
steel industry world over.

Tata Steel's Acquisition of Corus - Next Page>>

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1] "Did Tata Steel Overheat in its Zeal to Win Corus?" Knowledge@Wharton, February 08, 2007.

2] "Tata Win Booster for Corporate India's Confidence," The Economic Times, February 01, 2007.

3] As on January 31, 2007, 1 US Dollar = 44.18 INR and 1 Pound = 86.73 INR.

4] "Tata Steel Completes Acquisition of European Steelmaker Corus," International Herald Tribune, April 03,
2007.
5] Since Tata Steel and CSN could not declare their final offer by January 31, 2007, an auction had to be initiated
by The Takeover Panel which oversees mergers and acquisitions in the UK.

Introduction Contd...

Commenting on the deal, Sajjan Jindal,


Managing Director, Jindal South West Steel
said, "The price paid is expensive...all steel
companies may get re-rated now but it's a
good deal for the industry."6 Despite the
worries of the deal being expensive for Tata
Steel, industry experts were optimistic that the
deal would enhance India's position in the
global steel industry with the world's largest7
and fifth largest steel producers having roots
in the country. Stressing on the synergies that
could arise from this acquisition, Phanish
Puram, Professor of Strategic and
International Management, London Business
School said, "The Tata-Corus deal is different
because it links low-cost Indian production
and raw materials and growth markets to high-
margin markets and high technology in the
West.

The cost advantage of operating from India can be leveraged in Western markets, and
differentiation based on better technology from Corus can work in the Asian markets."8

Background Note

Tata Steel

Tata Steel is a part of the Tata Group, one of


the largest diversified business conglomerates
in India. Tata Group companies generated
revenues of Rs. 967,229 million in the
financial year 2005-06.

The group's market capitalization was US$ 63


billion as of July 2007 (only 28 of the 96 Tata
Group companies were publicly listed). In
1907, Jamshedji Tata established Tata Steel at
Sakchi in West Bengal. The site had a good
supply of iron ore and water...
Excerpts

Tata Steel Vs CSN: The Bidding War

There was a heavy speculation surrounding Tata Steel's proposed takeover of Corus ever
since Ratan Tata had met Leng in Dubai, in July 2006. On October 17, 2006, Tata Steel
made an offer of 455 pence a share in cash valuing the acquisition deal at US$ 7.6 billion.
Corus responded positively to the offer on October 20, 2006.

Agreeing to the takeover, Leng said, "This


combination with Tata, for Corus shareholders
and employees alike, represents the right
partner at the right time at the right price and
on the right terms." In the first week of
November 2006, there were reports in media
that Tata was joining hands with Corus to
acquire the Brazilian steel giant CSN which
was itself keen on acquiring Corus. On
November 17, 2006, CSN formally entered
the foray for acquiring Corus with a bid of
475 pence per share. In the light of CSN's
offer, Corus announced that it would defer its
extraordinary meeting of shareholders to
December 20, 2006 from December 04, 2006,
in order to allow counter offers from Tata
Steel and CSN...

Financing the Acquisition

By the first week of April 2007, the final draft of the financing structure of the
acquisition was worked out and was presented to the Corus' Pension Trusties and the
Works Council by the senior management of Tata Steel. The enterprise value of Corus
including debt and other costs was estimated at US$ 13.7 billion (Refer Table I for fund
raising mix for the Corus' acquisition)...

The Integration Efforts

Industry experts felt that Tata Steel should


adopt a 'light handed integration'approach,
which meant that Ratan Tata should bring in
some changes in Corus but not attempt a
complete overhaul of Corus'systems (Refer
Exhibit XI and Exhibit XII for projected
financials of Tata-Corus). N Venkiteswaran,
Professor, Indian Institute of Management,
Ahmedabad said, “If the target company is
managed well, there is no need for a heavy-
handed integration. It makes sense for the
Tatas to allow the existing management to
continue as before...

The Synergies

Most experts were of the opinion that the


acquisition did make strategic sense for Tata
Steel. After successfully acquiring Corus, Tata
Steel became the fifth largest producer of steel
in the world, up from fifty-sixth position.

There were many likely synergies between


Tata Steel, the lowest-cost producer of steel in
the world, and Corus, a large player with a
significant presence in value-added steel
segment and a strong distribution network in
Europe. Among the benefits to Tata Steel was
the fact that it would be able to supply semi-
finished steel to Corus for finishing at its
plants, which were located closer to the high-
value markets...

The Pitfalls

Though the potential benefits of the Corus deal were widely appreciated, some analysts
had doubts about the outcome and effects on Tata Steel's performance. They pointed out
that Corus' EBITDA (earnings before interest, tax, depreciation and amortization) at 8
percent was much lower than that of Tata Steel which was at 30 percent in the financial
year 2006-07...

The Road Ahead

Before the acquisition, the major market for


Tata Steel was India. The Indian market
accounted for sixty nine percent of the
company's total sales.

Almost half of Corus' production of steel was


sold in Europe (excluding UK). The UK
consumed twenty nine percent of its
production.

After the acquisition, the European market


(including UK) would consume 59 percent of
the merged entity's total production (Refer
Table III for the spread of Tata-Corus markets
before and after the acquisition)...
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Tata Steel's Acquisition of
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Period : 2006-2007
The Synergies
Pub. Date : 2008

Most experts were of Teaching Note : Available


the opinion that the Organization : Tata Steel Limited, Corus Group Plc
acquisition did make
strategic sense for Tata Industry : Iron & Steel

Steel. After successfully Countries : India, Netherlands


acquiring Corus, Tata
Steel became the fifth
largest producer of steel To download Tata Steel's Acquisition of Corus
in the world, up from case study (Case Code: FINC049) click on the
fifty-sixth position.
button below, and select the case from the list of

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synergies between Tata
Steel, the lowest-cost
producer of steel in the
world, and Corus, a
large player with a
significant presence in Price:

value-added steel
segment and a strong
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distribution network in
Europe. Among the For delivery through courier (within India): Rs.
benefits to Tata Steel 400 + Rs. 25 for Shipping & Handling Charges
was the fact that it
would be able to supply
semi-finished steel to
Corus for finishing at its
plants, which were
located closer to the
high-value markets...
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The Pitfalls

Though the potential benefits of the Corus deal » Finance Case Studies
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Steel's performance. They pointed out that
Corus' EBITDA (earnings before interest, tax, » How To Order This Case
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The Road Ahead
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Before the acquisition,


the major market for
Tata Steel was India.
The Indian market
accounted for sixty nine
percent of the
Go
company's total sales.

Almost half of Corus' Web icmrindia.org


production of steel was
sold in Europe
(excluding UK). The
UK consumed twenty
nine percent of its Please note:

production.
This case study was compiled from published
After the acquisition,
the European market sources, and is intended to be used as a basis for
(including UK) would class discussion. It is not intended to illustrate either
consume 59 percent of
the merged entity's total effective or ineffective handling of a management

production (Refer Table situation. Nor is it a primary information source.


III for the spread of
Tata-Corus markets
before and after the
acquisition)...

Exhibits

Exhibit I: Top Ten Players in the Global Steel


Industry
Exhibit II: Tata Steel - Consolidated Income
Statement (2003-07)
Exhibit III: Tata Steel - Consolidated Balance
Sheet (2003-07)
Exhibit IV: Corus - Consolidated Income
Statement (2004-06)
Exhibit V: Corus - Consolidated Balance Sheet
Exhibit VI: Takeover Regulations in the UK
Exhibit VII: Auction Rules that Governed the
Acquisition of Corus
Exhibit VIII: Corus - Stock Price Chart
(September 2002 - March 2007)
Exhibit IX: Tata Steel - Stock Price Chart
(September 2002 - June 2007)
Exhibit X: Fitch Ratings
Exhibit XI: Tata-Corus - Profile
Exhibit XII: Tata Corus - Consolidated
Financial Performance
Exhibit XIII: A Note on EV, EBITDA and
EV/EBITDA

Welcome to Corus
Corus is a customer focused, innovative value-driven company, which manufactures,
processes and distributes steel products and services to customers worldwide.

Corus is Europe's second largest steel producer with annual revenues of around £12
billion and a crude steel production of over 20 million tonnes.
• With innovation and continuous improvement at the heart of its business
performance, Corus aims to create value by offering a differentiated product range
supported by unrivalled customer service.
• Corporate responsibility is integral to the way Corus does business and the
objective is to be world class.
• Corus is a subsidiary of Tata Steel.
• Corus supplies a variety of innovative solutions to a broad range of markets. We
have specific information for our key market sectors. Please select from the list
here.