Tata Corus acquisition

On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company, at 455 pence per share of Corus. The following months saw a lot of negotiations from both sides of the deal. Tata Steel's bid to acquire Corus Group was challenged by CSN, the Brazilian steel maker. Finally, on January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.04 Billion. The deal is the largest Indian takeover of a foreign company and made Tata Steel the world's fifthlargest steel group.

The involved companies

'Tata Steel', formerly known as TISCO (Tata Iron and Steel Company Limited), was the world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity of 3.8 million tonnes. It is based in Jamshedpur, Jharkhand, India.[1][2] It is part of the Tata Group of companies. Post Corus merger, Tata Steel is India's second-largest and second-most profitable company in private sector with consolidated revenues of Rs 1,32,110 crore and net profit of over Rs 12,350 crore during the year ended March 31, 2008.[3][4]. The company was also recognized as the world's best steel producer by World Steel Dynamics in 2005. The company is listed on BSE and NSE; and employs about 82,700 people (as of 2007). Corus was formed from the merger of Koninklijke Hoogovens N.V. with British Steel Plc on 6 October 1999. It has major integrated steel plants at Port Talbot, South Wales; Scunthorpe,North Lincolnshire; Teesside, Cleveland (all in the United Kingdom) and IJmuiden in the Netherlands. It also has rolling mills situated at Shotton, North Wales (which manufacturesColorcoat products), Trostre in Llanelli, Llanwern in Newport, South Wales, Rotherham and Stocksbridge, South Yorkshire, England, Motherwell, Scotland, Hayange, France, andBergen, Norway. In addition it has tube mills located at Corby, Stockton and Hartlepool in England and Oosterhout, Arnhem, Zwijndrecht and Maastricht in the Netherlands. Group turnover for the year to 31 December 2005 was 10.142 billion. Profits were 580 million before tax and 451 million after tax.

Synergies between the two companies

There were a lot of apparent synergies between Tata Steel which was a low cost steel producer in fast developing region of the world and Corus which was a high value product manufacturer in the region of the world demanding value products. Some of the prominent synergies that could arise from the deal were as follows : Tata was one of the lowest cost steel producers in the world and had self sufficiency in raw material. Corus was fighting to keep its productions costs under control and was on the look out for sources of iron ore. Tata had a strong retail and distribution network in India and SE Asia. This would give the European manufacturer a in-road into the emerging Asian markets. Tata was a major supplier to the

Indian auto industry and the demand for value added steel products was growing in this market. Hence there would be a powerful combination of high quality developed and low cost high growth markets There would be technology transfer and cross-fertilization of R&D capabilities between the two companies that specialized in different areas of the value chain There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and ethics. Tata steel's Continuous Improvement Program Aspirewith the core values :Trusteeship,integrity,respect for individual, credibility and excellence. Corus's Continuous Improvement Program The Corus Way with the core values : code of ethics, integrity, creating value in steel, customer focus, selective growth and respect for our people.

Counter bid by CSN

In November 2006,Brazilian steel marker Companhia Siderrgica Nacional (CSN)challenged Tata Steel's proposal for acquisition. They countered Tata Steel's offer of 455 pence per share by offering 475 pence per share of Corus.

Proposed funding of the deal

Tata surprised the credit default swap segment of the derivative markets by deciding to raise $6.17bn of debt for the deal through a new subsidiary of Corus called 'Tata Steel UK', rather than by raising the debt itself. Tata's security credit rating is investment grade, whereas the new subsidiary may not be. The higher risk associated with raising debt through a subsidiary with a lower credit rating prompted Fitch Ratings to downgrade its rating of the credit swap risks in the takeover to 'negative'. Fitch also stated that Corus' responsibility for the debt may lead to Corus' own unsecured debt rating being downgraded. This does not affect the rating of bonds issued by Corus which are secured debt.

The deal
On January 31, 2007, following the lack of agreement on an offer, an auction process was triggered. Following the conclusion of the auction process (at an unprecedented length of nine rounds) conducted by the Panel in accordance with Rule 32.5 of the Code (the "Auction"), Tata Steel announced the proposed acquisition of Corus Group at 608p per share, that being 5p more than CSN's top offer of 603p. The final valuation of Corus was thus put at $12.04 Billion.

Timelines
On October 20, 2006, Tata Steel announced that it had agreed to pick up a 100% stake in the Anglo-Dutch steel maker Corus at 455 pence per share in an all cash deal, cumulatively valued at GBP 4.3 billion (USD 8.04 billion). On November 19, 2006, the Brazilian steel company CSN launched a counter offer for Corus at 475 pence per share, valuing it at $8.4 billion. On December 11, 2006, Tata preemptively upped the offer to 500 pence, which was within hours trumped by CSN's offer of 515 pence per share, valuing the deal at $ 9.6 Billion. The Corus board promptly recommended both the revised offers to its shareholders. On December 11, 2006, CSN announced a formal offer for the Company at an offer price of 515 pence per Corus Share , valuing the deal at $ 9.6 Billion.. The CSN Acquisition would also be implemented by way of a scheme of arrangement and is subject to a pre-condition that either Corus Shareholders reject the Tata Scheme or the Tata Scheme is otherwise withdrawn by Corus or lapses. The Corus board promptly recommended both the revised offers to its shareholders. Also on December 19, 2006, UK Watchdog the Panel on Takeovers and Mergers announced that the last date for each of Tata and CSN to announce revised offers for the Company, should they wish to do so, is 30 January 2007. They also warned that it would begin an auction procedure if the two remained in competition. On January 31, 2007 Tata Steel won their bid for Corus after offering 608 pence per share, valuing Corus at $11.3bn

Final deal structure

$3.53.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.51.8bn through a bridge loan) $5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn through high yield loan)

New Board formulation

A new board was formulated with representation from both the companies to provide a common platform for strategy and integration. Mr. R.N. Tata will be the Chairman of Tata Steel and Corus Mr. Jim Leng will be the deputy chairman of Tata Steel and Corus Mr. B Muthuraman, Mr. Ishaat Hussain and Mr. Arun Gandhi to join the Corus board

Strategic and Integration Committee

A 'Strategic and Integration Committee' was formulated to develop and execute the integration and further growth plans. Appropriate cross functional teams were formed under this committee to look into specific issues.

Analysis TATA-CORUS:Q.1. What are the benefits of the TATA-CORUS merger deal to the stakeholders of TATA Steel and the stakeholders of CORUS? Evaluate the post-merger security with the help of CAPM Model. A.1. On January 31st, 2007 Indias Tata Steel acquired Corus, the erstwhile British Steel Major at a price of 608 pence per Corus share totaling $12.1 billion/ Rs 54,000 crore/ 6.1 bn, which was five pence per share higher than the offer of Brazils CSN (Companhia Siderugica Nacional). The deal is the largest Indian takeover of a foreign company, and creates the world's fifth-biggest steel company from the present 56th rank. Benefits of TATA-CORUS merger deal to the stakeholders of TATA Steel Short-Term Implications Investors with a one-to-two year perspective may find the Tata Steel stock unattractive at current price levels. While the potential downside to the stock may be limited, it may consolidate in a narrow range, as there appears to be no short-term triggers to drive up the stock. The formalities for completing the acquisition may take three to four months, before the integration committees get down to work on the deal. In our view, three elements are stacked against this deal in the short run: 1) Equity dilution: The financing of the acquisition is unlikely to pose a challenge for the Tata group, but the financial risks associated with high-cost debt may be quite high. Though the financing pattern is yet to be spelt out fully, initial indications are that the $4.1 billion of the total consideration will flow from Tata Steel/Tata Sons by way of debt and equity contribution by these two and the balance $8 billion, will be raised by a special investment vehicle created in the UK for this purpose. Preliminary indications from the senior management of Tata Steel suggest that the debt-equity ratio will be maintained in the same proportion of 78:22, in which the first offer was made last October. Based on this, a 20-25 per cent...

Tata - Corus: Visionary deal or costly blunder?

01 February 2007

news

Is the Corus acquisition by Tata Steel a defining moment for the company as made out to be? Or is it a disaster in the making for Tata Steel? By Rex Mathew. After four months of twists and turns, Tata Steel has won the race to acquire Corus Group. The bidding war between Tata Steel and Brazilian company CSN was riveting and ended in a rapid-fire auction. Initial reactions to the deal are highly diverse and retail investors are completely puzzled by the market reaction. Going by the stock market reaction yesterday, the acquisition is a big blunder. The stock tanked 10.5 per cent after the deal was announced and another 1.6 per cent today. Investors are worried about the financial risks of such a costly deal. Media reaction to the deal has been just the opposite. Almost all the reports were adulatory while editorials praised the coming of age of Indian industry. A prominent financial daily presented the deal almost as revenge of the natives against the old colonial masters with a picture of London covered in our national colours. Its editorial warned the market 'not to bet against Tata', citing the previous instances when sceptics were proved wrong by the group. Official reaction has been no different and the finance minister even offered all possible help to the Tata Group. Is the acquisition too costly for Tata Steel? Is price the only criterion while evaluating an acquisition? Should managers focus on keeping shareholders happy after every quarter or should they focus on the long-term, big picture? These are tough questions and, unfortunately, answers would be clear only after many years - at least in this case. When could the steel cycle turn? The last few years were some of the best ever for the global steel industry as robust demand from emerging economies like China pushed up prices. Profits of steel manufacturers across the globe swelled and their market capitalisations have multiplied many times.

Country China Japan US

Global Steel output (in million tonnes) 2005 2006 355.8 418.8 112.5 116.2 94.9 98.5

% change 17.7 3.3 3.8

Russia South Korea Germany India Ukraine Italy Brazil World production

66.1 47.8 44.5 40.9 38.6 29.4 31.6 1,028.8

70.6 48.4 47.2 44.0 40.8 31.6 30.9 1,120.7

6.8 1.3 6.1 7.6 5.7 7.5 (2.2) 8.9

How long will the good times last? Tata Steel believes the steel cycle is in a long-term up trend and the risk of a downturn in prices is low. In fact, managing director B Muthuraman said the global steel industry might witness sustained growth as during the 30-year period between 1945 and 1975. The massive post-war infrastructure build-up in Western countries led to the sustained steel demand growth in that period. The coming decades would see similar infrastructure spending in emerging economies and steel demand would continue to grow, according to this view. The International Iron and Steel Institute (IISI), a respected steel research body, corroborates this in its outlook. The growth in demand for global steel would average 4.9 per cent per year till 2010 according to the IISI. Between 2010 and 2015, demand growth is expected to moderate to 4.2 per cent per annum according to IISI forecasts. Much of this demand growth would come from China and India, where the IISI estimates growth rates to be 6.2 per cent and 7.7 per cent annually from 2010 to 2015. Now lets consider steel prices. Expectations of sustained demand growth have already led to massive capacity additions, mostly in emerging markets. Chinese steel capacity has expanded significantly over the last decade while a large number of mega steel plants are being planned in India. Capacity additions by Russian and Brazilian steelmakers would also be significant in future as they have access to raw material. Would the capacity additions outrun the demand growth and lead to subdued steel prices? Under normal circumstances, that could have been a very strong possibility. But many industry leaders believe that the global steel industry would see a structural shift in the coming years. Some of the inefficient steel mills in mature markets would face closure while others would shift production to high value-added products using unfinished and semi-finished steel supplied by steel mills in locations like India, Russia and Brazil with access to raw material. This would limit aggregate supply growth and keep prices stable in future. Major global steel makers are also not unduly worried about the possibility of large-scale exports from China, which would depress international steel prices. Chinese capacity is expected to continue to grow in the coming years, but so would the demand.

Besides, Chinese steel plants are not expected to emerge very efficient as they depend on imported raw materials, which limit their pricing power. Many steel analysts expect significant consolidation in the Chinese steel industry as margins erode further in future. The Chinese government has already started squeezing the smaller units by withdrawing their raw material import permits. The need for scale Going by the IISI forecasts, global steel demand would be 1.32 billion tonnes by 2010 and 1.62 billion tonnes by 2015. Even Arcelor-Mittal, the largest global steel player by far, has a present capacity, which is just 6.8 per cent for projected demand in 2015. To maintain its current share, Arcelor-Mittal would have to add another 50 million tonnes of capacity by then. This confirms the view that there is still considerable scope for consolidation in the steel industry.

Global steel ranking Company Arcelor - Mittal Nippon Steel Posco JEF Steel Tata Steel - Corus Bao Steel China US Steel Nucor Riva Thyssen Krupp Capacity (in million tonnes) 110.0 32.0 30.5 30.0 27.7 23.0 19.0 18.5 17.5 16.5

As the industry consolidates further, Tata Steel - even with its planned greenfield capacity additions would have remained a medium-sized player after a decade. This made it absolutely vital that the company did not miss out on large acquisition opportunities. Apart from Corus, there are not many among the top-10 steel makers, which would become possible acquisition targets in the near future.

Tata Steel - Corus : Present capacity (in million tonnes per annum) Corus Group (in UK and The Netherlands) 19

Tata Steel - Jamshedpur NatSteel - Singapore Millennium Steel - Thailand Aggregate present capacity Tata Steel - Corus : Projected capacity (in million tonnes per annum) Corus Group (in UK and The Netherlands) Tata Steel - Jamshedpur Tata Steel - Jharkhand Tata Steel - Orissa Tata Steel - Chattisgarh NatSteel - Singapore Millennium Steel - Thailand Aggregate projected capacity 19 10 12 6 5 2 1.7 55.7

5 2 1.7 27.7

With Corus in its fold, Tata Steel can confidently target becoming one of the top-3 steel makers globally by 2015. The company would have an aggregate capacity of close to 56 million tonnes per annum, if all the planned greenfield capacities go on stream by then. Neat 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 specialised 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. But at what cost?

Now that Tata Steel has achieved its strategic objective of becoming one of the major players in the global steel industry and steel demand growth is likely to be robust over the next decade, has the company paid too much for Corus? Even those analysts and industry observers who agree on the positive outlook for steel demand growth and the need to achieve scale believe so. The enterprise valuation of Corus at around $13.5 billion appears too steep based on the recent financial performance of Corus. 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 obscenely high. Tata Steel's B Muthuraman has defended the deal arguing that the enterprise value (EV) per tonne of capacity is not very high. The EV per tonne for the Tata-Corus deal is around $710 is only modestly higher than the Mittal-Arcelor deal. Besides, setting up new steel plants would cost anywhere between $1,200 and $1,300 per tonne and would take at least five years in most developing countries. But, are the manufacturing assets of Corus good enough to command this price? It is a well-known fact that the UK plants of Corus are among the least efficient in Europe and would struggle to break even at a modest decline in steel prices from current levels. Recent financial performance of Corus would dent the hopes of Tata Steel shareholders even further. EBITDA margins, after adjusting for one-time incomes, have steadily declined over the last 3 years. For the 9-month period ended September 2006, EBITDA margins of Corus were barely 8 per cent as compared to around 40 per cent for Tata Steel.

Year Revenues EBITDA EBITDA Margin (%) Operating Profits Operating Profit Margin (%) Net Profit Net Profit Margin (%)

Corus Financials 2004 18.32 1.91 10.44 1.30 7.09 0.87 4.73

2005 19.91 1.86 9.34 1.17 5.89 0.72 3.63

Jan-Sep 2006 14.10 1.12 7.96 0.75 5.29 0.25 1.77 Figures in $ Billion

The price of an asset is more a factor of its future earnings potential than its past earnings record. Operating margins of Corus can be significantly improved if Tata Steel can supply slabs and billets. Tata Steel is targeting consolidated EBITDA margins of around 25 per cent as and when it starts

supplying crude steel to Corus. If the company can sustain such margins on the enlarged capacities, it would be quite impressive. But that is a long way off as Tata Steel would have sufficient crude steel capacity only when its proposed new plants become operational. Till then, the company is targeting to maximise gains through possible synergies between the two operations, which are expected to yield up to $350 million per annum within three years. In the meanwhile, Tata Steel has to make sure that cash flows from Corus are sufficient to service the huge amount of debt, which is being availed to finance the acquisition. According to the details available so far, Tata Steel would contribute $4.1 billion as equity component while the balance $9.4 billion, including the re-financing of existing debt of Corus after adjusting for cash balance, would be financed through debt. The debt facilities are believed to be structured in such a way that they can be serviced largely from the cash flows of Corus. Interest rates on credit facilities for such buy-outs are often higher than market rates because of the risks involved. At an expected interest rate of 7 per cent per annum, the interest outgo alone would be over $650 million per year. Along with repayment of principal, the annual fund requirement to service this debt would be around $1.5 billion - assuming a 10-year repayment horizon. The current cash flows of Corus are barely sufficient to cover this, even after considering the synergy gains. If international steel prices decline even modestly, Tata Steel would have to dip into its own cash flows or find other sources like an equity dilution to service the debt. Besides, funds may also be required for upgrading some of the Corus plants to improve efficiencies. Tata Steel would have to manage all this without jeopardising its greenfield expansion plans which may cost a staggering $20 billion over the same 10-year period. No wonder investors are deeply worried! To its credit, the Tata Steel management has acknowledged that it would not be an easy task to manage the next five years when Corus would have to hold on to its margins without the help of cheaper inputs supplied by Tata Steel. If the group can survive this initial period without much damage, life may become much easier for the Tata Steel management. Investors would consider Corus a a burden for Tata Steel until such time there is a perceptible improvement in its margins. That would keep the Tata Steel stock price subdued and any decline in steel prices would have a disproportionately negative impact on the stock.

However, long-term investors would appreciate that right now steel manufacturing assets are costly and Corus was a prized target which made it even more costly. With the strategic importance of such a large deal in mind, Tata Steel management has taken the plunge. If it can pull it off, even after a decade, the Corus acquisition would become the deal, which would transform Tata Steel.

Tata-Corus deal opens door to European banks

Rajesh Unnikrishnan Jan 31, 2007, 04.00pm IST

LONDON: The Tata group's $11.3 billion acquisition Anglo-Dutch steelmaker Corus Group Plc would see an aggressive entry of European investment banks into the Asian, particularly Indian mergers and acquisition (M&A) market. The Indian M&A market are long dominated by the US banks. ABN AMRO, Deutsche Bank Rothschild and Credit Suisse Group are advising the Tata group which has raised its offer to outbid Brazil's CSN in an auction set by the UK's Take Over Panel. These investment bakers are hoping to snap up net fees of about 1.5 % on the deal after regulatory and legal expenses. Global fees typically average between 1.5 to 2.5% depending on the size and structure of a deal. Merrill, Morgan Stanley and Citigroup have long dominated the Indian M&A scene, which is set to get bigger as Asia's fourth-largest economy grows at about 9%. The salt-to-telecoms Tata group has long dealt with JM Morgan Stanley, the Indian joint venture of Morgan Stanley, and DSP Merrill Lynch, so choosing the Dutch and German banks was unusual. ABN and Deutsche were believed to have more local knowledge and access to funds, putting them in a better position to grab Indian business than U.S. banks, a London based investment banker said. "The successful Tata Corus deal would boost the profile of these banking firms and help to pitch for more business in India. India is a hot market now. Companies are increasingly looking to consolidate or expand through takeovers, both locally and overseas," a senior official with Elra Capital, a mid-sized investment banking firm said. M&As announced in India rose 38% in 2006 to a record $27.8 billion, including outbound deals that trebled to $21 billion, according to data compiler Deal Tracker. Investment banks' revenue in India rose 23% in 2006 to $413 million, including fees from initial public offerings and debt raising. It may be the first time ABN AMRO Rothschild (AAR),a joint venture formed around 10years back is advising a Indian group. ABN AMRO Rothschild has led many of the largest and most complex equity capital markets transactions ever executed globally.

ABN AMRO topped the Indian M&A deals table in 2006, from a distant fourteenth place in the previous year, boosted by an airport privatisation deal. Deutsche climbed to fifth from nineteenth a year earlier. At the same time, Morgan Stanley slid to ninth position after topping the table in 2005, while Merrill Lynch fell to seventh from second. However, in the global M&A market, Goldman Sachs topped the table in 2006 with deals worth $430 billion. Morgan Stanley is in the second position ($329) while JP Morgan ($319) is the third position. ABN AMRO was below the fifteenth position in the global M&A chart while Deutsche Bank and Rothschild is in the ninth and eleventh position.

Tata Steel Europe needs investment: Ratan Tata

PTI Mar 3, 2012, 11.10PM IST

JAMSHEDPUR: Tata Steel Europe (formerly Corus), needs investment and it can be planned only after economic situation in Europe improves, group chief Ratan Tata said here on Saturday. "It (Tata Steel Europe) was performing in negative due to various reasons, including the prevailing economic conditions there and high cost of raw materials.

Our European operations need investment. Let the economic condition improve there, which I hope would take place fast, and we will plan it out only after that," he said. Tata Steel, the world's seventh largest steel maker, had reported a consolidated net loss of Rs 602.67 crore for the October-December quarter, mainly due to Rs 781 crore (USD 147 million) loss in core earnings from the European operations. Slowdown in demand from the continent -- the largest market for the firm-- contributed significantly to the loss. A jump in raw material costs by 20.59 per cent was another reason. Tatas acquired Anglo-Dutch steel major Corus in 2007 for over USD 12 billion. A year later, group companyTata Motors brought out iconic British luxury car brand Jaguar Land Rover for USD 2.3 billion. "We (Tata group) have spent millions to earn a brand name over the years and finally succeeded," Tata said Tata, alongwith his successor-designate Cyrus Mistry and Tata Steel Managing Director H M Nerurkar was taking part in a question-answer session organized by Singhbhum Chamber of Commerce and Industry.