Tata Steel Acquisition of

Corus
Prepared By:
Abdurrahman Ozen
Rajan Thakur
 Trends in Global Steel Industry
Growth After Decades of Stagnation and Low Profitability
World Crude Steel
Production
Production Compound Annual Growth Production per
Volume Rate Capita
1 (Million tons) 1 (Average % for 5 year periods) 20 (Kg / Capita)
400 1,24 2 0
19
4 1
1 1 18
200 0 0

1 8 16
000 0

80 6 14
0 0

60 4 12
0 0

40 2 10
0 0

20 0 8
0 0

0 - 6
25 5 6 6 7 7 8 8 9 9 0 0 06 0 5 5 6 6 7 7 8 8 9 9 0 0 0
5 5 6 6 7 7 8 8 9 9 0 0 0
0 5 0 5 0 5 0 5 0 5 0 5 6 0 5 0 5 0 5 0 5 0 5 0 5 * 0 5 0 5 0 5 0 5 0 5 0 5 6
*
2006/200

Sources: IISI, World Steel in Figures 2007; Geographic Information

Systems
 Expected Trends in Global Steel Industry

• Analysts View
2. The massive post-war infrastructure
build in western countries led to
sustained steel demand during the
30-year period between 1945 and
1975.
“The coming decades would see
similar infrastructure spending
in emerging economies and
steel demand would continue to
 Effect of Demand on Global Steel Prices
Supply Driven Demand Driven
Privatization Consolidation
US$ / Cost Based Price Based
ton
90 90
0 China + 0
80 80
Global
0 GDP Sep ’07 =0 573
70 Asian (USA) 70
0 Crisis 0
60 Steel 60
0 Crisis 0
50 50

US$ /
ton
0 0
40 40
0 37 38 0
30 0 4* 30
0 * 0
20 Russian
20
20
0 Crisis 8
0
10 10
0 0
0 0
8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0
9 1 HRC
0 China 3 4
2 Estimated 5 6 7 8 9 0 1 2 3 4 5 6 7
HRC HRC HRC
Costs US* Europe* CIS*
(w/o General Expenses)

* Constant dollars (July 2007)

Source: CRU / WSD ** 2006 cost plus iron-ore price increase (9.5%
abril 07)
 China has Been the Main Driver Behind
Growth, Changing the Industry Structure
World Crude Steel Production
1975 2006
Other North
North Other
Central & America
America
South Central &
America 11% 13%
3% South 11%
19% America 4% CIS
10%

Western
23% 16% 9% Japan
Europe 22% EU 25

U 3%
1% 5% SSR
16% India 34%
India

China
China
Japan

644 Million Tonnes 1,244 Million Tonnes

Source: IISI, World Steel in Figures 1976, 2007

Global Concentration Lagging Behind Other
Metals, Suppliers and Key Customers
Industry Concentration, Top 5
Producers
81
%
72
66 %
% Top
7

49
%
40
38
%
%
28
%
20
%

Iron Nicke Alumin Aluminu Coppe Z Stee Automoti

Ore l a m r inc l ve
Sources: Morgan Stanley Research, 16 Feb 2007 IISI, World Steel in Figures 2006 JD Power
The Other Driver Behind Growth & Profitability has
been Industry Consolidation
Number of Steel Industry M Amount
& A’s (US$
Billions)
7 7
1 3 6
8

5
3

2 2
4 8

2 2 2 2 2 2
004 005 006 004 005 006
Source: Bloomberg, Completed
Deals
 Impact Of Industry Consolidation
will Become More Apparent in
Coming Years

Tactic
• Scale economies and
al synergies
Level
• Better balanced steel
inventories
• Optimization of Cost /
Production / Logistics
Strateg
ic
• Global production /
Level Local customer service
• Optimal plant location
 Tata Steel Background

• Tata Steel a part of the Tata group, one of the

largest diversified business conglomerates in
India.
• In the mid- 1990s, Tata steel emerged as Asia’s
first and India’s largest integrated steel producer
in the private sector.
• In February 2005, Tata steel acquisition the
Singapore based steel manufacturer NatSteel, let
the company gain access to major Asian markets
and Australia.
• Tata steel acquired the Thailand based Millennium
Steel in December 2005.
• Tata Steel generated net sales of 5 billion in the
financial year 2006-07.
 SWOT Analysis
Strengths : Opportunities:

 Low Debt to equity ratio.  Exposure to global steel market.

 Lowest cost producer in world.  Consolidation trend in Steel industry.
 TATA group has successfully
acquired some companies in the past

Weakness Threats

 Corus was triple the size of TATA  CSN Brazilian bidder.

steel in terms of production  Severstal Russian bidder.
 No committed financers to support
the deal .
 Corus Background
• Hoogovens had good access to the sea for the
supply of raw materials and export of finished
goods.
• The company was established at Ijmuiden, a town
on the north sea coast with good access inland via
the North Sea Canal.
• On October 06, 1999, Hoogovens(38.3%) merged
with British Steel Plc(61.7%) to form Corus Group
Plc.
• Philippe Varin(CEO) and Jim Leng chairman of
Corus, both worked to revive the company’s
business.
• The company reduced debt by selling its
 SWOT Analysis
Strengths :
 World’s ninth largest and Europe’s
second largest steel producer.
 Wide range of products
 Operating facilities spread in whole
Europe
Weakness
 Corus was in bad shape because of
high operational cost.
 Section 201 tariff imposed by Bush
administration in 2002 led to loss in
Corus clientele.
Opportunities
 Consolidation trend in Steel
Industry.
 To get right price at a time when
market is less volatile.
Threats
 Huge pension liability might have led
to collapse of the deal.
 Disagreement of Labor and
government due to possibility of job
cut.
The • On October 17, 2006 Tata
steel made an offer of 455
Highlights: pence a share in cash
valuing the acquisition
deal at US$ 7.6 billion.
• CSN(Companhia
Siderúrgica Nacional)
reacted quickly making a
counter bid of 475 pence
per share on November
17, 2006.
• So an auction was
initiated, after nine rounds
of bidding on January 31,
2007 Tata emerged
winner in the auction with
its final bid of 608
pence per share for
 Valuing the Acquisition
Method used Enterprise Value Multiple.
Enterprise value (EV) represents a company's
economic value -- the minimum amount someone
would have to pay to buy it outright.
EV = Mkt Cap. + Pref. Stcks + Min. interest +
Long Term debt –
Cash & cash Equivalent
 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)
 Valuing the Acquisition
EV = Mkt Cap. + Pref. Stcks + Min.
interest + Long
Term debt - Cash Equivalent
= 3.5 billion + 0 + 26 million + 1308
million – 871
million
=£ 3.963 billion. 
EBITDA = £ 947 Million(From Con.
Operations)
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
 Why Enterprise Multiple
ratio ???
• EV/EBITDA is usually
inappropriate for comparisons of
companies in different industries,
as their capital expenditure
requirements are different.
• EV/EBITDA also strips out the
effect of depreciation and
amortization. These are non-cash
items, and it is ultimately cash
 FINANCING THE
ACQUISITION
Break-up of Tata Steel
Mode Amount Equity contribution
(In $ Billion) (In $ million)
Tata Steel UK - Non-recourse Debt 6.14
Tata Steel Asia (Singapore SPV) 2.66
Tata Steel Equity Contribution 4.9
Cash Reserves 700
External Commercial Borrowings 500
Preference shares to Tata sons 640
Right issue 862
Convertible preference shares 1400
Foreign issue of Equity instruments 798
Sub-total 4900
Grand Total 13.7
 SWOT Analysis
• Strengths
2. Corus takeover catapults Tata Steel
from its current 65th place to No. 5
spot, with a combined capacity of
23.5 million.
3. Cost advantage of operating from
India can be leveraged in Western
markets and differentiation based
on better technology from Corus can
 SWOT Analysis
• Weakness
2. Corus EBITDA at 8% was much lower than that
of Tata steel which was at 30% in the financial
year 2006-07.
3. The merger requires high level of integration, for
technology transfer and coordinating supply
chains.
4. Where the Tata’s too keen???
The fact that Tata’s determination to acquire a
British steel maker, symbol of Britain’s industrial
power, was fuelled by patriotic passion against
the old hegemonic order, and rechristening it
 SWOT Analysis
• Opportunities
2. Chinese Steel plants dependence on
imported raw material, limit their
pricing power.
3. Corus strong research and
technology development, would add
to the competitive strength for Tata
Steel.
4. The acquisition would open new
markets and product segments for
 SWOT Analysis
• Threats
2. Capacity additions by China, Russia
and Brazil may outrun the demand
growth and lead to subdued steel
prices.
3. If the business performance of Corus
declines, the company’s cash flows
would reduce leading to a default on
the loan taken
 A Financial take on the
Acquisition.
1. Valuation
Tata Steel is paying 7 times EBITDA of Corus
enterprise value 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.
 Reply to the criticism
about the price paid being
• RatanTata 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
 A Financial take on the
Acquisition
2. Interest charges
• Tata’s new debt amounting to $8 billion due to
the acquisition, financed with Corus cash flows is
expected to generate up to $640 million in annual
interest charges (8% annual interest cost).
• This amount combined with Corus existing
interest debt will amount to approximately $725
million after the acquisition.
If the international steel prices
decline moderately, Tata Steel would
have to dip into its own cash flow or
find other sources like an equity
• Key Ratios
2006 2007 2008E 2009E

Debt / 0.3 0.7 1.8 1.6

Equity
Return on 41.8 36.5 22.1 24.8
Equity
If the projected synergies do not work
to the tune expected, it may turn out
to be a value destroying project