Group 5

Case Facts

Tata acquired Corus, which is four times larger than its size and the largest steel producer in the U.K . The deal , which creates the worlds fifth- largest steel maker , is Indias largest ever foreign takeover and follows Mittal steels $31 billion acquisition of rival Arcelor in the same year . Tata acquired Corus on the 2nd April 2007 for a price of $12 billion . The price per share was 608 pence ( Rs 484 ), which is 33.6% higher than the first offer which was 455 pence.

About The Deal

TATA Acquired CORUS on 2nd April 2007

The deal price was US $ 12.11 Billion

On 17 Oct, 2006 TATAs bidded at 455 pence per share and price per share was 390 pence at that time

TATA Steel, the winner of the auction for CORUS declares a bid of 608 Pence per share
TATA Surpassed the final bid from Brazilian steel maker COMPANHIA SIDERURGICA NACIONAL (CSN) of 603 pence per share The combined entity has become the worlds fifth largest steelmaker after the deal.

Rationale behind Acquisition

Consistent with Tata Steel's objective of growth and globalization.

Creates the 5th largest steel producer in the world.

Corus is an ideal combination of high-quality developed and lowcost high-growth markets and much broader distribution network.

There were opportunities for significant synergies between Tata Steel and Corus.
There was a considerable culture fit attributed to the Anglo-Saxon background of Corus and India's colonial past.

Corporate Strategy

To develop its carbon steel business Look beyond western Europe Globalization Deliver cost competitive steel to high- end product customers Play an active consolidator role in the steel industry light touch integration strategy

Tata Steel pre-merger profile

Tata Steel a part of the Tata group, one of the largest diversified business conglomerates in India. Founded in 1907,by Jamshedji Nusserwanji Tata 102 yrs in steel bazaar In the mid- 1990s, Tata steel emerged as Asias first and Indias largest integrated steel producer in the private sector. In February 2005, Tata steel acquired the Singapore based steel manufacturer NatSteel, that let the company gain access to major Asian markets and Australia. Tata steel acquired the Thailand based Millennium Steel in December 2005. Worlds 56th largest capacity of 30 million presence in 26 nations

SWOT Analysis of Tata Steel

-Low Cost production. -Easy access to raw material. - Low Debt Equity Ratio.
- Quality of Steel was not of International standards. -Non availability of latest R&D facility

SWOT

- To become a World leader in low cost and high quality steel products.

- To Compete with other big global players

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

diversified product mix

reduces risks higher end products will add to bottom line

Reasons for Tata Steel to Bid(contd.)

Economic of scale

Will help TATA to feature in Top 10 players in world

Technology Benefit
o Corus holds number of patents and R&D facilities.

Corus Pre merger profile

Corus Group plc was formed on 6th October 1999, through the merger of two companies, British Steel and Koninklijke Hoogovens Worlds 6th largest 2nd in Europe, 1st in UK Presence in 50 nations Corus has manufacturing operations in many countries with major plants located in the UK, The Netherlands, Germany, France, Norway and Belgium Supplier to many of the most demanding markets worldwide including construction, automotive, packaging, engineering 40,000 people worldwide

SWOT Analysis
Worlds ninth largest and Europes second largest steel producer. - Wide range of products of high technology.

- High operational Cost. - Lack of Access to raw material

SWOT
- To merge with a company to eliminate duplication and remove overlaps in marketing, accounting etc. - To get access to raw material and growth markets through merger.
- Increasing losses resulting to winding up of company -

Reasons For Corus For Accepting Bids

To extend its Global reach through TATA. To get access to Indian Ore reserves, as well as market for steel. To get access to low cost raw materials. Saturated market of Europe. Decline in market share and profit.

Strategies Behind this Merger

1. Growth through international expansion.
2. Capture the European customers in the automobile and aerospace industries 3. Capture the Indian automobile market by supplying high grades of steel. 4. Add more high technology products.

Funding for the deal

Routed through Tata Steels UK Special Purpose Vehicle(SPV) named Tata Steel UK Debt equity ratio was 1.9:1 Equity $ 4.1 billion Debt $ 8 billion through junk bonds Senior term loans from banks ABN Amro bank Deutche Bank CSFB

WHY CASH DEAL????

Immediate takeover was required. Share Swap deal would have been less attractive to the Corus shareholders. Share Swap would have meant FDI and that brings a lot of regulatory hassles which might not have been accepted by Corus shareholders. Share Swap would have diluted Tata Steels Equity base which was not in favour of Tata shareholders. And moreover cost of equity at around 15% is higher than that of debt of around 8%, so paying in cash brings down the cost of acquisition.

Integration efforts
Tata steel's Continuous Improvement Program Aspire with 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. As the core values of the two companies were same so Tata used Light Handed Integration Approach. Top management of the company remained same.

Legal compliances in the Deal

DEALING DISCLOSURE REQUIREMENTS

Under the provisions of Rule 8.3 of the City Code, if any person is, or becomes, interested (directly or indirectly) in one per cent or more of any class of relevant securities of Corus, all the dealings must be publicly disclosed by no later than 3.30 p.m. (London time) on the London business day following the date of the relevant transaction. This requirement will continue until the date on which the Scheme becomes effective, lapses or is otherwise withdrawn or on which the offer period otherwise ends. Under the provisions of Rule 8.1 of the City Code, all dealings in relevant securities of Corus by Tata Steel, Tata Steel UK, CSN, CSN Acquisitions or Corus, or by any of their respective associates, must be disclosed by no later than 12.00 noon (London time) on the London business day following the date of the relevant transaction.

EFFECT ON CONVERTIBLE BONDHOLDERS

On 4 December 2006, a meeting of the holders of the Dutch Bonds was held at which a proposal to amend the terms and conditions of the Dutch Bonds so that they would be redeemed early (at or about the Effective Date), was passed. That early redemption proposal is conditional upon the Scheme Effective Date being on or before 28 February 2007.

MANAGEMENT, EMPLOYEES AND LOCATIONS Tata Steel intends that the existing contractual and statutory employment and pension rights of all directors and employees of Corus Group will be fully safeguarded upon completion of the Revised Acquisition.

Valuation of the Deal

In 2005, Corus annual prod. was 18mt. & that of Tata was 5mt.

The Enterprise Value was placed at $10 billion including the outstanding debt.
The price to earning ratio was higher than what they paid for Arcelor. In case of Arcelor, the acquisition turned out to be $840 per tonne as compared to $750 per tonne for Corus assets even though EV/EBITDA was higher for Corus at 7.6 as against 5.4 in case of Mittal. EBITDA = Revenue- Expenses( Excluding tax, interest, depreciation and amortization) Enterprise Multiple = EV/EBITDA

Logic for the Valuation

The strategic objective of the deal was to bring to Tata Steel 19 million tonne capacity at once. It also gives the company access to the European markets. Corus has high R&D capabilities.

Corus had multi-locational plants and was not a fully integrated steel company.

5 Yr. Financial performance of Tata Stee

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

Production
Revenue EBIDTA EBIDTA Margin PBT Net Profit Net Profit Margin

`000 Mt
$ Mn $ Mn % $ Mn $ Mn %

3,636
1583 283 20% 52 43 3%

3,941
2150 516 27% 277 222 12%

4,089
2755 840 34% 616 404 16%

4,109
3532 1378 42% 1178 773 24%

4,552
3884 1401 40% 1187 794 23%

EVA

$ Mn -96 34 156 528 529

5 Yr. Financial performance of Corus Unit FY`02 FY`03 FY`04 FY`05 FY`06 Category
Production `000 Mt 17.1 19.4 19.5 18.7 18.8

Revenue EBIDTA EBIDTA Margin PBT Net Profit Net Profit Margin

$ Mn $ Mn %

11456 512 4.47 %

10018 305 3.04%

12165 1251 10.28%

10845 1142 10.53 %

12845 1846 14.37 %

$ Mn $ Mn %

-644 -741 - 6.47

-321 -388 - 3.87

766 593 4.87

649 512 4.72

610.35 446 3.47 %

Financial just before Acquisition Steel TATA Corus

2006-07 Turnover EBITDA PBT 4546 1704 1440 31st Dec,2006 18979 1846 610.35

PAT
Net Profit Margin EPS

971
23%

446
2.35 %

1.70

0.41

Dividend

254

134

TATA Steel before & After

2006-07 2007-08 2008-09

EBITDA/Turnover PBT (In crores Rs) PAT(In crores Rs) PBT/Turnover Interest Coverage Ratio EPS Debt /Equity P/E

31.14% 6313 4165 24.61 % 16.35 64.66 0.71 6.95

14.08 % 16371 12321 12.39 % 3.46 177.18 1.99 3.91

12.55 % 6743 4849.24 7.43 % 4.32 66 1.65 3.12

A Financial take on the Acquisit

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 Coruss existing interest debt amounts to $ 725 mn.

Benefits of the Deal

Augmented its crude steel capacity to 27 mtpa The combined entity forms the 5th largest Steel company The merged entity has brought Tata Steel to the world platform Provided Tata Steel access to new markets and presence across the steel value chain Much broader distribution network

Synergies from the Deal

Tata was one of the lowest cost steel producers and Corus was fighting to keep its productions cost under control Tata had a strong retail and distribution network in India and south east Asia. Hence there would be a powerful combination of high quality developed and low cost high growth markets Technology transfer and cross fertilization of R&D capabilities There was a strong culture fits between the two organizations both of which highly emphasized on continuous improvement and ethics Economies of Scale Increase in profitability Backward integration for Corus and Forward integration for Tata Steel

PITFALLS OF THE DEAL

High value paid. Corus EBITDA was at 8% which was much lower as compared to Tata Steels 30%. Debt of US $ 6.14 was raised against the cash flows of Corus. It was a risky proposition.

Tatas debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was maintaining earlier.
Fast consumption of Tata Steels captive iron ore reserves as production capacity increased from 5.3 million ( estimated for 50 years at this capacity) to 27 million tons of steel per annum.

Integration has to be fast and efficient. Increasing reach to joint entity to 4 continents and 45 countries including high value market of Europe. Increasing the EBITDA to 25% for joint entity by executing Tata steels brownfield and greenfield projects well in time. Increasing the capacity of the company beyond 50 million tons by 2015 so as to become one of 3 top steel producers in the world.

Strengths : Easy Access to quality raw material. New technology for producing high value products. Reach in 4 continents and 45 countries. Economies of Scale and production. Weakness : Cost of production per unit bound to increase. High Debt equity ratio. High dependability on the growth of market. A lot of stress on the cash flows of combined entity.

Opportunities : To become global player in steel industry. Takeover more companies successfully. Increase in production capacity beyond 56 mn tons by 2015

Threats : Cultural Diversifications are not easy to integrate. Markets should continue to grow. Rising cost of raw material. Rising terrorism and political unrest among nations.

A FINAL WORD ON THIS DEAL

If TATA steel were to create, from scratch, 19 million tonnes of steel making capacity comparable in quality to what Corus possesses, It would end up investing 70% to 85% more than it is paying now. Besides, setting up a new factory, a 3 to 5 years project if everything goes well, has great execution risk. 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 beyond 50 million tones per annum, if all the planned Greenfield capacities go on stream by then.

We can conclude that if the acquisitions well planned , executed and the necessary precautions taken for the deal a company can achieve its strategic objectives and thus ensure its growth through acquisition.

 I believe this will be the first step in showing that Indian industry can step outside the shores of India in an international market place and acquit itself as a global player

- Ratan Tata