TATA & CORUS

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STEEL INDUSTRY BACKGROUND

 As per IISI the demand for steel would be around 4.9%

(1.32 bn tonnes)in 2010. But would decrease in 2010-
2015 to 4.2% (1.62bn tonnes)
 China is the highest producer of steel in the world
 In 2006, motor vehicle sales fell 2.6%, while production
was down 2.8%.

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VISION TATA STEEL

“We aspire to be the global steel

industry benchmark for
Value Creation and Corporate
Citizenship”

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TATA STEEL BACKGROUND
• Tata Steel a part of the Tata group, one of the largest

diversified business conglomerates in India.

• Founded in 1907,by Jamshedji Nusserwanji Tata.
• Started with a production capacity of 1,00,000 tones, has transformed into a
global giant
• In February 2005, Tata steel acquired the Singapore based steel
manufacturer NatSteel.
• Tata steel acquired the Thailand based Millennium Steel in December 2005.
• Tata Steel generated net sales of Rs.175 billion in the financial year 2006-
07.
• The company’s profit before tax in the same year was Rs. 64.14 billion while5
its profit after tax was Rs. 42.22 billion.
SWOT ANALYSIS OF TATA STEEL

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 CORUS BACKGROUND
• Corus Group PLC was formed on 6th October 1999, through the
merger of two companies, British Steel and Koninklijke Hoogovens,
 Company had four divisions: Strip product , Long product ,
Aluminium and Distribution and Building system.
• 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.
• Was Largest steel producer in UK with £10,142 million annual
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revenue and work force of 50,000 employees
SWOT ANALYSIS

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 REASONS FOR TATA STEEL TO BID
 Tata is looking at 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
bottom line
 Corus holds a number of patents and R&D facility
 Cot of acquisition is lower than setting up a green field plant and marketing and
distribution channels
 Tata is know for efficient handling of labour and its aims at reducing employees
cost and improving productivity at Corus
 It had already expanded its capacity in India
 It will move from 55th in the world to 5th in production of steel globally. 9
ACCESS TO NEW MARKET

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 REASONS FOR CORUS FOR ACCEPTING
BIDS

 Tata debt of Corus is 1.6 bn GBP

 Corus needs supply of raw material at lower cost
 Though Corus had revenue of $18.06 bn, its profit was
just $626 mn (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%) 11
 Dec 18
Oct 6 Tata bid @500 pence /share
offer of 455 Brazilian counter bid at
pence per share 515pence per in cash

Oct 23 Brazilian
April 2
Steel Group CSN
Wins the bid

2007
2006

Oct 20 Nov 18 Jan 31

Corus accepted battle over Tata offers Corus
terms of £ 4.3 Corus intensifies investors 608 pence
billion per share in cash 12
WHY CASH DEAL????
 Immediate takeover was required.
 Share Swap deal would have been less attractive to the Corus
shareholders.
 Share Swap would have meant a lot of regulatory hassles which
might not have been accepted by Corus shareholders.
 Share Swap would have diluted Tata Steel’s Equity base which
was not in favor 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. 13
DEAL STRUCTURE: LEVERAGE BUY OUT
(LBO)

TATA Steel Ltd

TATA Steel Asia Equity (Tata Steel) USD 4.1 bn

Holdings
(Singapore)

Debt USD 6.14 bn long-term debt from

a consortium of banks raised US $ 2.66
TATA Steel UK bn through bridge loans.

Corus Group UK Existing Debt USD 0.85 bn

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FINANCING THE DEAL
 Equity contribution by Tata Steel to Tata Steel UK via Singapore of
$4.1 b
 Internal generation- $1.267 b
 External commercial borrowings- $0.5 b
 Proceeds from rights issue- $1.888 b
 Foreign equity offering- $0.445 b
 Non-recourse debt financing by bank consortium (at Tata Steel UK) of
$6.143 b
 Five-year amortizing loan of $3.236 b
 Seven-year minimally amortizing term loan of $2.907 b

 Bridge financing in Tata Steel Asia Holdings (Singapore) of $2.662 b

 Credit Suisse leaded, joined by ABN AMRO and Deutsche Bank in
the consortium.
 Of the $ 8 billion of financing , Credit Suisse provided 45% and ABN15
AMRO and Deutsche provided 27.5% each.
IMPACT ON TATA STEEL SHAREHOLDERS

 Tata Steel raised funds via rights issue and not private
placement
 Increase in value to existing shareholders

 Earnings per share and market capitalization of Tata Steel

shareholders will get diluted immediately after the takeover
due to high debt-equity ratio

 Fall in share prices will allow Tata to pick up its own shares
from the market at lower prices, fending off a takeover

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 PAT as a percentage of revenue (post Corus ) – 9.34%

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FINANCIALS

Particulars 2006-7 2007-8 2008-9 2009-10

PAT (Rs. In mn) 42770 123500 48,492 (21,208)

DEBT/EQUITY 0.84 1.99 1.65 1.77

EBITDA/turnover (%) 30.73 13.90 12.55 9.12

EPS 64.66 176.81 66.07 -

P/E 6.95 3.92 3.12 -

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 Continuous improvement  Continuous improvement

programme (ASPIRE) programme- “the corus way”

 Core values  Core values

 Trustees  Integrity

 Integrity  Creating value in steel

 Respect for individual  Customer focus

 Credibility  Selective growth

 Excellence  Respect for our people

 World class governance  World class governance 21

•Tata was one of the lowest cost steel producers & Corus was fighting
to keep its productions costs under control .
•Tata had a strong retail and distribution network in India and SE 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 fit between the two organizations both of
which highly emphasized on continuous improvement and Ethics.
•Economies of Scale.
•Increase in profitability.
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•Backward integration for Corus and Forward integration for Tata
Steel.
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 23
entity.
•High value paid. Approximately 7.7 times its Enterprise Value.
•Enterprise value =
common equity at market value
+ debt at market value
+ minority interest at market value, if any
+ preferred equity at market value
– cash and cash-equivalents.

•Corus’ EBITDA was at 8% which was much lower as compared to Tata Steel’s
30%.

•Debt of US $ 8 bn was raised against the cash flows of Corus. It was a risky
proposition.

•Tata’s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was
maintaining earlier.

•Fast consumption of Tata Steel’s captive iron ore reserves as production capacity
increased from 5.3 million ( estimated for 50 years at this capacity) to 27 million 24
tons of steel per annum.
•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

steel’s 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.

•The global demand for steel remained weak even in the second
quarter of financial year 2009-10. However, the prices of raw
materials for making steel fell in the year 2009. The Benchmark price
for coal fell to US$ 120 per tonne in 2009 from US$ 300 per tonne in
2008. 25
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 are 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. 26
“ 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

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