Project on Acquisitionof Corus by Tata SteelA Presentation by GROUP 5
TATA STEELCORUSABOUT THE MERGERTIMELINEWHY THIS MERGER BENEFICIAL FOR TATA STEEL?ANALYSIS: WHO GAINED MORE?COMMENTS OF GROUP FIVE ON THIS ANALYSISREFERENCESGROUP MEMBERTOPICS
The Tata Group of Companies: Collaborative growth Vision of becoming Indias as well as worlds most respected and successful business conglomerates. Six continents with diverse cultures. Products include steel bearing rings, forgings, flanges, steel tubes, cold rolled strips, seamlesstubes and metallurgical machinery.Tata Steel: After acquisition of Corus, Among the top ten steel manufacturers in the world. An annual crude steel capacity of over 28 million tons per annum (mtpa). Established in 1907. Most geographically-diversified steel producers, with operations in 26 countries and a commercialpresence in over 50 countries. Turnover of US$ 26.13 billion in FY 2011- 2012. Over 81,000 employees across five continents Fortune 500 company.Vision : To be the world’s steel industry benchmark through the excellence of its people, its innovativeapproach and overall conduct. Underpinning this vision is a performance culture committed to aspirationtargets, safety and social responsibility, continuous improvement, openness and transparency.TATA STEEL
CORUS : Europes second largest steel producer Revenues in 2005 : GBP 9.2 billion, and crude steel production of 18.2 million tones Primarily in the UK and Netherlands. Manufacturer of semi-finished and finished carbon steel products. Strip products ( coated and uncoated strip, welded tubes, sold both as coil and sheet) Long products (including sections, plates, wire rod, narrow strip and engineering steels) The distribution and building systems division, which operates as a link between Corussmanufacturing operation and its customers.Formation: Merger of British Steel Corporation & Koninklijke Hoogovens N.V.Headquarter: London, England, UKCORUS
Date: 20 October 2006Amount: $7.6 billion takeover bidBidder : Tata SteelTarget : CorusShare capital of Corus Group: At a price of 455 pence in cash foreach share valuing Corus at GBP 4.3 billion.Governing & Regulating Act: Section 425 of the (English)Companies Act 1985, subject to High Court of Justice in Englandand Wales and Corus shareholders approvals being obtained.At par with Tata Steels stated objective of growth andglobalization.ABOUT THE MERGER
TIMELINE•Corus Steel has decided to acquire a strategic partnership with a Company that is alow cost producerSeptember 20, 2006•The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand its businessfurtherOctober 5, 2006• The initial offer from Tata Steel is considered to be too low both by Corus andanalystsOctober 6, 2006•Tata Steel has kept its offer to 455p per share.October 17, 2006•Tata still doesn’t react to Corus and its bid price remains the same.October 18, 2006•Corus accepts terms of £ 4.3 billion takeover bid from Tata SteelOctober 20, 2006•Brazilian Steel Group CSN recruits a leading investment bank to offer advice onpossible counter-offer to Tata Steel’s bidOctober 23, 2006•Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for its decision toaccept an offer from Tata.October 27, 2006•The Russian steel giant Severstal announces officially that it will not make a bid forCorusNovember 3, 2006•The battle over Corus intensifies when Brazillian steel company CSN launched acounter offer for Corus at 475 pence per share, valuing it at $8.4 Billion.November 19, 2006•Tata preemptively upped the offer to 500 pence (the “Revised Tata Acquisition”).Other than the increased offer price, the Revised Tata Acquisition was subject tothe same terms and conditions as set out in the original offer.December 10, 2006•Within hours of Tata Steel increasing its original bid for Corus to 500 pence pershare, Brazils CSN made its formal counter bid for Corus at 515 pence per share incash, 3% more than Tata Steels OfferDecember 18, 2006•Britains Takeover Panel announces in an e-mailed statement that after an auctionTata Steel had agreed to offer Corus investors 608 pence per share in cashJanuary 31, 2007•Tata Steel manages to win the acquisition to CSN and has the full voting supportfrom Corus’ shareholdersApril 2, 2007
Between the two companies there exists a high degree of culturalcompatibility which would facilitate an effective integration of thebusinesses over time. Enhanced scale will position the combined group as the fifth largeststeel company in the world by production, with a meaningful presencein both Europe and Asia. Powerful combination of low cost upstream production in India withthe high-end downstream processing facilities of Corus will improve thecompetitiveness of the European operations of Corus significantly. Facilitates cross-fertilization of research and development capabilitiesin the automotive, packaging and construction sectors and there will bea transfer, from Europe to India, of technology, best practices andexpertise of senior Corus management.WHY THIS MERGER BENEFICIAL FOR TATA STEEL?
Leading the enlarged group with a combined management team andManufacturing will be organized so as to produce slabs / primary steelin low-cost facilities and produce high-end products in proximity toclient base - in both Europe and India. Strong market position by acquisition of Corus and vertical integration . Increased demand for steel specially in developing countries forgrowing sectors like Infrastructure, construction, automobiles andconsumer durables. The Investment demand was strong and rising with subsequent rises inthe in steel prices. (In August 2009, the index for basic metals hasrecorded growth rate of 8.5% and the production has grown7.6% compared to last year’s 6.6) Increased Chinese production and resultant sluggish steel prices withfalling net realizations to adversely impact profitability.WHY THIS MERGER BENEFICIAL FOR TATA STEEL?
StrengthLowest cost producer inworld.Experience of TATAgroup in doing globalactivity.Stable balance sheet(Low Debt to EquityRatio).WeaknessCorus was triple the size ofTATA steel in terms ofproduction.OpportunityConsolidation trend inSteel IndustryCSN’s lost image afterfailure of 2002negotiationsTo get exposed to globalsteel marketThreatBrazil company CSNRussian companySeverstalNo committed financers tosupport the possible dealWHY THIS MERGER BENEFICIAL FOR TATA STEEL?
To be funded through Tata Steel’s own cash resources and loans raisedby Tata Steel and its subsidiary companies formed for the purpose ofthis acquisition. Surprised the credit default swap segment of the derivative markets bydeciding to raise $6.17bn of debt for the deal through a new subsidiaryof Corus called Tata Steel UK, rather than by raising the debt itself. Tatas security credit rating is investment grade, whereas the newsubsidiary may not be. The higher risk associated with raising debtthrough a subsidiary with a lower credit rating prompted FitchRatings to downgrade its rating of the credit swap risks in the takeoverto negative. Fitch also stated that Corus responsibility for the debtmay lead to Corus own unsecured debt rating being downgraded. Thisdoes not affect the rating of bonds issued by Corus which are secureddebt.ANALYSIS: WHO GAINED MORE?
Assumptions for Valuations According to data monitor report, April 2009, CAGR 18.6%growth forecasted for Europe for the steel industry.Therefore, we have assumed peak growth in 2013. After that thegrowth slows down linearly till it hits 6% in 2025 (GDP growthrate in a mature economy). We have assumed terminal growthrate to be 4% due to rising costs and competitive factors. For 2009-10, Tata Steel posted a 49.5% fall in consolidatedprofits. Sales and profits tumbled because of the globaleconomic crisis (contraction in demand from the automotive andconstruction sectors). This is reflected in the NEGATIVE COI in2009-10. We are assuming that with slow down, Tata Steel willdecrease its Net working capital by increasing liabilities.ANALYSIS: WHO GAINED MORE?
Of the $ 8.12 billion of financing , Credit Suisse provided 45% and ABN AMROand Deutsche provided 27.5% each. Funding was for 60:40 debt equity. Equity Contribution from Tata Steel - $ 3.88billion. Share Swap deal less attractive to shareholders as Share Swap means FDI andbrings regulatory hassles which are unfavorable to Corus shareholders. ShareSwap would have diluted Tata Steel’s Equity base which was not in favor of Tatashareholders Cost of equity - 15% is higher than that of debt of around 8%, so paying in cashbrings down the cost of acquisition High value paid. Approximately 7.7 times its Enterprise Value. Corus’ EBITDA was at 8% which was much lower as compared to Tata Steel’s 30%. Debt of US $ 6.14 was raised against the cash flows of Corus (LBO). It was a riskyproposition. Tata’s debt equity ratio was adversely affected to 2.74:1 from 1.1 which it wasmaintaining earlier. Fast consumption of Tata Steel’s captive iron ore reserves as production capacityincreased from 5.3 million ( estimated for 50 years at this capacity) to 27 milliontons of steel per annum.ANALYSIS: WHO GAINED MORE?
TATA Steel Group rose to 5th position from 56th The production capacity increased from 4million tones to 28million tones by 2011 Standard & Poor’s Rating cut it credit Rating to BB from BBB and removed themfrom the negative watch list Big boost to the Indian economy as TATA acquired a company 3 times its size. The R&D Unit of Corus complements that of TATA’s Help from financing institutions as $8 billion was raised through debtCOMMENTS OF GROUP ON THIS ANALYSIS
Tata Steel Stock Price Post Merger in Indian Stock MarketCOMMENTS OF GROUP ON THIS ANALYSIS
Tata Steel Stock Price Post Merger in European Stock MarketCOMMENTS OF GROUP ON THIS ANALYSIS
http://www.scribd.com/Valuation-of-Tata-Steel-After-Corus-Acquisitionhttp://www.tata.inDebarshi DasSourav BiswasPrattoy ChatterjeePriyanka DeyGoutam ShitSoumendra Nath MullickREFERENCESGROUP MEMBERS