OUTLINE TATA STEEL background CORUS background Rationale for the acquisition Synergies expected from the deal Funding structure of the deal Long-term implications of the deal
TATA STEEL BACKGROUND A part of TATA Group of Company’s. Formerly known as TISCO and TATA IRON AND STEEL COMPANY LIMITED. Located in Jamshedpur, Jharkhand, India. World’s 7th largest steel company. India’s 2nd largest and 2nd most profitable private sector company. Data as per March 31, 2008 Capacity = 31 million tones Revenues = 132,110 crore Net profit = 12,350 crore
CORUS BACKGROUND One of the largest steel companies in Europe. Came into being in 1999 with the merger of British Steel plc and Dutch steelmaker. Also has a presence in The Netherlands, Germany, France, Belgium, the United States, and Canada. The company manufactures, processes, and distributes metals products to the construction, automotive, mechanical engineering, packaging, and other markets.
THE ACQUISITION AND THE RATIONALE BEHIND IT Rationale TATA CORUSTo tap mature European market. To extend its Global reach throughHelped TATA to feature in Top 10 TATA.players in world. To get access to Indian OreTechnological benefits. reserves, as well as virgin market forCorus holds number of patents and steel.R&D facilities. To get access to low cost materials.Cost of acquisition is lower than Saturated market of Europe.setting up of Green field plant & Decline in market share and profit.marketing and distribution channel.TATA manufactures Low Value, longand flat steel products ,while Corusproduce High Value Strippedproducts.
SYNERGIES EXPECTED FROM THE DEAL 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. Backward integration for Corus and Forward integration for Tata Steel.
FUNDING STRUCTUREIt was a CASH DEAL because- 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 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.Equity + Loan = Deal$3.95 + ($3.654 + $2.233 + $2.233) = $12.07
LONG - TERM IMPLICATIONS 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 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.