Tata – Corus case

Analysis
 Introduction ( Position as on
25.4.2007)
• Tata Steel’s recent $13.2 billion acquisition of the Anglo-
Dutch conglomerate Corus Steel has prompted India’s
corporate and political elite to indulge in much euphoric
chest-thumping about “rising India.”
• The boast of Tata Chairman Ratan Tata that the takeover
“is the first step in showing that Indian industry can step
outside its shores into an international market place as a
global player,” was echoed by India’s Commerce and
Industry minister.
• Said Kamal Nath, “It is a two-way street now. Not only
India is seeking foreign investment, but Indian
companies are emerging investors in other countries.”
 But…
• Tata’s acquisition of Corus is largely being
financed through debt and many investment
analysts argue that Tata paid substantially
more than the company is worth so as to
outbid Brazil’s Companhia Siderurgica Nacional
(CSN).
• The 608 British pence per share that Tata paid to
acquire Corus is 33.6 percent higher than its
first offer, made in October 2005, of 455 pence
per share.
Internal resources about only $4
billion
• Tata has reportedly financed only $4
billion of the Corus purchase from
internal company resources, meaning
that more than two-thirds of the deal has
had to be financed through loans from
major banks, including Lloyds Bank,
Deutsche Bank and ABN Amro.
 Consequently,
• the Tata business empire, which is
comprised of 96 companies with a total
revenue of $21.9 billion in fiscal year
2005-6, will be transformed from a largely
family-owned enterprise into one that will
be under the constant and direct
scrutiny of the foreign-controlled banks
that financed the Corus takeover.
Formidable challenge reflected in
stock market response
• The formidable challenge confronted by Tata in
ultimately making this takeover profitable was
reflected in the response of the stock market.
• The day after the acquisition was announced,
Tata Steel’s shares fell by 10.7 percent on the
Bombay stock market.
• Ratan Tata has rejected suggestions that his
company paid too much for Corus, but has
refused to rule out job cuts.
 Leverage, Workers employed
• The heavily-leveraged takeover of Corus,
which currently employs 47,000 workers in
plants in Britain, the Netherlands,
Germany, France, Norway and Belgium,
will catapult Tata Steel from its current
position as the world’s 56th largest steel-
maker to the world’s fifth largest.
 Production capacity
• Before the merger, Tata Steel had an annual
production capacity of 5.3 million tonnes. Now its
productive capacity is five-times larger, 25
million tonnes
• Despite its much smaller capacity, Tata Steel
was able to almost equal Corus’ operating
profit last year, earning $840 million on sales
of 5.3 million tonnes, while Corus generated
$860 million in profits on sales of 18.6 million
tonnes.
• Why?
 Why?
• Tata’s much higher rate of return is by no
means the result of higher productivity
from the use of more advanced
technology.
• Rather, it is the result of much lower input
costs due to the low wages of Tata’s
workforce and its access to cheap Indian
iron ore.
Acquisition of Corus Group plc, UK
• Tata Steel’s investment in Corus Group plc is consistent
with the Company’s stated objective of growth and
globalisation.In keeping with its vision of becoming a
truly global player and creating a 50 million tonne steel
capacity by 2015, through both organic and inorganic
growth, the Company had been examining various
opportunities.
• The process started with the acquisition of NatSteel Asia
Pte. Ltd. (Singapore) in 2005, and Tata Steel (Thailand)
Public Co. Ltd. (erstwhile Millennium Steel) in 2006, the
planned brownfield expansion in Jamshedpur and the
long-term greenfield projects in Orissa, Chhattisgarh and
Jharkhand.
 Corus Group plc, UK
• In October 2006, the Company submitted a bid to acquire the UK
based steel making company viz. Corus Group plc (Corus).
• The acquisition was completed on 2nd April, 2007 at a price of608
pence per ordinary share in cash for a net consideration of
• USD 12.9 billion.
• Corus is a leading steel company with an annual crude steel
production of 18.3 million tonnes and revenues of USD 19.2 billion
in 2006.
• Corus’ operations are organised into three principal divisions; Strip
Products, Long Products and Distribution and Building Systems,
with manufacturing facilities located in UK and Netherlands.
• It holds a strong position in the automotive, construction and
packaging sectors in Europe.
 Corus Group plc, UK
• With the acquisition, the Company has emerged as the sixth largest
steel manufacturer in the world.
• Tata Steel is the lowest cost steel producer in the world,
catering mainly to the domestic market. The Company has a
competitive advantage of captive iron ore mines and collieries.
• On the other hand, Corus has state-of-the-art plants located in the
UK and Netherlands producing mainly high end products, with a
strong R & D capabilities.
• The combination of these two entities will give the Company access
to highly developed and competitive markets of Europe, a strong
product portfolio and state-of -the art technology in manufacturing.
• The Company also sees a strong cultural fit with Corus, which is
one of the key elements for successful integration.
 Corus Group plc, UK
• The Company believes that there are several
areas where synergies are possible and is
confi- dent that these benefits will start accruing
from the current year itself.
• Since the acquisition is effective from 2nd April
2007, the financial results of Corus will get refl
ected in the consolidated financial statements of
the Company from the current year.
Tata Steel has two main aims in its
leveraged buyout of Corus
• One is to gain access to European and by
extension North American steel markets,
markets that it could not otherwise hope to
penetrate because of it low-end steel
products.
• The other is to acquire the advanced
technology that Corus uses in producing
highly-processed steel used by automobile
and other industries.
 Tata Steel’s case
• Tata Steel's case for the
acquisition is that its low-cost
plants in India would use
Corus's finishing plants to
supply and expand the latter's
high-end customer franchises
in Europe.
 Finance

• In the last few years, the Company has

been steadily consolidating its financial
position.
• No major borrowings were undertaken and
the entire funds for capital expenditure
were met from internal generation.
• Surplus cash reserves were temporarily
invested in money market mutual funds to
facilitate liquidity.
Leveraging the Balance Sheet
• The Company was, therefore, in a strong position to
leverage its balance sheet to meet the substantial funds
required for the acquisition of Corus.
• The Company proposes to infuse USD 4.1 billion as
equity to part finance the transaction.
• The equity will comprise of USD 700 million from
internal generation, USD 500 million of external
commercial borrowings, USD 640 million from the
preferential issues of equity shares to Tata Sons Ltd.
in 2006- 07 and 2007-08, USD 862 million from a
rights issue of equity shares to the shareholders,
USD 1000 million from a rights issue of convertible
preference shares and about USD 500 million from a
foreign issue of equity-related instrument.
• Tata Steel UK Limited, a wholly-owned indirect
investment subsidiary of the Company, has
contracted a USD 6.14 billion long-term debt
from a consortium of banks, with a non-recourse
provision as far as Tata Steel is concerned.
• The balance amount of USD 2.66 billion is
proposed to be raised through a long tenor
quasi-equity or debt capital market instrument.
• Considering the large amount of funds required,
adequate care has been taken to ensure that
the additional borrowings are efficiently priced
and serviced without overly stretching the
Company’s balance sheet.
• The financing structure also allows deleveraging
of Corus without any pre-payment costs and
provide flexibility to take advantage of better
terms in the future
Corus Group plc, UK
 Further,
• Tata also hopes to cut Corus’ costs by
exporting relatively inexpensive iron-ore
and low-grade steel from India for use by
Corus in Europe.
• But for Tata Steel to adequately feed its
much large European subsidiary, it is
estimated that it will have to triple its
current production capacity of 5 million
tonnes.
 Cultural aspect
• Getting top and middle management teams to
work cohesively is often a problem with many
M&A deals.
• Tata Steel plans to induct senior executives from
the two companies to sit on each other's boards
as also a core steel team, but otherwise leave
the existing Corus management intact.
• Fears of job losses among Corus's 43,000
employees have been put off for later, but Tata
Steel is not making any assurances, besides
contributing to its under-funded pension
scheme.
 Integration issues
• "This merger will require a high level of
integration," says Puranam.
• "Corus will have to shut down some of its
plants in the U.K., and the two parties will have
to work together for technology transfer and
coordinating supply chains.
• What works in favor of Tata-Corus is the
friendly nature of the deal, and the strong
Anglo-Indian link. I believe many Tata Steel
managers were trained in the U.K."
 Critical factors
• Global demand for steel, could yet cause Tata and its corporate and
government cheerleaders to rue the deal.
• Moreover to make the leap to “global player” Tata Steel has had to
place itself under the firm-scrutiny of the money-sharks of world
finance capital .
• Tata’s dependence on world money markets may well increase in
the coming period as the cost of borrowing money in India becomes
more costly .
• The tightening money market in India could also impact on the
domestic growth rate, further undermining Tata Steel’s financial
position.
• Believing the Corus takeover to be a gamble, the credit-rating
agency Standard & Poor’s has issued a cautionary note stating that
it involves financial risks for Tata Steel and that the company will,
therefore, now be on “credit watch.”
 According to S&P analyst
• Anshukant Taneja, “The size of the acquisition and the
potential cash outflow in Tata Steel’s offer for Corus
could have an adverse impact on its financial risk
profile .
• In 2005 there were 100 overseas acquisition worth
$2.37 billion and in 2006, 166 acquisitions worth
$23.1 billion.
• This year just two acquisitions—Tata’s $13 billion
takeover of Corus and the $6 billion acquisition of
Canadian aluminium giant Novelis Inc by the Birla
Group’s Hindalco Industries Ltd.—have been valued
at almost $20 billion.
 On the negative side..
• As for Tata Steel, it is now firmly
encumbered with a large long-term and
potentially debilitating debt.
• There is no doubt that the workers of Tatas
—in India and Europe—will be made to
pay the price for the company’s
overstretched ambitions in the form of
layoffs and “plant consolidations.”
 Other challenges
• While Tata Steel now has tremendous growth
opportunities, it also faces significant challenges.
• Maintaining its low-cost advantages by securing captive
raw materials as it expands capacity is one; another is
tempering its bet on the current high steel prices with the
prospect that they could soften over time.
• Imminent consolidation in China, the rise of new rivals
as a result of consolidation, and cartelization among the
top producers are transforming the global steel
business. What will all these factors mean for the Tata
Steel-Corus merger? India Knowledge@Wharton spoke
with Wharton professors and steel industry experts for
glimpses of what lies ahead.
 Driven by Threat
• The current round of global steel consolidation has an unfamiliar ring, notes
Paul Tiffany, adjunct professor of management at Wharton and senior
lecturer at the University of California's Haas School of Business in
Berkeley.
• "It's interesting that the consolidation in the steel industry is driven not by
market opportunity but by the threat of the industry going out of business,"
says Tiffany, who consults with U.S. Steel and authored the 1998 book, The
Decline of American Steel: How Management, Labor and Government
Went Wrong.
• Tiffany says that at first sight, steel is "not a naturally global industry,"
without the economic argument of brands that can sell across countries.
"Steel is an undifferentiated commodity in many respects," he says. "Steel
is what economists call a producer good.
• The major users for steel are the automobile industry and the construction
industry, and brand doesn't matter much." Tiffany says the industry's
underlying dynamics fly in the face of notions of globalization.
• "One problem with steel is that its bulk and weight tend to minimize how far
you can export it," he says. Tata Steel has been actively promoting a
handful of steel brands, which account for about a sixth of its revenues.
 Big Question
• "Both Tata-Corus and Mittal-Arcelor are
betting that prices will remain strong in
what is a classic cyclical industry.“
• The questions the industry faces,
according to Tiffany, are: How long and
how deep is the demand from China, and
will India and Russia really begin to make
a major investment in infrastructure,such
as highways in rural areas?
According to Peter Fish, Managing
Director at MEPS (International)
• He predicts that a decline in steel prices could
benefit Tata-Corus. "Prices in the U.S. are
already on the way down.
• In Europe, they will turn down by the end of the
year. They could fall by more than 10% during
the year," he says. "When prices drop, obviously
the companies that will survive the best will be
those that are most competitive. If you have
cheap raw materials available, you have a
better opportunity to survive the difficult
times."
 Consolidation of steel industry
in China
• Another factor that will have implications for the
global steel industry -- including Tata and Corus
– is the inevitable consolidation within China,
according to Tiffany, who notes that China has
some 800 steel mills, of which 133 are
integrated producers. "There is bound to be
consolidation in China," he says.
• "The reason there are so many integrated firms
in China is because the highway system is not
yet large enough to allow a handful of firms
to dominate. Every area now needs a steel mill.
• Going forward, Chaudhuri is not too worried about the
declining steel demand from the developed world.
"Demand from developing countries, such as India, has
just begun so I see other opportunities and other
emerging markets," he says. "The supply side is more of
a concern, because of China.
• What is the quality of steel the Chinese are putting out --
is it the same type of steel, the same quality [as that of
• Tata-Corus]?
• If it is lower-grade steel, the Tata bet would be the
right one. They are trying to move up the value
chain."
 Cartelization in steel industry
• Steel is an industry that historically has had lots of collusion.
The reason is the very high cost to build a steel mill. And
steel is not fungible. Where you build it is where you are.
• If the market goes down, you have all these fixed costs, so
this industry worldwide -- starting in Germany in the 1880s
-- has long promoted the need for a cartelized industry to
protect against the downside. So some residue of that is still
there."
• But Tiffany points out that the newly emerging global
players from India, Russia and China have never been part
of that inner circle. "The global club has been Western
European and American," he says.
• "Look at the opposition that the Mittal-Arcelor [merger]
faced. The lack of opposition to the Tata-Corus deal is
because Tata Steel is paying a good price."
 Is the payment too much?
• Chaudhuri says that while Tata-Corus's advantage lies in
low-cost raw materials, "the benefits will come mainly
from being a one-stop shop for all kinds of steel, which
could help the company get orders from customers across
wider geographies." It would be a case of overstating
strengths, if the deal were justified simply on the basis of
the sourcing of ore and cost synergies. "It would not
make so much sense because then $8 billion is a lot of
money to pay, especially when it is all cash," he says.
• What he sees as a significant driver is that "they can
improve economies of scale and scope and have
greater distribution for Tata and Corus products in
geographies where they are not present.“ for Tata and
Corus products in geographies where they are not
present."
 Raising Equity
• Mumbai April 17 : In what is dubbed as
the biggest fund-raising exercise by an
Indian company, Tata Steel is gearing up
to raise $2.3 billion (about Rs 10,000
crore) in the coming few months to part
finance its $12.9-billion acquisition of
Anglo-Dutch steel maker Corus.
• The money is being raised through two
rights issues and an overseas issue.
 Equity and Debt
• The $2.3 billion that Tata Steel will be raising is
part of the company's committed equity
contribution of $4.1 billion (Rs 17,750 crore) for
the Corus acquisition.
• The remaining $8.8 billion will be financed
through a non-recourse debt arranged by a
consortium of banks for $6.14 billion at Tata
Steel UK (the SPV for the buy-out) and the
balance $2.66 billion raised in the form of bridge
finance by its subsidiary Tata Steel Asia
Singapore
 Continued..
• Tata Steel maintains that its contribution of
$4.1 billion for the acquisition will not affect
its own greenfield and brownfield projects
in India, as its own cash flows are "robust
enough".
• The company also feels that its financials
are not getting stressed in the wake of the
ongoing fund raising exercise.
 Continued..
• Out of its share of $4.1 billion, Tata Steel
has already invested about $1.8 billion (Rs
7,900 crore). This was made through
internal generation of $700 million (Rs
3,000 crore), external commercial
borrowings of $500 million (Rs 2,170
crore) and funds from the preferential
issue of equity shares to Tata Sons at an
average price of Rs 499.7 per share that
fetched $640 million (Rs 2,770 crore).
 Steely drive
• Equity-debt combination at 40:60 ratio
• Reconstituted Corus board to have
representatives of Tata Steel
• Synergies worked out between the two
companies in areas such as
manufacturing, best practices, marketing
and R&D
 Continued…
• Mr Tata highlighted the need for raw
materials security and said the Tata
Group was looking at "how we can align
ourselves, buy into and partner with
sources of iron ore, coal, etc."
• The group is scanning various possibilities
in this regard, including the acquisition of a
coal mine in Australia.
State Bank Of India(11th sep,2007)
• The State Bank of India (SBI), the country's
largest lender, has come to Tata Steel's aid for
completing the fund-raising for its $12.9 billion
acquisition of Anglo-Dutch steelmaker Corus.
• The bank has agreed to provide up to $1 billion
to Tata Steel's special purpose vehicle, Tata
Steel UK, to refinance $7.2 billion of bridge loans
taken for the biggest buyout by an Indian
company.
• A Tata Steel spokesperson confirmed that the
company was availing of the loan from the SBI.
 Continued…
• Tata Steel had to turn to the SBI after
some foreign banks backed out, thanks to
the sub-prime crisis in the US and the
credit squeeze that followed.
• This is also the first acquisition financing of
this size provided by the SBI, which till
now was involved in deals of less than
$100 million (Rs 410 crore).