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8/8/2019 Tata - Corus Deal .. Done
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TATA & CORUS
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S TEEL 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 T VISION T ATA ATA SS TEELTEEL
´We aspire to be the global steel´We aspire to be the global steelindustry benchmark forindustry benchmark for
Value Creation and CorporateValue Creation and Corporate
Citizenshipµ Citizenshipµ
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T ATA S TEEL B ACKGROUND
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 giantIn 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 while
its profit after tax was Rs. 42.22 billion.5
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SWOT A NALYSIS OF T ATA S TEEL
-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
- To become a World leaderin low cost and high quality
steel products.
- To Compete with otherbig global players
SWOT
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SWOT A NALYSIS
World·s ninth largest and Europe·ssecond largest steel producer.
- Wide range of products of hightechnology.
- High operational Cost.- Lack of Access to raw material
- To merge with a company toeliminate duplication and removeoverlaps in marketing, accounting
etc.- To get access to raw material andgrowth markets through merger.
- Increasing losses resulting towinding up of company
SWOT
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R EASONS FOR T ATA S TEEL TO B ID
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.
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ACCESS TO NEW MARKET
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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%)
REASONS FOR CORUS FOR ACCEPTING BIDS
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April 2Wins the
bid
Oct 6offer of 455
pence per share
Oct 23 BrazilianSteel Group CSN
Dec 18Tata bid @500 pence
/shareBrazilian counter bid at
515pence per in cash
Jan 31Tata offers Corus
investors 608 penceper share in cash
Nov 18battle over
Corus intensifies
Oct 20Corus acceptedterms of £ 4.3
billion
20072006
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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.
WHY CASH DEAL????
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DEAL STRUCTURE : L EVERAGE BUY OUT (LBO )DEAL STRUCTURE : L EVERAGE BUY OUT (LBO )
Equity (Tata Steel) USD 4.1 bn
Debt USD 6.14 bn long-term debt froma consortium of banks raised US $ 2.66bn through bridge loans.
Existing Debt USD 0.85 bn
TATA Steel Ltd
TATA Steel Asia
Holdings(Singapore)
TATA Steel UK
Corus Group UK
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FINANCING THE DEAL
Equity contribution by Tata Steel to Tata Steel UK via Singapore of $4.1 bI nternal generation- $1.267 bExternal commercial borrowings- $0.5 bProceeds from rights issue- $1.888 bForeign equity offering- $0.445 b
N on-recourse debt financing by bank consortium (at Tata Steel UK) of $6.143 b
Five-year amortizing loan of $3.236 bSeven-year minimally amortizing term loan of $2.907 b
B ridge financing in Tata Steel Asia Holdings (Singapore) of $2.662 b
Credit Suisse leaded, joined by A BN AMRO and Deutsche B ank in theconsortium.
Of the $ 8 billion of financing , Credit Suisse provided 45% and A BN AMRO and Deutsche provided 27.5% each.
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PAT as a percentage of revenue (post Corus ) ² 9.34%
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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.22
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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.
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.
High Debt equity ratio.High dependability on the growth of market. A lot of stress on the cash flows of combined
entity.
To become global player in steel industry.Takeover more companies successfully.
Increase in production capacity beyond 56mn tons by 2015
- Cultural Diversifications are not easy tointegrate.
Markets should continue to grow.Rising cost of raw material.
Rising terrorism and political unrest amongnations.
SWOT
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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¶s30%.
Debt of US $ 8 bn was raised against the cash flows of Corus. 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.
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Increasing reach to joint entity to 4 continents and 45 countriesincluding 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 by2015 so as to become one of 3 top steel producers in the world.
The global demand for steel remained weak even in the secondquarter of financial year 2009-10. However, the prices of raw materialsfor making steel fell in the year 2009. The Benchmark price for coalfell to US$ 120 per tonne in 2009 from US$ 300 per tonne in 2008.
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If TATA steel were to create, from scratch, 19 million tonnes of steelmaking capacity comparable in quality to what Corus possesses, Itwould 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 everythinggoes well, has great execution risk.
With Corus in its fold, Tata steel can confidently target becoming oneof the top 3 steel makers globally by 2015 . the company would havean aggregate capacity beyond 50 million tones per annum, if all theplanned Greenfield capacities go on stream by then.
We can conclude that if the acquisitions are well planned , executedand the necessary precautions taken for the deal a company canachieve its strategic objectives and thus ensure its growth throughacquisition. 26
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´ I believe this will be the first step in
showing that Indian industry can stepoutside the shores of India in aninternational market place and acquititself as a global playerµ
- Ratan Tata
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