SVKM’s Narsее Monjее Institutе of Managеmеnt Studiеs,

Hydеrabad

Post Graduatе Diploma in Managеmеnt

2018-2020

PITCH BOOK ON
ACQUISITION OF TATA STEEL AND CORUS

SUBMITTED BY:
KARTIK SHANDILYA (80303170103)
NEHAL GOYAL (80303180059)
KRITI RUNGTA (80303180155)
KRITIKA MAHALWAL (80303180109)
 BACKGROUND

The Indian Steel industry is regarded as the most important component for the
development of nation, because steel industry (heavy industry) is considered as a very
important and influential parameter for the development of any modern economy. The
finished steel production in India has grown from 1.1 million tones in 1951 to 31.63
million tones in 2001-02, which can be regarded as a remarkable example of India’s
development in economic activities. Along with the Steel Authority of India that had
multi-plant operations, Tata Steel played a vital role in the improvement of steel
production in the country. The consumption level of steel from 1990 to 2002 has
increased continuously and good production capacities of domestic steel producer have
made this possible. However, the per capita income and consumption of steel in India is
much lesser than compared to other countries.

Global Steel Industry

In global steel industry the consumption of steel has been decreased drastically in 2007,
in comparison to 2006. According to International Iron and Steel Institute (IISI) till
2010 the average demand for steel would be 4.9 per cent per year. But during 2010 and
2015 the growth is expected to be 4.2 per cent. In fact, IISI forecasts the global steel
demand would be 1.32 billion tones by 2010 and 1.62 billion tones by 2015. Much of
this demand growth is expected to be generated from countries like China and India.
Among the major steel producing countries the production of steel has increased from
2005-2006 except Brazil. China is the highest steel producing country in the world with
a production of 355.8 million tones in 2005 and 418.8 million tones in 2006.
 PARTIES INVOLVED

A) Tata Steel
The case of Tata Steel acquiring Corus throws up several interesting questions on
emerging multinationals and traditional multinationals in the steel industry and
particularly the complexities of the acquisition in the above context. What has been
surprising in the above case is that how could a small steel maker, Tata Steel from a
developing country like India buy up a large steel company, Corus PLC from the United
Kingdom. Prior to the acquisition, Corus was four times bigger than Tata Steel.
However, the operating profit for Tata Steel was $840 million (sale of 5.3 million
tonnes), whereas in case of Corus it was $860 million (sale of 18.6 million tones) in the
year 2006. It is also interesting to find out why a large global steel maker, Corus decided
to sell itself off to a small steel maker from a developing country. Tata Steel is Asia’s
first and India’s largest integrated private sector steel company with 2005/06 revenues
of US$ 5 billion and crude steel production of 5.3 million tonnes across India and
South-East Asia. It is a vertically integrated manufacturer and is one of the world’s most
profitable and value creating steel companies. In 2005, Tata Steel acquired 100% equity
interest in NatSteel Asia in Singapore and in 2006 acquired majority control of
Millennium Steel in Thailand, now Tata Steel Thailand.

Tata Steel – Trend & Growth Rate Report, 2001-2006

 B) CORUS

Corus Group plc was formed on 6th October 1999, through the merger of two
companies, British Steel and Koninklijke Hoogovens, following the
privatization of many steelworks companies by the U.K. government. The
company consists of four divisions which include: Strip Products, Long
Products, Aluminum and Distribution and Building Systems. With headquarters
in London, Corus operates as an international company, satisfying the demand
of many steel customers worldwide. Its core business comprises of
manufacturing, development and allocation of steel and aluminum products and
services.
The company has a wide variety of products and services which comprise of the
manufacturing of electrical steel, narrow strip, plates, packaging steel, plated
steel strip, semi finished steel, tube products, wire rod and rail products and
services. However, the company is also engaged in providing a variety of
services including design, technology and consultancy services.
Corus is Europe’s second largest steel producer with revenues in 2005 of £9.2
billion (US$18 billion and crude steel production of 18.2 million tonnes,
primarily in the UK and the Netherlands. Corus had about 42,600 employees in
over 40 countries and sales offices and service centres worldwide. The number
of employees in UK has been about 23,600; in Germany about 2,600; in
Netherlands about 11,400 and in other countries about 5000.
Combining international expertise with local customer service, the Corus brand
represents quality and strength.
 Indian Scenario
After liberalization, there have been no shortages of iron and steel materials in
the country. Apparent consumption of finished (carbon) steel increased from
14.84 Million tonnes in 1991-92 to 39.185 million tonnes (Provisional) in 2005-
06. The steel industry which was facing a recession for some time has staged a
turn around since the beginning of 2002. Demand has started showing an
uptrend on account of infrastructure boom. The steel industry is buoyant due to
strong growth in demand particularly by the demand for steel in China. The
Steel industry was de-licensed and de-controlled in 1991 & 1992 respectively.
Today, India is the 7th largest crude steel producer of steel in the world. In
2005-06, production of Finished (Carbon) Steel was 44.544 million tonnes.
Production of Pig Iron in 2005-06 was 4.695 Million Tonnes. The share of Main
Producers (i.e. SAIL, RINL and TSL) and secondary producers in the total
production of Finished (Carbon) steel was 36% and 64% respectively during the
period of April-November, 2006.
 Corus decides to sell
Reasons for decision:

 Total debt of Corus is 1.6bn GBP

 Corus needs supply of raw material at lower cost
 Though Corus has revenues of $18.06bn, its profit was just $626mn
(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%)

Tata Decides to bid

Reasons for decision:

 Tata is looking to 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.
 Cost of acquisition is lower than setting up a green field plant and
marketing and distribution channels
 Tata is known for efficient handling of labour and it aims at reducing
employee cost and improving productivity at Corus
 It had already expanded its capacities in India.
 It will move from 55th in world to 5th in production of steel globally.
Tata Steel Vs CSN: The Bidding War

There was a heavy speculation surrounding Tata Steel's proposed takeover of

Corus ever since Ratan Tata had met Leng in Dubai, in July 2006. On October
17, 2006, Tata Steel made an offer of 455 pence a share in cash valuing the
acquisition deal at US$ 7.6 billion. Corus responded positively to the offer on
October 20, 2006.
Agreeing to the takeover, Leng said, "This combination with Tata, for Corus
shareholders and employees alike, represents the right partner at the right time
at the right price and on the right terms." In the first week of November 2006,
there were reports in media that Tata was joining hands with Corus to acquire
the Brazilian steel giant CSN which was itself keen on acquiring Corus. On
November 17, 2006, CSN formally entered the foray for acquiring Corus with a
bid of 475 pence per share. In the light of CSN's offer, Corus announced that it
would defer its extraordinary meeting of shareholders to December 20, 2006
from December 04, 2006, in order to allow counter offers from Tata Steel and
CSN.

Financing the Acquisition

By the first week of April 2007, the final draft of the financing structure of the
acquisition was worked out and was presented to the Corus' Pension Trusties
and the Works Council by the senior management of Tata Steel. The enterprise
value of Corus including debt and other costs was estimated at US$ 13.7 billion.

The Integration Efforts

Industry experts felt that Tata Steel should adopt a 'light handed integration’
approach, which meant that Ratan Tata should bring in some changes in Corus
but not attempt a complete overhaul of Corus'systems (Refer Exhibit XI and
Exhibit XII for projected financials of Tata- Corus). N Venkiteswaran,
Professor, Indian Institute of Management, Ahmedabad said, “If the target
company is managed well, there is no need for a heavy-handed integration. It
makes sense for the Tatas to allow the existing management to continue as
before.

The Synergies

Most experts were of the opinion that the acquisition did make strategic sense
for Tata Steel. After successfully acquiring Corus, Tata Steel became the fifth
largest producer of steel in the world, up from fifty-sixth position. There were
many likely synergies between Tata Steel, the lowest-cost producer of steel in
the world, and Corus, a large player with a significant presence in value-added
steel segment and a strong distribution network in Europe. Among the benefits
to Tata Steel was the fact that it would be able to supply semi-finished steel to
Corus for finishing at its plants, which were located closer to the high-value
markets.

The Pitfalls

Though the potential benefits of the Corus deal were widely appreciated, some
analysts had doubts about the outcome and effects on Tata Steel's performance.
They pointed out that Corus' EBITDA (earnings before interest, tax,
depreciation and amortization) at 8 percent was much lower than that of Tata
Steel which was at 30 percent in the financial year 2006-07.

The Road Ahead

Before the acquisition, the major market for Tata Steel was India. The Indian
market accounted for sixty nine percent of the company's total sales. Almost
half of Corus' production of steel was sold in Europe (excluding UK). The UK
consumed twenty nine percent of its production.
After the acquisition, the European market (including UK) would consume 59
percent of the merged entity's total production.
 Key Milestones of the Tata Corus Deal

September 20, 2006 : Corus Steel has decided to acquire a strategic partnership
with a Company that is a low cost producer.

October 5, 2006 : The Indian steel giant, Tata Steel wants to fulfill its ambition
to Expand its business further.

October 6, 2006 : The initial offer from Tata Steel is considered to be too low
both by Corus and analysts.

October 17, 2006 : Tata Steel has kept its offer to 455p per share.

October 18, 2006 : Tata still doesn’t react to Corus and its bid price remains the
same.

October 20, 2006 : Corus accepts terms of £ 4.3 billion takeover bid from Tata
Steel.

October 23, 2006 : The Brazilian Steel Group CSN recruits a leading
investment bank to offer advice on possible counter-offer to Tata Steel’s bid.

October 27, 2006 : Corus is criticized by the chairman of JCB, Sir Anthony
Bamford, for its decision to accept an offer from Tata.

November 3, 2006 : The Russian steel giant Severstal announces officially that
it will not make a bid for Corus.

November 18, 2006 : The battle over Corus intensifies when Brazilian group
CSN approached the board of the company with a bid of 475p per share.

November 27, 2006 : The board of Corus decides that it is in the best interest of
its will shareholders to give more time to CSN to satisfy the preconditions
and decide whether it issue forward a formal offer.

December 18, 2006 : Within hours of Tata Steel increasing its original bid for
Corus to 500 pence per share, Brazil's CSN made its formal counter bid for
Corus at 515 pence per share in cash, 3% more than Tata Steel's Offer.
January 31, 2007 : Britain's Takeover Panel announces in an e- mailed
statement that after an auction Tata Steel had agreed to offer Corus investors
608 pence per share in cash.

April 2, 2007 : Tata Steel manages to win the acquisition to CSN and has the
full voting support form Corus’ shareholders.

Corus Acquisition Cost and Sources of Funds

 Over all scenario
Tata Steel acquiring Corus throws up several interesting questions on emerging
multinationals and traditional multinationals in the steel industry and
particularly the complexities of the acquisition in the above context. What has
been surprising in the above case is that how could a small steel maker, Tata
Steel from a developing country like India buy up a large steel company, Corus
PLC from the United Kingdom. Prior to the acquisition, Corus was four times
bigger than Tata Steel. However, the operating profit for Tata Steel was
$840 million (sale of 5.3 million tons), whereas in case of Corus it was $860
million(sale of 18.6 million tons) in the year 2006.
It is also interesting to find out why a large global steel maker, Corus decided
to sell itself off to a small steel maker from a developing country. Many
questioned if the Tatas were wise in acquiring Corus that had accumulated huge
debt burden, made operational losses and whose share price had drastically
come down. The intriguing issue of this acquisition has been on how the final
bidding price of the Corus rise up to 70% over the stock price of Corus prior to
the bidding. Most importantly, how did Tata Steel organize the huge capital for
the acquisition? It appears that several external players articipated in the
acquisition process and so how were they all involved in the bidding process.
Further, the issues of post acquisition are also unique in this case as the context
and culture of the acquirer and the acquired companies are different.
Until the 1990s, not many Indian companies had contemplated spreading their
wings abroad.
An Indian corporate or group company acquiring a business in Europe or the
U.K. seemed possible only in the realm of fantasy. In addition to these issues,
Indian companies in general have had huge liabilities of origin in term of poor
quality, service and reliability in the international markets. At the same time
many the global steel industry was getting restructured from a large number of
smaller steel makers to a fewer large steel conglomerates through the worldwide
mergers and acquisition. The steel companies in India were also wondering on
how to go about in these circumstances. In the above context, how did the top
management of Tata Steel and the Tata Group Perceive the acquisition of
Corus?
When Tata Steel began bidding higher price on Corus plc, many wondered how
the Tatas manage the huge financial deal and whether it will be good for the
financial health of Tata Steel.
Tata acquired Corus on the 2nd of April 2007 for a price of $12 billion making
the Indian Company the world’s sixth largest steel producer. This acquisition
process has started long back in the year 2005. However, Corus itself was
involved in a considerable number of Merger & Acquisition (M&A) deals and
joint ventures (JVs) beginning in the year2000. In a period of seven years Corus
was involved in 14 deals. In 2006, the Tata first offered 455 pence per share of
Corus but by the end of the bidding process in 2007, Tata offered 608 pence per
share, which is 33.6% higher than the first offer. For this deal, Tata has financed
only $4 billion, though the total price of this deal was $12billion.

Tata steel financial status post merger

Post Acquisition Management:
There has been a great deal of suspicion on how well the two entities, viz., Tata
Steel and Corus plc integrate in the post acquisition situation. This concern has
been expressed since the culture and perspectives of the two companies and the
people are seemingly very different from each other. Ratan Tata however, has
been confident that the post acquisition management will not be too difficult as
the two organizational cultures will be effectively integrated. Ratan Tata has
said he is confident the two companies will have “a cultural fit and similar work
practices.”
Tata Corus has made developed some management structure to deal with the
smooth operation of the two entities. It has also adopted several system
integrations in both the entities to smoothen the transactions between the two
entities. Tata Steel has formed a seven- member integration committee to
spearhead its union with Corus group. While Ratan Tata, chairman of the Tata
group, heads the committee, three of the members are from Tata Steel and the
other three are from Corus group.
The company has also created several Taskforce Teams to ensure integration
specific set of activities in the two entities for smoother transaction. For
instance, the company has created a task force to integrate the UK/EU model in
construction to the Indian market.

Tata Corus Task force

Post Tata Corus merger, Tata Steel has access to considerable IP and expertise
in Construction from UK/EU based models. The key driver is to find ways to
utilize this knowledge and assist the capture of value for Tata Steel in the
construction market in India. To achieve, a taskforce comprising of following
executives from both the entities is being formed with immediate effects.
Method used Enterprise Value Multiple

Enterprise value (EV) represents a company's economic value -- the minimum

amount someone would have to pay to buy it outright.

EV = Mkt Cap. + Pref. Stocks + Min. interest + Long Term debt –

Cash & cash Equivalent

EBITDA can be used to analyze and compare profitability between companies

and industries because it eliminates the effects of Financing and accounting
decisions.
• EBITDA = Revenue- Expenses (Excluding tax, interest, depreciation
and amortization)

Enterprise Value
EnterpriseMultiple 
EBITDA
EV = Mkt Cap. + Pref. Stocks + Min. interest + Long
Term debt - Cash Equivalent
= 3.5 billion + 0 + 26 million + 1308 million – 871
million
=£ 3.963 billion
.
EBITDA = £ 947 Million(From Con. Operations)

Enterprise Value
EnterpriseMultiple   4.18
EBITDA
times.
 Deal Terms
• All Cash Deal
• Leveraged Buy Out
• The Acquisition is proposed to be made by Tata Steel U.K., a wholly-
owned indirect subsidiary of Tata Steel, recently incorporated in the United
Kingdom for the purpose of completing the Acquisition. The said
Acquisition is proposed to be effected by means of a scheme of arrangement
under Section 425 of the (English) Companies Act 1985; subject to High
Court of Justice in England and Wales and Corus' shareholders approvals
being obtained.
• Acquisition is proposed to be funded through its own cash resources and
loans raised by Tata Steel and its subsidiary companies formed for the
purpose of this acquisition
• The long term financing pattern for the net acquisition consideration of
Corus would be USD 12.9 billion and Tata Steel UK would be funded in the
long term from the following sources:

Equity Capital from Tata Steel Ltd - USD 4.10 billion

Long-term debt from consortium of banks - USD 6.14 billion
Quasi - Equity funding at Tata Steel Asia Singapore - USD 1.25 billion
Long term Capital funding at Tata Steel Asia Singapore - USD 1.41 billion
Total USD - 12.90 billion

Sources of funding for Tata Steel's investment of USD 4.1 billion (about
Rs.17,750 crores) in its wholly-owned subsidiary Tata Steel Asia Holdings
(Singapore) Ltd. which would in turn invest the same in Tata Steel UK
which has acquired CORUS plc. U.K.
 • Internal Generation - Rs.3,000 crores (USD 700 million).
• External Commercial Borrowings - Rs.2,170 crores (USD 500 million).
• Funds from the Preferential Issues of equity shares to Tata Sons Ltd. of
Rs.2,770 crores (USD 640 million)
• Rights Issue of equity shares to the shareholders in the ratio 1:5 at a price
of Rs.300 per share involving issue of equity shares of Rs.3655 crores (USD
862 million)
• Un-linked Rights Issue of Convertible Preference Shares in the ratio of 1:7
having a coupon rate of 2% with conversion into equity shares after two
years at a price in the range of Rs.500 to Rs.600 per share as may be
determined at the time of the issue. This issue would provide a total amount
of about Rs.4,350 crores (about USD 1000 million)
• A foreign issue of an equity-related instrument upto an amount of upto
USD 500 million in such form as may be considered appropriate. This issue
would be made on an ex-Right basis and on terms as may be determined at
the time of the issue subject to approval of the shareholders.
• The post-tax cost of this total financing package on completion is expected
to be around 4.3% per annum

Standalone Valuation of Corus

WACC Calculation:
Risk-free rate: 4.5%
Risk Premium: 7%
Beta: 2.17
Cost of Equity = 4.5% + 2.17*7% = 19.7%
Cost of Debt = 6%
Tax Rate = 25.5%
Debt/Equity Ratio = 15%
WACC = (1-0.255)*(15/115)*(0.06) + (100/115)*(0.197) = 17.9%
WACC = 17.9%