TATA STEEL - CORUS DEAL

A QUANTUM LEAP
 TATA STEEL…..

• Subsidiary of TATA group

• India’s largest private sector steel company
• Ranked 56th in world steel production
• Among the fewer steel companies in the world that is EVA+
• Products
– Auto sector and booming construction industry

– Wire manufacturing facilities in India, Sri Lanka and Thailand

Tata Steel Brands
 About Corus…

• The London-based Corus Group is one of the world's largest producers of steel and
aluminum.
• Formed in 1999 following the merger of Dutch group Koninklijke Hoogovens N.V.
with the UK's British Steel Plc
• 9th largest steel producer in the world and the second-largest producer in Europe,

• High value-added product range and strong positions in automotive, construction

and packaging. with a workforce of 45,800 employees.
• Corus has four divisions: strip products division,  long products division,
distribution and building systems division, and aluminum division.
• Annual turnover of $18 billion.
 Need for Consolidation in Steel Industry

• Steel is less global than the industries that use it .

• Cyclical in nature.
• Suppliers & Buyers are well consolidated
• Steel companies' profitability are driven by four factors - cost, volumes, product mix and
price.
• Efficiencies and improved productivity.
 Deal for Tata…

• Global expansion to produce finished steel using their slabs in mature markets.

• Advanced High quality steel

• Capacity of 19 MTPA at a cost of little more than half of what a similar Greenfield
site would.
• Access to developed and mature markets of Europe.
• Highly developed R&D capability of Corus.
• Similarity in management and work culture.
 Deal for Corus

• Arcelor Mittal deal

• benefit from the economies of scale by opening to huge new markets like India and
China.
• Access to Indian iron ore resources
• Lower cost producing centers

• Growth opportunities
 Tata’s Acquisition of Corus:
A Quantum Leap

• Tata Steel bid for the entire equity capital of Corus at 455/s @ 26%
premium to the 12-month average price of Corus.
•Brazil’s CSN made an indicative bid of 475 pence a share on November 17, 2006.

• At this, Tata Steel raised its bid to $9.2 bn at 500 pence per Corus share on December 11,
2006.

• CSN in response made a formal bid of $9.6 bn at 515 pence a share in cash on the same
day. Consequently, the UK.

•Takeover Panel set January 30, 2007 as the deadline for Tata Steel and CSN to make
revised offers.

•On January 31, 2007 Tata Steel acquired Corus for 608/s and took a quantum leap from
being ranked 56th in the global steel production to 6th largest steel producer.
 Finer aspects

• Corus valued at 6.2 billion Pounds. Representing 1216 pence per ADS.
• Enterprise value at multiple of 7 EBIDTA for year ended 31 dec ‘05 and 9 times
for 12 months ended 30 sep ’06.
• Premium of 68.7% over average closing price of 360.5 pence prior to the day Tata
announced it’s bid.
• Awarded best M&A deal for the year by Asset Asia and Finance Asia
 The issues…

• Ensure that its debt-equity ratio does not get out of control.
• leave enough flexibility for future fund-raising.
 Funds tickled in…

Deal divided into two parts:

• CSFB Corus’s banker stepped in to fund 45% of the deal.
• CSFB helped raise $ 6.1 billion through high yield mezzanine and long-term
funding in the UK-based acquisition vehicle, Tata Steel UK.
The remaining $ 6.8 bn was raised in following manner:
• Issued shares on a rights basis to raise about $862 million while about $1 billion came from
another rights issue of convertible preference shares.
• $862 million was raised from rights issue of equity shares to the shareholders in the ratio of 1:5 at
a price of Rs300 per share
• Followed by an issue of convertible preference shares in the ratio of 1:7 worth about $1 billion.
• The company also mopped up about $500 million through an ADR/GDR issue.
• Mobilized $1.8 billion, about $700 million came from internal accruals, $500 million from ECB’s
and about $640 million through preferential issues of equity shares to Tata Sons.
• $1.41-billion came from long-term capital funding and the $1.25-b quasi-equity funding at
Singapore subsidiary, Tata Steel Asia.
Details Amount

Debt through high-yield, mezzanine and long-term funding $ 6.1 bn

Rights issue of equity shares $ 0.862 bn

Rights issue of convertible preference shares $ 1 bn

issue of ADR/GDR $ 0.5 bn

internal accruals $ 0.7 bn

external commercial borrowings $ 0.5 bn

preferential issues of equity shares to Tata Sons $ 0.64 bn

long-term capital funding at Tata Steel Asia $ 1.41 bn

quasi-equity funding at Tata Steel Asia $ 1.25 bn

 Process
Process ofofIntegration
Integration

 Philosophy : “ One Enterprise – Two Entities ”.

 Synergies worth USD 450 million have been identified.

 “ Wave one ” synergies.

 Synergy worth USD 76 million have already been realized.

Source : www.tatasteel.com
 Core areas of Synergy
Core areas of Synergies

 Manufacturing

 Procurement

 Research and Development

 Finance and Corporate

Steel Steel
Production
Production : :Post
PostDealDeal
Access to New Markets
Geographical Distribution of Revenue

2007-08

Europe UK
32% 36%

Others
5%
Asia
27%
Consolidated Financial Highlights 2007-08
 Consolidated Financial Ratios

FINANCIAL RATIOS 2007-08 2006-07 2005-06

1. EBIDTA/Turnover 14.08% 31.14% 32.11%
2. PBT/Turnover 12.39% 24.61% 26.81%
3. Return on Average Capital Employed 22.68% 23.27% 39.38%
4. Return on Average Net Worth 50.88% 34.09% 43.41%
5. Asset Turnover 108.61% 77.02% 121.43%
6. Average Inventory to Turnover 16.63% 12.14% 11.82%
7. Average Debtors to Turnover 16.13% 5.29% 5.71%
8. Gross Block to Net Block 2.51 1.65 1.67
9. Net Debt to Equity 1.42 0.71 0.05
10. Current Ratio 1.87 2.45 1.35
11. Interest Cover Ratio 4.91 16.35 35.13
12. Net Worth per Share (post CCPS conversion) 475.45 223.08 181.53
13. Earnings per Share (Basic) 177.18 64.66 67.62
14. Dividend Payout (Equity) 11.09% 26.51% 22.05%
15. P/E Ratio 1.4 6.95 7.93
 Comparative Analysis

Profit after tax Rs. 12321 crores

Actuarial gain (non-recurring profit) Rs. 5,906 crores

Profit without actuarial gain Rs. 6,415 crores

 Comparative Analysis

ITEM March 2008 March 2007

Net Sales (In Rs. crore) 1,34,089 27,437
Interest Paid 4,183 411
Number of equity Shares (In Crore) 73.06 58.05

Increase in Securities Premium Account 4,133

Increase in Special Reserve (for actuarial profit) 5,913

Increase in Profit & Loss Account 3,394

 Key Risk….

 Raw Material Security

 Volatility in Prices

 Cyclic Nature of Industry

 Steel Demand may Slow down

 Financial Risk

 Extent of Synergies Realized

 Road Ahead….

 Raw Material Security

 Expansion

 Return on Invested Capital ( ROIC )

 Aim of Getting $450 million by 2010

 Increase EBITDA to 25%

Employee Stock Option Plan
An Overview
The flow..

Concept of ESOP
Trend of ESOPs
Employer experience-Some facts
Type of ESOPs
Disadvantage of ESOP
Concept of ESOP
•Definition according to SEBI “Plan under which company
provides options to the employees the benefit or the right to
purchase at a future date the securities offered by the
company at a pre determined price”.
• Introduced initially in technology based companies and now
spread over Pharmaceutical, Communication, Entertainment,
information technology sectors.

• In 1992, only One million employees held stock options, mostly

managers and executives. By mid-1990s, growing steadily over
the decade to 10 million.

• Infosys, HLL, WIPRO, Polaris, Dr Reddy, Ranbaxy, Wockhardt,

Lupin, Gillette…….have introduced this.
Objective 0f ESOP

•Retention tool and bring in a sense of commitment.

•Form of Compensation/reward.
•Creating a vibrant ownership culture.

•Improvement in individual and group performance.

•Loyalty due to ownership factor.

Methodology

•Grant of options to the employees.

•Employees can convert the options into shares at a pre
determined price.
•Disposal of share in the market after a specified period of
time as stipulated by the company.

•Exercise price (price which the employee is required to pay)

or the intrinsic price (difference between market price and
exercise price).
Types of ESOPs
•Option: Right of the employee to buy or sell the shares at a
pre determined price and predetermined date.
•Restricted Stock: Shares given with vesting conditions.
(Vesting percentage refers to that portion of total options
granted, which you will be eligible to exercise.
Vesting period is the period on the completion of which the
said portion can be exercised)
•Stock appreciation: The employee receives the net amount
of the increase in the stock price.
Employer Experience ……some facts
According to survey conducted by Hewitt the following were
the findings:
•Companies which had ESOP had a greater ROA (return of
asset) compared to industry peer group.
•Greater total Shareholder return compared to peer group.
•Greater employee impact on the Business results.
•Looking at 345 companies world wide , 69.6% survived through
1999, compared to 54.8% of the non-ESOP matches. "Survival"
here means continued to do business as the same entity.

Closing, sale, or merger would constitute non-survival.

Disadvantage of ESOPs

•Any fluctuation in the market prices…. there is a tendency

to offload the ESOPs.
It defeats the very purpose of:
– Ownership (as employees sell the allotted quota);
– Retention (as employees switch jobs and get compensated for
the lost value by the new employer)
•When the stock prices go down, ESOP becomes worthless
paper
Thank you