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Strategy of Tata Corus Acquisition

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On April 2, 2007, Tata Steel Ltd. (Tata Steel) completed its acquisition of the Corus Group (Corus) for US$ 12. 1 billion. The combined company went on to become the fifth largest steel producer in the world and had a crude steel production of 27 million tonnes in 2007. 1 The acquisition was driven by the need to gain access to better technology and to new markets. The synergy arising out of the acquisition was valued at US$76 million for the financial year 2007-08. Further, joint integration teams were formed for key areas and this team identified synergies worth US$ 450 million to be realized by the year 2010. | Analysts felt that the acquisition of Corus would lead to cross fertilization of the research and development capabilities in the automotive, packaging, and construction sectors and technology transfers from Europe to India. Tata Steel was also expected to gain from the best practices and expertise of senior Corus management. The combination of Tata Steel's low cost upstream production in India with the high end downstream processing facilities of Corus was likely to improve the competitiveness in the European operations, analysts said. Tata Steel was expected to retain access to low cost raw materials and exposure to high growth in emerging markets, and to achieve price stability in developed markets. As a result of large scale consolidation, synergies were expected in joint procurement. Economies of scale were likely to result during raw material purchase negotiations and also while implementing product price changes. These synergies were expected to increase the merged entity's profitability. After the acquisition, the top management team of Corus was retained as Tata Steel believed that a high degree of cultural compatibility existed between the two companies. This was expected to facilitate an effective integration of business over a period of time, according to analysts. Tata Steel's manufacturing strategy was to produce slabs/ primary steel in low cost countries and produce high end products close to the client base both in Europe and in India. It also intended to sell low profit Corus assets and aimed to increase its return on invested capital to 30 percent. 3 Some analysts, however, criticized the Corus deal on account of the likely outcome and effects on Tata Steel's performance. Corus'EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) was 8 percent, which was much lower than Tata Steel's 30 percent in the financial year 2006-07. 4 Some financial analysts were of the opinion that Corus was overvalued at approximately 7. 7 times the EV (enterprise value) to EBITDA. 5 Analysts expressed concerns that the Corus acquisition would result in significant equity dilution of Tata Steel. The company would also become highly leveraged due to the significant increase in debt in its capital structure. The US$ 6. 14 billion debt6 that was raised to finance the acquisition had been secured by the assets of Corus and would be serviced by the cash flows generated by Corus. Financial experts pointed to the risk taken by Tata Steel as it passed the debt burden on to Corus. | There was danger that if the business performance of Corus declined, the company’s cash inflows would reduce, leading to a default on the loan taken. Q1) What in your opinion, were the advantages accruing to Tata Steel through the acquisition of the Corus Group? Q2) What are the risks or limitations associated with the acquisition of the Corus Group by Tata Steel? ```````````````````` ------------------------------------------------- Abstract: On January 31, 2007, Tata Steel Limited (Tata Steel), one of the leading steel producers in India, acquired the Anglo Dutch steel producer Corus Group Plc (Corus) for US$ 12. 11 billion (€ 8. 5 billion). The process of acquisition concluded only after nine rounds of bidding against the other bidder for Corus - the Brazil based Companhia Siderurgica Nacional (CSN). This acquisition was the biggest overseas acquisition by an Indian company. Tata Steel emerged as the fifth largest steel producer in the world after the acquisition. The acquisition gave Tata Steel access to Corus' strong distribution network in Europe. | | Corus' expertise in making the grades of steel used in automobiles and in aerospace could be used to boost Tata Steel's supplies to the Indian automobile market. Corus in turn was expected to benefit from Tata Steel's expertise in low cost manufacturing of steel. However, some financial experts claimed that the price paid by Tata Steel (608 pence per share of Corus) for the acquisition was too high. Corus had been facing tough times and had reported a substantial decline in profit after tax in the year 2006. Analysts asked whether the deal would really bring any substantial benefits to Tata Steel. Moreover, since the acquisition was done through an all cash deal, analysts said that the acquisition would be a financial burden for Tata Steel. ------------------------------------------------- Issues: » Gain an in-depth knowledge about various corporate valuation techniques. » Critically examine the rationale behind the acquisition of Corus by Tata Steel. Understand the advantages and disadvantages of cross-border acquisitions. » Understand the need for growth through acquisitions in foreign countries. » Study the regulations governing mergers & acquisitions in the case of a cross-border acquisition. » Get insights into the consolidation trends in the Indian and global steel industries. ------------------------------------------------- Contents: | Page No. | Introduction| 1| Background Note| 2| Tata Steel Vs CSN: The Bidding War| 4| Financing the Acquisition| 5| The Integration Efforts| 7| The Synergies| 8| The Pitfalls| 9| The Road Ahead| 10| Exhibits| 12| ------------------------------------------------- Keywords: Tata Steel, Corus, Companhia Siderurgica Nacional, Mergers and Acquisitions, Global consolidation, Special Purpose Vehicle, All cash deal, Share Swap, Integration, Synergies, Takeover Regulations, EBITDA The financials for this deal [require] high performance levels, perfect post-deal execution and sustained high steel prices. It is a risky game and will be okay for Tata as long as the economy is growing and no major bumps occur. If [these bumps] do occur, they can become a challenge, and I am reminded of the high leverage days of the mid-1980s. "1 - Vivek Gupta, Managing Director, AT Kearney (India), in February 2007. "Indian steel companies are on a consolidation mode. The Tata-Corus deal has set many records. So far, the only $1 billion-plus deal was done by ONGC, and it's the first milestone for India Inc, with the Tata deal crossing $10 billion mark. It's a landmark deal since an Indian company has taken over an international company three times its size. "2 - S. Mukherji, Managing Director, ICICI Securities, in February 2007. ------------------------------------------------- Introduction On January 31, 2007, India based Tata Steel Limited (Tata Steel) acquired the Anglo Dutch steel company, Corus Group Plc (Corus) for US$ 13. 70 billion3. The merged entity, Tata-Corus, employed 84,000 people across 45 countries in the world. It had the capacity to produce 27 million tons of steel per annum, making it the fifth largest steel producer in the world as of early 2007 (Refer Exhibit I for the top ten players in the steel industry after the merger). Commenting on the acquisition, Ratan Tata, Chairman, Tata & Sons, said, "Together, we are a well balanced company, strategically well placed to compete at the leading edge of a rapidly changing global steel industry. "4| | Tata Steel outbid the Brazilian steelmaker Companhia Siderurgica Nacional's (CSN) final offer of 603 pence per share by offering 608 pence per share to acquire Corus. | Tata Steel had first offered to pay 455 pence per share of Corus, to close the deal at US$ 7. 6 billion on October 17, 2006. CSN then offered 475 pence per share of Corus on November 17, 2006. Finally, an auction5 was initiated on January 31, 2007, and after nine rounds of bidding, Steel could finally clinch the deal with its final bid 608 pence per share, almost 34% higher than the first bid of 455 pence per share of Corus. Many analysts and industry experts felt that the acquisition deal was rather expensive for Tata Steel and this move would overvalue the steel industry world over. | Commenting on the deal, Sajjan Jindal, Managing Director, Jindal South West Steel said, "The price paid is expensive... all steel companies may get re-rated now but it's a good deal for the industry. 6 Despite the worries of the deal being expensive for Tata Steel, industry experts were optimistic that the deal would enhance India's position in the global steel industry with the world's largest7 and fifth largest steel producers having roots in the country. Stressing on the synergies that could arise from this acquisition, Phanish Puram, Professor of Strategic and International Management, London Business School said, "The Tata-Corus deal is different because it links low-cost Indian production and raw materials and growth markets to high-margin markets and high technology in the West. | The cost advantage of operating from India can be leveraged in Western markets, and differentiation based on better technology from Corus can work in the Asian markets. "8 | ------------------------------------------------- Background NoteTata Steel Tata Steel is a part of the Tata Group, one of the largest diversified business conglomerates in India. Tata Group companies generated revenues of Rs. 967,229 million in the financial year 2005-06. The group's market capitalization was US$ 63 billion as of July 2007 (only 28 of the 96 Tata Group companies were publicly listed). In 1907, Jamshedji Tata established Tata Steel at Sakchi in West Bengal. The site had a good supply of iron ore and water... | ------------------------------------------------- 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. billion (Refer Table I for fund raising mix for the Corus' acquisition)... | ------------------------------------------------- The Integration EffortsIndustry 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 AheadBefore 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 (Refer Table III for the spread of Tata-Corus markets before and after the acquisition)... ------------------------------------------------- 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 AheadBefore 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 (Refer Table III for the spread of Tata-Corus markets before and after the acquisition)... |
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