Case 5 Tata Steel’s Acquisition of Corus

8/10/2019 Case 5 Tata Steel’s Acquisition of Corus

http://slidepdf.com/reader/full/case-5-tata-steels-acquisition-of-corus 1/28

Tata Steel’s Acquisition of Corus

On January 31, 2007, Tata Steel Limited (Tata Steel), one ofthe leading steel producers in India, acquired the Anglo

Dutch steel producer Corus Group Plc (Corus) for US$ 12.11billion (€ 8.5 billion). The process of acqui sition concludedonly after nine rounds of bidding against the other bidder forCorus - 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 networkin Europe.

Corus' expertise in making the grades of steel used in

automobiles and in aerospace could be used to boost TataSteel's supplies to the Indian automobile market. Corus inturn was expected to benefit from Tata Steel's expertise in low

cost manufacturing of steel. However, some financial expertsclaimed that the price paid by Tata Steel (608 pence per shareof 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 theacquisition was done through an all cash deal, analysts said

that the acquisition would be a financial burden for TataSteel.





405


“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

Exhibit I: Top Ten Players in the Global Steel Industry

S.No. CompanyCrude Steel Production

(In million tons)

1 Arcelor Mittal 109.7

2 Nippon Steel 32.9

3 POSCO 30.5

4 JFE Steel 29.9

5 Tata Corus 27.0

6 Baosteel 22.7

1 “Did Tata Steel Overheat in its Zeal to Win Corus?” Knowledge@Wharton, February 08,2007.

2 “Tata Win Booster for Corporate India‟s Confidence,” The Economic Times, February 01,2007.

3 As on January 31, 2007, 1 US Dollar = 44.18 INR and 1 Pound = 86.73 INR.4 “Tata Steel Completes Acquisition of European Steelmaker Corus,” International Herald

Tribune, April 03, 2007.



Mergers & Acquisitions, and Strategic Alliances

406

S.No. CompanyCrude Steel Production

(In million tons)

7 US Steel 19.3

8 Nucor 18.4

9 Riva 17.5

10 ThyssenKrupp 16.5

Source: V. Sridhar, “Burden of Steel,” Frontline, November 04-17, 2006.

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, Tata 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 Note

Tata 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).

5 Since Tata Steel and CSN could not declare their final offer by January 31, 2007, an auctionhad to be initiated by The Takeover Panel which oversees mergers and acquisitions in the UK.

6 “India Inc. Hails Tata‟s Win”, The Times of India, January 31, 2007. 7 On June 25, 2006, India born Laxmi Mittal‟s Rotterdam based steel company Mittal Steel

Company N.V. (largest steel producer before the acquisition) acquired Luxembourg basedArcelor SA (second largest steel producer before the acquisition). This acquisition resultedin the formation of ArcelorMittal which became the largest steel producer in the world.

8 “Pedal to the Metal: Challenges of Tata Steel‟s Corus Takeover,” Knowledge@Wharton,October 31, 2006.




407

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 grew rapidly and by 1911, it had its

own railway network that connected its factory to the iron and coal beds. At this time,

the company was producing 70,000 tons of iron per year. During the first and thesecond World Wars, Tata Steel was one of the main suppliers of steel required for

manufacturing shells and armored cars.

Tata Steel‟s business continued to grow over the decades and in 1973, it took over

some flux mines and collieries near Jharia, West Bokaro9. In 1983, the company

acquired the Indian Tube Company Limited, a manufacturer of seamless and welded

tubes. In 1991, it acquired the ferro-chrome unit of OMC Alloys Limited near

Bamnipal in Orissa.

With the liberalization of Indian economy in the early 1990s, Tata Steel‟s business

grew rapidly. In the mid-1990s, Tata Steel emerged as Asia‟s first and India‟s largest

integrated steel producer 10 in the private sector. In April 2000, Tata Steel

commissioned its Cold Rolling Mill (CRM) plant at Jamshedpur.

In February 2005, Tata Steel acquired the Singapore based steel manufacturer

NatSteel Limited (NatSteel). NatSteel owned steel mills in Australia, China,

Philippines, Thailand and Vietnam. Thus, with this acquisition, the company gained

access to major Asian markets and Australia. To strengthen its position further in the

Asian steel industry, Tata Steel acquired the Thailand based Millennium Steel in

December 2005. These two acquisitions not only helped Tata Steel to strengthen its

presence in major Asian countries but also provided it with an additional customer

base of two million tons of steel.

Tata Steel generated net sales of Rs 175.52 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 (Refer Exhibit II for consolidated income statement of TataSteel and Exhibit III for consolidated balance sheet of Tata Steel).

Exhibit II: Tata Steel – Consolidated Income Statement (2003-07)

(In Rs. Million)

2007 2006 2005 2004 2003

1. Sales /

Income From

Operations

197,625.70 171,442.20 158,768.70 119,209.60 97,932.70

Less: Excise

Duty

(22,105.50) (20,048.30) (13,779.20) (12,185.70) (10,719.70)

Net Sales /

Income

from

operations

175,520.20 151,393.90 144,989.50 107,023.90 87,213.20

2. Total

Expenditure

(105,787.50) (92,078.80) (84,535.90) (72,069.80) 64,193.40

9 Till the year 2000, Bokaro was in Bihar. Now, it is a part of the new state, Jharkhand.10 Integrated steel producers have the facilities to manufacture steel, from the iron ore stage

right up to the finished steel stage.




408

2007 2006 2005 2004 2003

3. Operating

Profit (1-2)

74,069.40 61,862.70 61,933.90 36,359.20 23,019.80

4. Other

Income

4,336.70 2,547.60 1,480.30 1,405.10 503.90

5. Interest

( net)

(1,739.00) (1,184.40) (1,868.00) (1,221.70) 3,048.20

6. Depreciation (8,192.90) (7,751.00) (6,187.80) (6,251.10) 5,554.80

7. Profit before

Tax and

Exceptional

Items

(3+4-5-6)

64,137.50 52,927.30 53,878.10 28,886.40 14,920.70

8. Exceptional

Items

Employee

Separation

Compen-

sation

(1,521.00) (527.70) (905.30) (2,226.80) (2,295.70)

9. Tax (20,395.00) (17,335.80) (18,231.20) (9,197.40) (2,618.80)

10 Net Profit

(+) / Loss

(-) (7-8-9)

42,221.50 35,063.80 34,741.60 17,462.20 10,006.20

11. Paid-up

Equity Share

Capital (Face

Value :

Rs 10 per

Share )

5,806.70 5,536.70 5,536.70 3,691.80 3,679.70

12. Reserves

excluding

revaluation

reserves

133,684.20 - 73,266.70 - -

13. Basic and

Diluted

Earnings per

Share (not

annualized )

(after

Exceptional

items)

Rs. 73.76 Rs. 63.35 Rs. 62.77 Rs. 47.32 Rs. 27.43

14. Aggregate of

Public

Shareholding




409

2007 2006 2005 2004 2003

Number of

shares Nos.

403,316,773 405,186,77

3

406,463,44

0

271,966,96

2

270,653,10

5% of

shareholding

69.48% 73.21% 73.44% 73.71% 73.59%

Source: Tata Steel Annual Reports, 2004-07.

Exhibit III: Tata Steel – Consolidated Balance Sheet (2003-07)

(In Rs. Million)

2007 2006 2005 2004 2003

Sources of

Funds

Total ShareCapital

5806.70 5536.70 5536.70 3691.80 3691.80

Equity Share

Capital

5806.70 5536.70 5536.70 3691.80 3679.70

Preference

Share Capital

0.00 0.00 0.00 0.00 0.00

Reserves 13,3684.20 9,2016.30 6,5062.50 4,1466.80 2,8163.00

Revaluation

Reserves

0.00 0.00 0.00 0.00 5.40

Networth 13,9490.90 9,7553.00 7,0599.20 4,5158.60 3,1860.20

Secured Loans 3,7589.20 2,1917.40 2,4681.80 3,0101.60 3,6676.30

Unsecured

Loans

5,8864.10 3244.10 2715.20 3720.50 5579.80

Total Debt 9,6453.30 2,5161.50 2,7397.00 3,3822.10 4,2256.10

Total

Liabilities

23,5944.20 12,2714.50 9,7996.20 7,8980.70 7,4116.30

Application

of Funds

Gross Block 16,0294.90 15,4071.70 13,1792.60 12,5058.30 12,1927.10

Less: Accum.

Depreciation

7,4863.70 6,6998.50 5,9396.80 5,4116.20 4,8499.90

Net Block 8,5431.20 8,7073.20 7,2395.80 7,0942.10 7,3427.20

Capital Work

in Progress

2,4974.40 1,1577.30 1,8726.60 7636.40 2010.80

Investments 6,1061.80 4,0699.60 2,4326.50 2,1941.20 1,1945.50




410

2007 2006 2005 2004 2003

Inventories 2,3329.80 2,1747.50 1,8724.00 1,2490.80 1,1529.50

Sundry

Debtors

6316.30 5394.00 5818.20 6513.00 9584.70

Cash and

Bank Balance

7,6813.50 2883.90 2467.20 2507.40 3731.20

Total Current

Assets

106,459.60 30,025.40 27,009.40 21,511.20 24,845.40

Loans and

Advances

40,259.50 19,944.60 21,606.30 15,080.00 20,000.80

Total CA,

Loans &

Advances

146,719.10 49,970.00 48,615.70 36,591.20 44,846.20

Deferred

Credit

0.00 0.10 0.90 1.60 0.00

Fixed Deposits 209.80 334.10 553.20 1,016.70 1,146.30

Current

Liabilities

53,892.20 45,523.90 42,972.40 39,000.00 35,942.30

Provisions 30,375.40 23,614.40 25,244.20 20,689.90 22,171.10

Total CL &

Provisions

84,267.60 69,138.30 68,216.60 59,689.90 58,113.40

Net Current

Assets

62,451.50 -19,168.30 -19,600.90 -23,098.70 -13,267.20

Miscellaneous

Expenses

2,025.30 2,532.70 2,148.20 1,559.70 0.00

Total Assets 235,944.20 122,714.50 97,996.20 78,980.70 74,116.30

Contingent

Liabilities

50,729.60 22,094.50 19,111.20 15,080.10 13,162.20

Book Value

(Rs)

240.22 176.19 127.51 122.32 86.54

Source: Tata Steel Annual Reports, 2004-07.

Corus

The history of Corus can be traced back to the early 20th

century when Koninklijke

Hoogovens (Hoogovens) was founded by the Government of Netherlands in The

Hague on September 20, 1918. The major objective of establishing Hoogovens was to

enable the Dutch industry become less dependent on imports of steel. Moreover, the

Netherlands had good access to the sea for the supply of raw materials and export of

finished goods. The company was established at IJmuiden, a town on the North Sea

coast with good access inland via the North Sea Canal.




411

After several acquisitions over the decades, Hoogovens had become one of the major

players in the European steel industry. By the year 1990, the Hoogovens group had

five divisions – Steel, Aluminum, Technical Services, Subcontracting, and Steel

Processing & Trading. Hoogovens manufactured steel and aluminum and thecompany‟s major customers were automobile, automobile components, aerospace,

ship building, construction, batteries, furniture and optics industries.

One of the major achievements on the business front in 1998 was Hoogovens‟

selection as the only long term European supplier to Boeing. The company bagged

various awards such as corporate supplier award by Volkswagen Audi Group, a

Toyota Achievement award and the Duracell award for continuous improvement11

.

On October 06, 1999, Hoogovens merged with British Steel Plc12

(British Steel) to

form Corus Group Plc, the world‟s third largest steel producer during that time.

Hoogovens held 38.3% stake in the new company while British Steel held 61.7%. At

this point in time, British Steel was struggling, and the merger was initiated to help it

revive its business. British Steel had registered a net loss of more than £80 million inthe financial year 1998. According to John Bryant, the CEO of Corus in 1999, “The

aim of the merger was to attain operating economies by combining the facilities of the

two companies to eliminate duplication and remove overlaps in marketing,

accounting, procurement, logistics, R&D and other functions.”13

However, the merger did face a few problems in the beginning. The Dutch and the

British did not get along well. A few strategic decisions like the closure of the

company‟s aluminum business were called off, and a merger with CSN was

abandoned.13

The losses kept mounting and by 2001, the merged entity had suffered

an operating loss of £1.152 billion. The bad financial performance reflected the very

low prices of steel, as low as US$ 200-250 per ton between 2001 and 2002. Pound

sterling‟s gains against the euro also worked against the company.

In 2003, Philippe Varin (Varin) took over as the CEO of Corus. Varin and Jim Leng

(Leng), Chairman of Corus, both worked to revive the company‟s business. They were

able to cut costs to the tune of £600 million and reduced operating losses from £425

million in 2002 to £199 million in 2003. Corus was able to earn an operating profit of

£612 million in the year 2004.14

The duo resorted to major job cuts, purchase and

supply chain optimization, and also reduced the company‟s debt by selling its

aluminum business to a US based company, Aleris, for £570 million. These strategic

moves and favorable global conditions like increasing steel prices due to increased

demand from China and favorable pound-dollar exchange rate helped the company to

stage a turnaround.15

When Varin took charge, the share price of Corus was quoting at

an all time low of 40 pence. From April 2003 onwards, the share price moved up and

it stood at 390 pence before the company‟s merger with Tata Steel.

11 “History Of Koninklijke Hoogovens,” www.corus.com. 12 British Steel was formed after the nationalization of private steel companies in Britain in

1967, through the Iron and Steel Act. The company was privatized in 1988.13 Jayanta Mallick, D Murali, “Steel in the Melting Pot of Mergers,” The Hindu Business Line,

October 16, 2006.13 In 2002, CSN openly held talks with Corus about a possibility for a merger but backed off

mid way because of Corus‟ poor financial performance and also uncertainties in the thenglobal economic scenario and international financial markets.

14 Corus Annual Report, 2004.15 Jeremy Warner, “Varin Has Done Well With Corus, But When The Steel Cycle Turns,

What Will He Do for an Encore,” The Independent, March 17, 2006.

http://www.corusgroup.com/file_source/StaticFiles/Corporate/History_KH.pdf



http://www.corus.com/







412

In 2006, Corus reported an annual turnover of £9 billion. The company had four

divisions -- aluminum, distribution & building products, long products and strip

products (Refer Exhibits IV for consolidated income statement of Corus and Exhibit

V for consolidated balance sheet of Corus). By 2006, Corus had slipped to the ninth

position among the largest producers of steel in the world.

Exhibit IV: Corus – Consolidated Income Statement (2004-06)

(In £ Million)

2006 2005 2004

Group Turnover 9,733.00 9,155.00 9332.00

Total Operating Costs -9,276.00 -8,512.00 -8750.00

Group Operating Profit/Loss 457.00 643.00 582.00

Finance Costs -202.00 -127.00 -123.00

Finance Income 34.00 31.00 12.00

Share of post-tax profits of join ventures

and associates

24.00 1.00 21.00

Profit before taxation 313.00 548.00 527.00

Taxation -119.00 -116.00 -119.00

Profit after taxation from continuing

operations

194.00 432.00 408.00

Profit after taxation from discontinued

operations

35.00 19.00 33.00

Profit after taxation 229.00 451.00 441.00

Attributable to:

Equity holders of the parent 223.00 452.00 447.00

Minority Interests 6.00 -1 -6

229.00 451.00 441.00

Earnings per shareFrom Continued operations:

Basic Earnings per ordinary share 21.01p 48.14p 46.40

Diluted Earnings per ordinary share 20.38p 46.21p 43.48

From discontinued operations:

Basic Earnings per ordinary share 3.91p 2.70p 3.94

Diluted Earnings per ordinary share 3.72p 2.49p 3.65

Source: Corus Annual Report, 2006.




413

Exhibit V: Corus – Consolidated Balance Sheet

(In £ Million)

2006 2005 2004

Non-current Assets

Goodwill 72.00 83.00 85.00

Other tangible assets 58.00 56.00 39.00

Property plant and equipment 2,758.00 2,820.00 2,793.00

Equity accounted investments 89.00 95.00 109.00

Other investments 62.00 113.00 66.00

Retirement benefit assets 451.00 157.00 311.00

Deferred tax assets 178.00 172.00 174.003,668.00 3,496.00 3,577.00

Current assets

Inventories 1,890.00 1,954.00 1,732.00

Trade and other receivables 1,683.00 1,512.00 1,363.00

Current tax assets 7.00 21.00 19.00

Other Financial Assets _ 85.00 _

Short term investments 8.00 _ 11.00

Cash and short term deposits 823.00 871.00 589.00

Assets held for sale 1.00 3.00 _

4,412.00 4,446.00 3,714.00

Total Assets 8,080.00 7,942.00 7,291.00

Current liabilities

Short term borrowings -159.00 -384.00 -379.00

Trade and other payables -2017.00 -1844.00 -1,742.00

Current tax liabilities -89.00 -79.00 -117.00

Other Financial Liabilities _ -38.00 _

Retirement benefit obligations -2.00 -5.00 -18.00

Short term provisions and other

liabilities

-81.00 -117.00 -141.00

-2,348.00 -2,467.00 -2,397.00

Non-current liabilities

Long term borrowings -1,236.00 -1,308.00 -1,063.00

Deferred tax liabilities -123.00 -126.00 -137.00

Retirement benefit obligations -210.00 -436.00 -455.00




414

2006 2005 2004

Provisions for liabilities and

charges

-94.00 -116.00 -122.00

Other non-current liabilities -70.00 -46.00 -26.00

Deferred income -65.00 -65.00 -33.00

-1,798.00 -2,097.00 -1,836.00

Total liabilities -4,146.00 -4,564.00 -4,233.00

Net Assets 3,934.00 3,378.00 3,058.00

Equity

Called up share capital 1,725.00 1,697.00 1,696.00

Share Premium Account 389.00 173.00 168.00

Statutory Reserve _ _ 2,338.00

Other reserves 331.00 283.00 201.00

Consolidated reserves 1,485.00 1,199.00 -1,378.00

Equity attributable to equity

holders of the parents

3,930.00 3,352.00 3,025.00

Minority interests 4.00 26.00 33.00

Total Equity 3,934.00 3,378.00 3,058.00

Source: Corus Annual Report, 2006.

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 200616

. 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.”17

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 CSN18

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, Corusannounced 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.

16 Kausik Datta, Ishita Ayan Dutt, “Tatas to Float $2 bn Bond for Corus Buy,” BusinessStandard, October 06, 2006.

17 Hugo Duncan, “Corus Agrees £4.3 Billion Takeover by Indian Rival,” The Independent, October20, 2006.

18 Baiju Kalesh, “Corus Bankers Back Tatas in Bid to Buy CSN,” The Times of India, November 01, 2006.




415

On December 10, 2006, Tata Steel revised the acquisition bid to 500 pence per share.

Defending this revised bid, Ratan Tata said, “We remain convinced of the compelling

strategic rationale of this partnership and the revised terms deliver substantial

additional value to Corus shareholders.”19

CSN reacted quickly, making a counter bid of 515 pence a share on December 11,

2006. Otavio Lazcano, Chief Financial Officer, CSN gave the rationale for placing a

higher bid by saying. “This is a project focused on industrial growth that complements

both the markets and the product portfolios of both companies.”20 Corus again

approved this bid and Leng offered his reasons of doing so. He said, “It is ...

consistent with our strategic objective of securing access to raw materials, low-cost

production and growth markets. The combination of the two businesses will create a

strong platform from which to compete and grow in an increasingly global market and

[is] consistent with our strategic objective.”21

In the light of offers and counter offers from Tata Steel and CSN, the Takeover

Panel22

, Britain‟s watch dog on mergers and acquisitions set the deadline of January30, 2007 for both the companies to make their final offer (Refer Exhibit VI for

Takeover Regulations in the UK). The panel also stipulated that if no outright winner

emerged, an auction would be conducted. Even by January 30, 2007, none of the

companies had declared their final offer. The Takeover Panel then asked for an

auction to be held at 4:30 PM GMT on January 31, 2007, after the closing hours of the

London Stock Exchange (Refer Exhibit VII for the auction rules that governed

acquisition of Corus).

Exhibit VI: Takeover Regulations in the UK

The process for M&A transactions in the UK involving public companies is

primarily regulated by the City Code on Takeovers and Mergers, known as the

Takeover Code. The Takeover Code contains a detailed set of rules governing most practical aspects of the process. The Takeover Code is administered and enforced

by the Panel on Takeovers and Mergers, which operates an interventionist regime

under which the participants in the M&A process have frequent access to the

Takeover Panel‟s secretariat (the Panel Executive) that provides day-to-day

guidance (and formal rulings) on the application of the Takeover Code.

Other relevant sources of law and regulation applicable to M&A transactions

include the Companies Act 1985 (replaced by the Companies Act 2006), which

governs schemes of arrangement (see question 2.1) and the compulsory acquisition

(„squeeze out‟) procedure. The Financial Services and Markets Act 2000 (known as

Contd…

19 Surojit Chatterjee, “Tata Steel Raises Corus Bid to $9.2 Billion, Watches CSN‟s Move,”International Business Times, December 11, 2006.

20 Surojit Chatterjee, “CSN Tops Sweetened Offer for Corus, Bid War Enters End Game,”International Business Times, December 13, 2006.

21 Surojit Chatter jee, “CSN Tops Sweetened Offer for Corus, Bid War Enters End Game,”International Business Times, December 13, 2006.

22 The Panel on Takeovers and Mergers (the „Takeover Panel‟) is a regulatory body based inLondon, UK. It was set up in 1968 and is charged with the administration of the City Codeon takeovers and mergers. Its role is to ensure that all the shareholders are treated equallyduring takeover bids. The Panel is a non-statutory body. It has no legal power to enforce itsdecisions. It is the de facto arbiter of takeover bids and has the support of government andother organizations with statutory involvement.

http://en.wikipedia.org/wiki/London%2C_United_Kingdom

http://en.wikipedia.org/wiki/Shareholder

http://en.wikipedia.org/wiki/Shareholder

http://en.wikipedia.org/wiki/London%2C_United_Kingdom




416

Contd…

„FSMA‟), which regulates investment business and securities markets generally is

also relevant, in particular, as it regulates financial promotions, the public offeringof securities and „market abuse.‟ Prospectus rules and Listing Rules made by the

Financial Services Authority („FSA‟) may also be relevant to a securities exchange

offer, where the securities to be issued are to be listed, as they may affect the

freedom of action of the target.

There are two methods used to undertake an M&A transaction in the UK. These

are: (i) a takeover offer, under which the bidder makes a general offer to all target

shareholders to purchase all (or very rarely some) of their shares in the target; and

(ii) a scheme of arrangement, which is a court supervised process that involves a

shareholder vote.

Under either method, a bidder may pay in cash or through the issue of securities or

a combination of both (although in certain circumstances the bidder may be

required to provide, as a minimum, the opportunity for the target shareholders tochoose cash). The takeover offer may be quicker than a scheme of arrangement,

and can be successful with a lower level of support from target shareholders. A

scheme of arrangement provides an all or nothing result, as the bidder will, if it is

successful, acquire all the shares of the target; while if it fails, it will acquire none.

The main hurdle in the acquisition in UK or EU (European Union) is to achieve a

sufficient level of target shareholder support. This is easier if the recommendation

of the target board is obtained. It is necessary for the bidder to arrange committed

financing before a bid is launched (by a formal announcement). This can represent

a major hurdle for a bid dependent on significant leverage. It also becomes

problematic because of legal impediments on using the target‟s assets as collateral

for any acquisition finance. The prohibition on „financial assistance‟ can be

overcome but it is a constraint on the structuring and implementation of leveraged bids. The other main hurdle is to obtain regulatory approval. In addition to target

shareholder acceptance or approval, the principal consents required will be

regulatory (anti-trust and other regulatory approvals, if any). As with any M&A

transaction, change of control requirements in the target‟s contractual arrangements

may be relevant, and it may be necessary for the bidder to obtain its own

shareholders‟ approval. It is a general principle of the Takeover Code that all target

shareholders must be afforded equal treatment. This is translated into detailed rules

requiring that the same consideration be offered to all and prohibiting special deals

with any target shareholders.

The principal documentation involved in a takeover offer include: a press

announcement confirming the bidder‟s intention to make an offer (setting out the

consideration to be offered and all conditions to which the offer is subject); an offerdocument (containing the formal offer, with all terms and conditions and financial

and other information on the bidder and the target); a form of acceptance (by which

the offer can be accepted); and a circular from the target board to its shareholders

(setting out its views on the offer and the substance of the independent advice

received). Target employees may insist that a statement setting out their views on the

offer also be appended. If the transaction is undertaken through a scheme of

arrangement, the documentation is almost identical in terms of content but in place of

the offer document there is a circular to target shareholders and a notice convening

meetings of shareholders with proxy forms in place of the form of acceptance.

Contd…




417

Contd…

If the consideration includes securities, a prospectus (or equivalent document) will

be required. Regulatory filings may require substantial documents and considerable preparation time. These are not, however, public documents.

Source: www.iclg.co.uk.

Exhibit VII: Auction Rules that Governed the

Acquisition of Corus

Much before the commencement of the auction, the maximum number of rounds

and all the rules of the auction are announced by the Takeover Panel. All the

concerned companies (the bidders and the company to be acquired) have to convey

their consent to these rules to the Takeover Panel. For example, in the takeover

auction for Corus, it was decided that the auction procedure would consist of a

maximum of nine rounds, comprising up to eight rounds in which each offeror was

able to lodge a fixed price bid in cash followed by a final round if the auction

procedure had not by then concluded. In the final round, each offeror was able to

lodge either a fixed price bid in cash or a cash bid calculated by a formula

according to which the offeror could lodge a bid at a specified amount in cash more

than the other offeror subject to a specified maximum cash amount.

It was also announced that ninth round would take place only if the offeror who has

the lower cash bid at the beginning of that round lodged increased cash bid in that

round. Such a cash bid was to be at least 5 pence higher than the cash bid at the

beginning of that round. It is expected that the increased bids (if any) lodged during

the auction procedure will not be publicly announced by any of the parties.

If the auction procedure is not completed within the stipulated time period, the

Panel Executive makes an announcement setting out the prices of the offers to be

announced by each offeror following the conclusion of the auction procedure and

expects to freeze the auction procedure at that time and to announce the prices of

the highest cash bids (if any) lodged by each offeror at that point.

The Panel Executive reserves the discretion to amend the auction procedure as

appropriate. Following the conclusion of the auction procedure, neither offeror is

permitted to revise the price of its offer from that established by means of the

auction procedure, or to introduce any new alternative offer.

Compiled from www.economictimes.com, www.corusgroup.com and other sources.

After nine rounds of bidding on January 31, Tata Steel emerged winner in the auction

with its final bid of 608 pence per share of Corus. Justifying his stand and as a reply tothe criticisms about the price paid being too high, Ratan Tata said, “We had taken a

view that we would not go beyond a point... We did not reach that point. Had we

reached that point, we would have walked away. Overbidding or not is subjective

when it comes to a judgment call.”23

On January 31, 2007, Corus shares rose by 6.8% to 601.5 pence on the London Stock

Exchange (Refer Exhibit VIII for Corus‟ stock price chart between September 2002

and March 2007). However, the Indian investors were unhappy about the premium

23 “Did Tata Steel Overheat in its Zeal to Win Corus?” Knowledge@Wharton, February 08,2007.

http://www.corusgroup.com/

http://www.corusgroup.com/




418

that Tata Steel had agreed to pay to acquire Corus. Tata Steel‟s shares fell by 10.7% to

Rs. 463.95 on the Mumbai Stock Exchange (Refer Exhibit IX for Tata Steel‟s stock

price chart between September 2002 and June 2007). In a press conference on the day

the auction concluded, Ratan Tata said that the market was being harsh about the deal.He said, “One makes the mistake of taking a short term view of a corporation and its

life. It would take several years for us to build a 19 million ton enterprise from

scratch, leave alone establishing it in Europe.”24

Exhibit VIII

Corus – Stock Price Chart (September 2002 – March 2007)

Source: www.finance.yahoo.com.

Exhibit IX

Tata Steel – Stock Price Chart (September 2002 – June 2007)

Source: www.finance.yahoo.com.

24 Chris Noon, Ruth David, “Tata Prevails in Corus Battle,” www.forbes.com, January 31,2007.

http://www.forbes.com/





419

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 (Refer Table I for

fund raising mix for the Corus‟ acquisition). Tata Steel decided to go in for an all cash

deal25 rather than opting for a share-swap26. To raise the required funds, Tata Steel

opted for a mix of debt (US$ 6.14 billion) and equity (US$ 7.56 billion). It was

planned that the acquisition would be completed through Tata Steel‟s UK Special

Purpose Vehicle (SPV)27

named Tata Steel UK. Tata Steel UK planned to raise US$

6.14 billion through a mix of high-yield mezzanine28

and long term debt funding.

Most of these loans were secured by the cash flows and assets of Corus.

Table I: Fund Raising Mix for the Corus’ Acquisition

ModeAmount

(In US$ Billion)

Break-up of Tata

Steel Equity

contribution

(In US$ Million)

Tata Steel UK – Non-recourse

Debt

6.14

Tata Steel Asia (Singapore SPV) 2.66

Tata Steel Equity Contribution 4.90

Cash Reserves 700

External Commercial Borrowings 500

Preference Shares to Tata Sons 640Rights Issue 862

Convertible Preference Shares 1400

Foreign Issue of Equity Instruments 798

Sub-total 4900

Grand Total 13.70

Source: “Tatas Plan Fund Raising Mix for Corus,” The Econo mic Times, April 18, 2007 and

other sources.

25 This is a mode of financing an acquisition by paying cash to the shareholders of the acquired

company in lieu of their shares. The acquired company‟s shares get de-listed after the acquisition.26 This is a mode of financing an acquisition where in acquiring company uses its own stock to pay for the acquired company. The shareholder of the acquired company receives a certainnumber of shares of the acquiring company‟s stock for each share of stock they previouslyheld in the acquired company.

27 SPV is also referred to as a „bankruptcy-remote entity‟ whose operations are limited to theacquisition and financing of specific assets. The SPV is usually a subsidiary company withan asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.

28 A hybrid of debt and equity financing that is typically used to finance the expansion ofexisting companies. Mezzanine financing is debt capital that gives the lender the rights toconvert to an ownership or equity interest in the company if the loan is not paid back in timeand if the full amount is not paid. It is generally subordinated to debt provided by seniorlenders such as banks and venture capital companies.




420

To provide for immediate funding of the acquisition, Tata Steel Asia (Tata Steel‟s

Singapore SPV) raised US$ 2.66 billion through bridge loans29

. Banks like ABN Amro,

Deutsche Bank, Lloyds and Standard Chartered Bank, agreed to provide bridge loans to

the company. Payment for these bridge loans upon their maturity was by way of non-recourse

30 facilities which were being arranged by a syndicate led by ABN Amro,

Citigroup and Standard Chartered Bank. The refinancing facility comprised of quasi-

equity instruments worth US$ 1.25 billion and long term loans of US$ 1.41 billion.

Tata Steel‟s own contribution in the Corus deal amounted to US$ 4.9 billion. The

company invested US$ 1.84 billion to acquire Corus through its cash reserves of US$ 700

million, external commercial borrowings of US$ 500 million and an issue of equity shares

of Tata Steel to Tata Sons31

which fetched US$ 640 million32

. The company planned to

raise the remaining US$ 3.06 billion through two rights issues and a foreign issue.

The first rights issue of Tata Steel was to be in the ratio of 1:5 at a price of Rs 300 per

share. This issue was expected to generate US$ 862 million. Tata Steel also planned a

second rights issue of convertible preference shares in the ratio of 1:7, having an interest

rate of 2 percent, convertible into equity shares after two years at a price in the range of

Rs 500 to Rs 600 per share. The price was to be determined at the time of the rights

issue. This issue was expected to provide a total amount of US$ 1.4 billion. Tata Sons

planned to invest money for any unsubscribed portion of both these rights issues.

Tata Steel also planned a foreign issue of an equity-related instrument to generate an

amount of US$ 798 million. The type of instrument to be issued in the foreign issue

had not been decided as of July 2007. According to industry experts, the most likely

option was an issue of ADRs or GDRs33.

The public announcement of the fund raising mix for the acquisition met with mixed

reactions in the market. The participants of Credit Default Swap (CDS)34 segment of

29 A short-term loan that is used until a person or a company secures permanent financing orremoves an existing obligation. This type of financing allows the user to meet currentobligations by providing immediate cash flow. The loans are short-term (up to one year)with relatively high interest rates and are backed by some form of collateral such as realestate or inventory. A bridge loan is also known as „interim financing,‟ „gap financing‟ or„swing loan‟ (www.investopedia.com).

30 Non-recourse debt refers to secured loan that is secured through the pledge of collateral, without personal liability of the borrower. In case the borrower defaults on the payments, lender canrecover through the collateral and if the amount is not sufficient to cover the outstanding loan, the borrower is not responsible to pay the remaining amount. This loan is normally used to financecommercial real estate and projects that need high capital expenditure.

31 Tata Sons is the promoter of the Tata group and all its key companies. Tata Sons wasestablished in 1868 by Jamsetji Tata as a trading concern. Tata Sons holds a majority stakein the Tata group companies.

32

“Funding of Corus Transaction”, www.tatasteel.com, April 17, 2007. 33 ADR is a negotiable certificate issued by a US bank representing a specified number of

shares (or one share) in a foreign stock that is traded on a US exchange. ADRs aredenominated in US dollars, with the underlying security held by a US financial institutionoverseas. GDR is a negotiable certificate held in the bank of one country (for eg., UK)representing a specific number of shares of a foreign stock (in this case, of Tata Steel)traded on an exchange of another country (UK). (www.investorwords.com).

34 It is a swap designed to transfer credit exposure of fixed income products between parties. Itis the most widely used credit derivative. It is an agreement between a protection buyer anda protection seller whereby the buyer pays a periodic fee in return for a contingent payment by the seller upon a credit event (such as a certain default) happening in the reference entity.Most CDS contracts are physically settled, where upon a credit event, the protection sellermust pay the par amount of the contract against the protection buyer‟s obligation to deliver a bond or loan of the name against which protection is being sold.

http://en.wikipedia.org/wiki/Swap_(finance)

http://en.wikipedia.org/wiki/Credit_derivative

http://en.wikipedia.org/wiki/Default_(finance)

http://en.wikipedia.org/wiki/Default_(finance)

http://en.wikipedia.org/wiki/Credit_derivative

http://en.wikipedia.org/wiki/Swap_(finance)




421

the derivative markets were amazed on Tata Steel‟s decision to raise about 45 percent

of the required finances for the acquisition through Tata Steel UK, rather than by

raising the debt itself. Financial experts pointed out that Tata Steel‟s security credit

rating was investment grade35 whereas Tata Steel UK had a lower security creditrating. Due to the higher risk associated with raising debt through Tata Steel UK,

Fitch Ratings decided to downgrade its rating of the credit swap risks in the takeover

to „negative‟36. (Refer Exhibit X for a note on Fitch Ratings).

Exhibit X: Fitch Ratings

Fitch Ratings Ltd was founded by John Knowles Fitch in 1913 in as the Fitch

Publishing Company in New York City. Head quartered in New York City and

London, Fitch Ratings Ltd is now an international credit rating agency. It has

defined various parameters for grading debt bonds issued by companies and these

grading are used world-wide to rate the bonds.

Investment Grade

AAA : the best quality companies, reliable and stable

AA : quality companies, a bit higher risk than AAA

A : economic situation can affect finance

BBB : medium class companies, which are satisfactory at the moment

Non-Investment Grade (also known as junk bonds)

BB : more prone to changes in the economy

B : financial situation varies noticeably

CCC : currently vulnerable and dependent on favorable economic conditions to

meet its commitments

CC : highly vulnerable, very speculative bonds

C : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to

pay out on obligations

D : has defaulted on obligations and Fitch believes that it will generally default on

most or all obligations

NR : not publicly rated.

Source: www.investopedia.com.

Financial experts said that Tata Steel opted for an „all cash‟ deal as compared to a

„share swap‟ deal as the latter would have been less attractive to the Corus

shareholders. Stressing this, Jayesh Desai, Head Investment Banking, Ernst & Young

said, “Foreign sellers are not yet confident about accepting payments in the form of

equity in Indian companies. For them it would amount to foreign direct investment,

which brings regulatory issues. As for many private equity funds, they don‟t yet

understand the Indian market well and so are reluctant to accept stock.”37

35 A bond is considered investment grade if its credit rating is BBB- or higher given byStandard & Poor‟s or Baa3 or higher given by Moody‟s or BBB (low) or higher which isgiven by DBRS. Generally, they are bonds that are judged by the rating agency as likelyenough to meet payment obligations that banks are allowed to invest in them.

36 “Debt Traders Lose Their Shirt Over Tata Steel -Corus Deal,” The Economic Times,October 26, 2006.

37 “How Indian Companies Fund Their Overseas Acquisitions,” Knowledge@Wharton, December14, 2006.

http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Bond_credit_rating

http://en.wikipedia.org/wiki/Standard_%26_Poor's


http://en.wikipedia.org/wiki/Moody's



http://en.wikipedia.org/wiki/DBRS

http://en.wikipedia.org/wiki/DBRS



http://en.wikipedia.org/wiki/Bond_credit_rating

http://en.wikipedia.org/wiki/Bond_(finance)






423

Ratan Tata emphasized that Corus would not be Indianised. He said, “The top

management of Corus will remain with the company and therefore will be part of our

integrated operations. The CEO of Corus will remain as the CEO of Corus.”40

Tata

Steel also maintained three Corus people (P. Varin, R. Henstra, D. Lloyd) on the Tata-Corus board. Tata Steel said that culturally, there was a strong fit with regard to the

values of both companies (Refer Table II for a comparison of the business cultures of

both the companies).

To take care of the merger integration efforts, Tata Steel formed a seven member

committee headed by Ratan Tata. The committee began its task of determining strategic

priorities of Tata-Corus in the near future. They also identified areas that had clear

business benefits in order to drive integration efforts towards those areas. Between June

2007 and October 2007, the committee‟s verification and draft implementation plans

were to be kept ready while detailed synergy targets were to be included in business

unit/site plans for the second half of 2007 and the annual plan for 2008-10. 41

Table II: Business Cultures of Tata Steel and Corus – A Comparison

Tata Steel Corus

Continuous improvement program

“ASPIRE”

Continuous improvement program –

“The Corus Way”

Core Values: Core Values – Code of Ethics:

Trusteeship

Integrity

Respect for the individual

Credibility

Excellence

Integrity

Creating value in steel

Customer focus

Selective growth

Respect for our peopleWorld class governance World class governance

Source: Tata Steel Annual Report, 2006-07.

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. Another area – an obvious outcome of large scale consolidation –

would be the synergies of joint procurement. Economies of scale would give more

strength during raw material purchase negotiations and also while implementing

product price changes. All these synergies, was expected to increase the merged

entity‟s profitability further.

40 Chris Noon, Ruth David, “Tata Prevails in Corus Battle,” www.forbes.com, January 31, 2007.41 “Ratan Tata to Head Corus Merger Panel”, The Economic Times, May 21, 2007.






424

Tata Steel‟s optimism regarding the synergies that could be generated after merger

with Corus was strong. B Muthuraman (Muthuraman), Managing Director, Tata Steel

said, “In terms of synergies, we see synergies in improvement of operating practices

in many areas. We have had a reasonably good look at it in the limited time that we

had with Corus. We see synergies in procurement of materials, we see synergies in the

marketplace, we see synergies in shared services, we see synergies in improvement of

our operations in India using what Corus has in some areas which is better than us. In

terms of total synergies, we believe that it is roughly about US$ 300-350 million

dollars per year, which is something, which we will be able to bring to the bottomline

of the combined entity. It will take a little bit of time; it will start at a lower value for

the first 1 or 2 years. From the third year onward, we expect to realize the full

synergy.”42

According to industry experts, Tata Steel would have two options with regard to steel

production after the acquisition. The first option would be to continue with its primary

steel production close to its iron-ore deposits, and then ship semi-finished steel for

finishing at Corus‟ plants which were close to foreign consumer markets. The second

option would be to shift a part of Corus‟ steel -making capacities to India, where Tata

Steel was already planning a massive expansion to cater to the rapidly growing

demand of steel in the country. Corus‟ expertise in making better grades of steel used

in automobiles and in aerospace could be used to boost Tata Steel‟s supplies to the

growing Indian automobile market.

Corus Consultancy Services based in Newport, South Wales, provided iron, steel and

metal related consultancy, right from the stage of ore mining to that of marketing the

finished products. It was planned that this would be synergized with an automation

unit that Tata had in India. Muthuraman said, “Apart from steel, there are a lot of

other strengths Corus has, that can be tapped by Tata Steel, in consultancy and otherareas. We‟ll try to increase these synergies.”43

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. Questions posed by financial experts were

primarily related to the valuation and funding of the deal. Corus ended up being

valued at approximately 7.7 times the EV (enterprise value) to EBITDA, which was

considered an overvaluation (Refer Exhibit XIII for an explanation on EV, EBITDA

and the EV/EBITDA). Commenting on the valuation, Navin Jindal, Vice-Chairman

and Managing Director, Jindal Steel and Power Limited said “This is not an

attractive price but, if the Tatas have liquidity it will be a good investment in the

long run.”44

42 Muthuraman‟s Speech at a Press Conference for Corus Acquisition on January 31, 2007,www.tatasteel.com.

43 “TCS, Other Tata Companies to Benefit,” The Economic Times, February 03, 2007.44 “India Inc. Hails Tata‟s Win,” The Times of India, January 31, 2007.




425

Exhibit XIII: A Note on EV, EBITDA and EV/EBITDA

Enterprise Value (EV) is a measure of a company‟s value, often used as an

alternative to straightforward market capitalization. EV is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash

equivalents.

EBITDA can be used to analyze and compare profitability between companies and

industries because it eliminates the effects of financing and accounting decisions.

However, this is a non-GAAP measure that allows a greater amount of discretion

as to what is (and is not) included in the calculation. This

also means that companies often change the items included in their

EBITDA calculation from one reporting period to the next.

EBITDA = Revenue – Expenses (excluding tax, interest, depreciation and

amortization)

EV/EBITDA also known as Enterprise Multiple is a ratio used to determine the

value of a company. The enterprise multiple looks at a firm as a potential acquirer

would, because it takes debt into account – an item which other multiples like the

P/E ratio do not include. Enterprise multiple is calculated as:

Enterprise Multiple = Enterprise Value

EBITDA

A low Enterprise Multiple ratio indicates that a company might be undervalued.

The enterprise multiple is used for several reasons:

1) It is useful for transnational comparisons because it ignores the distorting effects

of individual countries‟ taxation policies.

2) It is used to find attractive takeover candidates. Enterprise value is a better

metric than market capitalization for takeovers. It takes into account the debt which

the acquirer will have to assume. Therefore, a company with a low enterprise

multiple can be viewed as a good takeover candidate.

However, it should be remembered that enterprise multiples can vary depending on

the industry. Therefore, one has to compare the multiple to other companies or to

the industry in general. Higher Enterprise Multiples are characteristic to high

growth industries and lower multiples to industries with slow growth.

Compiled from www.investopedia.com, www.answers.com and other sources.

Analysts expressed concerns that the Corus‟ acquisition would result in significantequity 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 debt

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. Post-acquisition, Tata-Corus

would have a net debt-equity ratio45

of 2.74:1 as against 1:1 Tata Steel had been

maintaining.

45 It is a measure of a company‟s financial leverage calculated by dividing its totalliabilities by stockholders‟ equity. It indicates what proportion of equity and debt thecompany is using to finance its assets. Debt Equity Ratio = Total Liabilities/Share Holder‟sEquity.




426

Financial experts pointed out the risk taken by Tata Steel as it piled the debt burden on

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.

According to the credit rating agency Standard & Poor‟s (S&P) 46, the move was

financially risky f or Tata Steel. 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.”47

It was also pointed out that after the Corus deal, Tata Steel would no longer remain as

the lowest cost producer of steel in the world. Tata Steel‟s critical cost advantage was

its access to raw materials. Data suggested that Tata Steel‟s captive iron reserves in

India would last about 50 years given the company‟s earlier annual production

capacity of 5.3 million tones of steel. However, the iron reserves would decrease

rapidly with the Tata-Corus production capacity of 27 million tons of steel per annum.

Corus itself did not have access to any iron ore or coal reserves.

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 (Refer Table

III for the spread of Tata-Corus markets before and after the acquisition).

Table III: Spread of Markets Before and After the Acquisition

Before the Acquisition After the Acquisition

Tata Corus Tata-Corus

India 69% Europe

49%

Europe 37%

Asia (ex. India) 23% UK 29% Asia 24%

Rest of the World (ROW) 8% North America 10% UK 22%

Asia 9% North America 8%

ROW 3% ROW 9%

Source: Tata Steel Annual Report, 2006-07.

Tata Steel‟s immediate plan after completing the integration was to conduct a joint

synergy analysis and establish a plan or a timeline for delivery. Since Tata Steel had

quite a few brownfield48 and greenfield projects in the offing, they were to be pursued

46 S&P is a division of McGraw-Hill that publishes financial research and analysis on stocksand bonds. It is one of the top three companies in this business, along with Moody‟s andFitch Ratings.

47 Chris Noon, Ruth David, “Tata Prevails in Corus Battle,” www.forbes.com, January 31,2007.

48 A type of investment where a company or government entity purchases or leases existing production facilities to launch a new production activity.






427

further. The achievement of an EBITDA of 25% was also targeted. Moreover, the

company aimed at a robust capital structure and financial flexibility.

As a result of the Corus acquisition, Tata Steel got access to the developed markets ofEurope. According to Muthuraman, “Europe is a very mature market with the

customers demanding very high quality service and these require special capabilities,

which are resident in a company like Corus through which Tata Steel can also learn a

lot of things. So apart from bringing 19 million ton capacity all at once to Tata Steel

basket, it gives access to Tata Steel into the developed and mature markets of Europe

where quality of products is important, service is important.”49

The merged entity aimed at transferring European technology and the expertise of the

research and development wing of Corus to India to develop new products and capture

growth in India and Asia. By the year 2015, Tata-Corus targeted that production

should increase to more than 50 MTPA50

from about 27 MTPA in early 2007.

In mid-2007, Tata Steel formed 18 teams each consisting of three to four membersfrom both companies to work on various potential synergy areas like iron and steel

making, manufacturing, marketing, logistics and procurement of consumables. These

teams were to come up with a report on the synergy potential and priorities and it was

planned that by October 2007, detailed synergy targets would be set for the combined

entity.51

The objective was to develop efficient practices by sharing information,

know-how and best practices of both the companies with the ultimate aim of cost

reduction.

49 Muthuraman‟s Speech at a Press Conference for Corus Acquisition on January 31, 200 7,www.tatasteel.com.

50 Tata Steel Annual Report 2006-07.51 Tata Steel Annual Report 2006-07.




428

Suggested Readings and References:

1.

Corus Group: A Profile, BBC News Online, January 30, 2001. 2. Tata Steel Acquires Thailand's Millennium Steel , domain-b.com,

December 15, 2005.

3. Jeremy Warner, Varin Has Done Well With Corus, But When The Steel

Cycle Turns, What Will He Do for an Encore, The Independent, March 17,2006.

4. Kausik Datta & Ishita Ayan Dutt, Tatas to Float $2 Billion Bond for Corus

Buy, Business Standard, October 06, 2006.

5. Tatas set M&A Street Ablaze with Corus Deal The Economic Times,October 09, 2006.

6. Jayanta Mallick, D.Murali, Steel in the Melting Pot of Mergers, The Hindu

Business Line, October 16, 2007

7. Radhika Kamat Tata Steel: Challenges Ahead in Corus Acquisition TheHindu Business Line, October 19, 2006.

8. Hugo Duncan, Corus Agrees £4.3 Billion Takeover by Indian Rival, TheIndependent, October 20, 2006.

9. Corus Accepts Takeover Bid by Tata Steel, www.rediff.com, October 20,2006.

10. Jennifer Ryan Tata Debt for Corus Leaves Derivative Trades in Lurch

www.bloomberg.com, October 25, 2006.

11. Debt Traders Lose Their Shirt Over Tata Steel-Corus Deal, The

Economic Times, October 26, 2006.

12. Tata and Corus, Economist, October 26, 2006

13. Pedal to the Metal: Challenges of Tata Steel’s Corus Takeover, Knowledge@Wharton, October 31, 2006.

14. Corus Bankers Back Tatas in Bid to Buy CSN The Times of India, November 1, 2006.

15. V Sridhar, Burden of Steel, Frontline, November 04 – 17, 2006

16. Tatas’ Corus bid Hits Roadblock, www.tribuneindia.com, November 18,2006.

17. CSN Begins Due Diligence on Corus; Tata Steel Scrip Down , The Hindu

Business Line, November 21, 2006.

18. Surojit Chatterjee, Tata Steel Raises Corus Bid to $9.2 Billion, Watches

CSN’s Move,” International Business Times, December 11, 2006.

19. Surojit Chatterjee, CSN Tops Sweetened Offer for Corus, Bid War Enters

End Game, International Business Times, December 12, 2006.

20. How Indian Companies Fund Their Overseas Acquisitions,Knowledge@Wharton, December 14, 2006.

21. Shareholders of Tata Mum on Corus Pricing The Times of India,December 14, 2006.




429

22. RPT-UK Takeover Panel to Launch Auction for Corus, www.reuters.com,January 26, 2007

23. Corus: Tata, CSN Battle to be Settled by Auction, www.tribuneindia.com, January 27, 2007.

24. Tata-CSN Battle Enters Final Round, The Economic Times, January 27,2007.

25. India Inc. Hails Tata’s Win, The Times of India, January 31, 2007.

26. Chris Noon, Ruth David, Tata Prevails in Corus Battle, www.forbes.com, January31, 2007.

27. Mr. Muthuraman’s Speech, Transcript of Press Conference for CORUS

Acquisition, www.tatasteel.com, January 31, 2007,

28. Neelima Mahajan, It Takes a Whole Lot to Sing a Perfect Chorus, TheTimes of India, February 01, 2007.

29. Tata Win Booster for Corporate India’s Confidence, The Economic Times,February 01, 2007.

30. TCS, Other Tata Companies to Benefit, The Economic Times, February 03,2007.

31. Reinvention of Family Business The Economic Times, February 08, 2007.

32. Did Tata Steel Overheat in its Zeal to Win Corus? Knowledge@Wharton,February 08, 2007.

33. D. Murali, Corus Vs Hutch: The Inevitable Comparison The HinduBusiness Line, February 09, 2007.

34. Prasun Sonwalkar, Arvind Padmanabhan, Tata-Corus Deal - Tata Acquires

Corus for $12 Billion: India’s Biggest Overseas Takeover,www.iacfpa.org, February 09, 2007

35. Pallavi Roy, Mobis Philipose, This is Corus, Businessworld, February 19,2007.

36. Corus to be Unlisted from April: Tata Steel Mid-Day, March 05, 2007.

37. C. P. Chandrashekhar, Tata's Gamble: Triumph or Nemesis? One WorldSouth Asia, March 15, 2007.

38. Tata Steel Completes Acquisition of European Steelmaker Corus, International Herald Tribune, April 03, 2007.

39. Tata Steel Completes Acquisition of Steelmaker Corus, www.cnbc.com,

April 03, 2007.

40. Tatas unwrap details on Corus Funding The Times of India, April 11,2007.

41. Tatas more bullish on Corus Synergy The Hindu Business Line, April 17,2007.

42. Tatas Plan Funding Mix for Corus The Economic Times, April 18, 2007.

43. Tatas More Bullish on Corus Synergy, The Hindu Business Line, April 18,2007.

http://www.tribuneindia.com/



http://www.tribuneindia.com/




430

44. Tata Steel Raising $2.3 b for Corus Payment , The Hindu Business Line,April 18, 2007.

45. Funding of Corus Transaction, www.tata.com, April 18, 2007.

46. Citi and StanChart move in on Corus Debt www.projectfinancemagazine.com,May 2007.

47. Ratan Tata to Head Corus Merger Panel , The Economic Times, May 21,2007.

48. Mr Ratan Tata to Head TATA Corus Integration Committee,www.steelguru.com,May 22, 2007.

49. Corus Group Employees Council investigating Tata Steel Financing www.abcmoney. co.uk, May 31, 2007.

50. Sambit Saha Tata Steel stalks Canadian Giant The Telegraph, June 03,

2007.

51. A Background of the Indian Steel Industry: An Introduction www.indiansteelalliance.com.

52. Mergers & Acquisitions in U.K., 2007, www.iclg.co.uk.

53. Mergers & Acquisitions in India, 2007 , www.iclg.co.uk.

54. PLC Cross Border Mergers and Acquisitions Handbook, 2006-2007,

www.practicallaw.com.

55. Tata Steel Annual Reports, 2003-07.

56. www.en.wikipedia.org.

57.

www.investopedia.com.

58. www.investorwords.com.

59. www.tata.com.

60. www.tatasteel.com

61. www.corusgroup.com.

62. www.csn.com.br.

63. www.forbes.com.

64. www.steel.gov.in

Documents

Case 5 Tata Steel’s Acquisition of Corus