CF Case Study Group 3 SectionA V3

8/12/2019 CF Case Study Group 3 SectionA V3

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Capital Structure Analysis: Tata Steel

Group - 3, Section A

Case Synopsis

Professor Kunal

Corporate Finance

23rdFebruary 2014

Capital Structure Analysis and Financial Strategy: Tata Steel Ltd

Tata Steel Ltd. has long and significant history of more than 100 years in the Indian business context.

However, with little significant development by the company in recent history, it was a tough task for the

CFO, Kaushik Chatterjee, to decide on the expansion plan and investment strategy of Tata Steel Ltd.

According to the CFO, surviving amidst volatility was the highest priority. The steel market is volatile for

two basic reasons: raw material price and volatile buying behavior of the consumer. For instance,

Automobile consumption patterns are unstable and they care about the exposures they take, he says.

Volatility in raw material prices makes it very difficult for steel industry to keep up with those trends

where reorder of raw material has lead time of 45 days to reach the plant and another 35 days in steel

making process to produce steel. So, by the time steel comes out of the production unit, prices and market

situation are completely different.

Moreover, uncertainty in the global market leaves little cushion but to invest in new raw material sources

and choose product mix which are less sensitive to price increase by managing fixed costs through in-

sourcing and outsourcing, by consolidating sites and by optimizing operations at each site. More

significantly, there are no overnight solutions to what is going on in the developed world. It highly

depends on how political decision-making will evolve, he saidin an interview with Ernst and Young.

Tata Steel has developed a methodology to deal with this pattern of volatility in the global market and

decided strategy to conduct scenario analysis every month, since 2007. This strategy brought

significant improvement in managing price and market uncertainty.

Since Indias new government formation in 2004, booming economy leveraged agriculture, manufacture

and service sector growth trajectory for increasing demand of domestic consumption. In the wake of this,


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Steel Industry in India has shown significant upward trend because of the large domestic and global

demand. Indias significant gross domestic product increase in 2006 and increasing demand of

Automobile, Real Estate and Infrastructure sector at India and abroad, has put Indian steel industry on the

global map. As per the latest survey done by the International Iron and Steel Institute, India is the 7th

largest steel producer in the world. Moreover, globalization, liberalization and government policy

decision on interest rates which directly affect the capital structure planning of the company.

In todays competitive environment capital structure decision-making plays a very immense role in

management decision-making process. Therefore, the way of financing policy of firms assets through a

combination of equity and debt becomes very much important to maintain sustainable growth and

competitive advantage. The form and type of financing of funding sources will define the firms capital

structure.

Tata Steel had an expansion plan to cope with uncertainty in raw material and market in India and

Europe. It was a tough time ahead because euro zone and global economy was leading towards the debt

crisis. CFO, Kaushik Chatterjee, was in a dilemma to decide on the financing strategy, the valuation of

the firm for bidding. However, he suppose to take decision on capital structure, optimum level equity and

long-term bank loans to acquire European firm Anglo-Dutch steelmaker Corus in UK and maintain post

acquisition debt levels in Tata Steel Ltd.

Corporatefinance

decisions

Investment

PortfolioMerger andAquitions

Capital

Finance

Debt

Long term Short term

Equity

Stock issueIPO

RiskManagement

Measurement


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History

The Company was originally incorporated as "The Tata Iron and Steel Company Limited" on August 26,

1907 as a public limited company, under the provisions of the Indian Companies Act, 1882. The

Company was established by Jamsetji N. Tata, the founder of the Tata companies, and today is one of the

flagship Tata companies. Pursuant to a resolution of the Board of Directors dated May 19, 2005 and of

the shareholders of the Company dated July 27, 2005, the name of the Company was changed to "Tata

Steel Limited" with effect from August 12, 2005. The Registered Office of the Company is situated at

Bombay House, 24 Homi Mody Street, Fort, Mumbai 400 001.

The Company manufactures a diversified portfolio of steel products, with a product range that includes

flat products and long products as well as some non-steel products such as Ferro alloys and minerals,

tubes and bearings. The Company, through its Indian operations, is a large manufacturer of Ferro chrome

and steel wires in India and a supplier of chrome ore internationally. The Companys main markets

include the Indian construction, automotive and general engineering industries.

The Companys main facilities have been historically concentrated around the Indian city of Jamshedpur

(Jharkhand), where the Company operates a 6.8-mtpa crude steel production plant and a variety of

finishing plants close to the iron ore and coal reserves. The Company proposes to increase the crude steel

production of the Jamshedpur plant by 2.9 mtpa to 9.7 mtpa. The Companys bearings division is located

at Kharagpur (West Bengal), Ferro manganese plant is located in Joda (Orissa), charge chrome plant is

located in Bamnipal (Orissa), cold rolling complex is located in Tarapur (Maharashtra) and wire division

is located at Tarapur (Maharashtra), Bangalore (Karnataka), and Indore (Madhya Pradesh). The Company

also has iron ore and coalmines, collieries and quarries in the states of Jharkhand, Orissa and Karnataka.

Internationally, the Company has holdings in steel-related businesses of NatSteel Asia, with facilities

located in Singapore, China, Malaysia, Vietnam, the Philippines, Thailand and Australia. The Equity

Shares of the Company were first listed on the BSE in 1937 and on the NSE on November 18, 1998.

Global Depository Receipts issued by the Company are listed on the Luxembourg Stock Exchange and

5,753,386 Global Depository Receipts issued by the Company are listed on the London Stock Exchange.


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Convertible Alternative Reference Securities ("CARS") & convertible bonds issued by the Company are

listed on the Singapore Stock Exchange and the Singapore Exchange Securities Trading Limited

respectively.

The Company has entered into a Brand Equity and Business Promotion Agreement with the Promoter

dated December 18, 1998 for the use of the "Tata" name. Milestones achieved by the Company since

incorporation is mentioned below:

In 2005-2006, the Tata Group had revenues of $21.9 billion, which was approximately 2.8 percent of

Indias gross domestic product. With a market capitalization of $63.0 billion in 2007, the Tata Group

employs around 2,460,000 people and comprises 96 operating companies in seven business sectors:

information systems and communications (Tata Consultancy Services), engineering, materials, services,

energy, consumer products and chemicals. The group has 28 publicly listed firms with approximately 2

million shareholders. Operations span 85 countries on six continents and there has been an overall rapid

growth through acquisition and merger activity (www.tatasteel.com, 2007, July 23).

Family members have run the company for five generations. The current chairman of Tata Group is Ratan

Tata who succeeded J.R.D. Tata in 1991. At his time of succession, the Tata Group was a sprawling

network of 250 companies, many doing poorly. He has since downsized the group to 96 firms. Not

content to operate only in India, he has increasingly challenged his managers to expand overseas.

Steel Industry in India and economic condition

As GDP growth weakened more than expected in 2012 on account of stalled investment against the

backdrop of tightening policies, widening trade and fiscal deficit, high inflation and weak FDI inflows,

the Financial Year 2012-13 was a year of subdued activity for steel using sectors in particular the auto

segment; it is expected that 2013 will continue to remain a challenging year for the automotive sector as

high interest rates and fuel expenses will continue to act as a drag on demand. However, the construction

sector remained relatively resilient in 2012 and is expected to remain stable.

Steel demand has remained sluggish so far in 2013 amidst weak activity and poor sentiment; however,


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activity is expected to accelerate modestly in the coming months. Steel demand is expected to grow by

5.9% to 75.8 million tonnes in 2013 following 2.5% growth in 2012 as monetary easing is expected to

support investment activities. Strengthening domestic consumption and improving external conditions

will also help underpin the growth of steel using sectors.

In the context of the difficult macro-economic environment, what financial strategy should Tata Steel

adopt? Tata steels financing strategy for the year should focus on two key components

(a)Maintenance of a liquidity buffer for continued global operations (comprising cash & cashequivalents and undrawn lines) and

(b)Sustenance of leverage pressures on account of increasing volumes and capital expenditurerequirements in India.

CFO, Koushik Chatterjee: Background

Mr. Koushik Chatterjee joined Tata Steel in 1995. During his stint in the Company, he worked in the

areas of Corporate Finance and Planning. During the years 1996-1998, he was also a visiting faculty at

XLRI, Jamshedpur in Corporate Finance. In 1998 he was transferred to the Tata Steel Head Office in

Mumbai and subsequently to Tata Sons Limited in the Group Executive Office (GEO). He became

General ManagerCorporate Finance in Tata Sons in 2002. During his tenure in Tata Sons Limited, he

was involved in Mergers & Acquisitions activities including privatizations and joint ventures. He was

also the lead facilitator in the Group wide roll out of Economic Value Added (EVA) for the major Tata

companies.

Mr. Chatterjee re-joined Tata Steel on August 1, 2003 and was appointed the Vice President (Finance)

w.e.f. August 1, 2004. With the announcement of the new Tata Steel Group post the acquisition of Corus,

Mr. Chatterjee was appointed as Group Chief Financial Officer w.e.f. 1st January 2008. He has overall

responsibility for Group Financial Reporting, Investor Relations, Financing Strategy including debt and

equity raising, Corporate M&A, Risk Management and Compliance, Taxation Strategy and Planning and

Co-ordination of statutory and management reporting.


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He is on the Board of several Tata Steel Group companies including Tata Steel UK, NatSteel Asia Pte.

Limited, Tata Steel (Thailand) Public Company Limited, Southern Steel Berhad, Malaysia and others.

Business Today Magazine declared Mr. Chatterjee one of Indias best CFOs in 2005 and 2006 and by

CNBC in 2007. He is also a frequent speaker in various conferences in India and abroad including the

McKinsey Global CFO Forum, Economist Conferences and CII organized conferences.

Rationale behind the Deal

There were a lot of apparent synergies between Tata Steel, a low cost steel producer in a fast developing

region of the world and Corus, a high value product manufacturer. Some of the prominent synergies that

could arise from the deal were as follows:

Tata was one of the lowest cost steel producers in the world and had self-sufficiency in raw material.

Corus was fighting to keep its productions costs under control and was on the lookout for sources of iron

ore. Tata had a strong retail and distribution network in India and South East Asia. This would give the

European manufacturer an inroad into the emerging Asian markets.

Tata was a major supplier to the Indian auto industry and the demand for value added steel products was

growing in this market. Hence there would be a powerful combination of high quality, developed and low

cost, high growth markets. There would be technology transfer and cross-fertilization of R&D capabilities

between the two companies that specialized in different areas of the value chain. There was a strong

culture fit between the two organizations both of which highly emphasized on continuous improvement

and ethics.

The Counterbid by CSN

In November 2006, Brazilian steel maker CSN challenged Tata Steel's proposal for acquisition. They

countered Tata Steel's offer of 455 pence per share by offering 475 pence per share of Corus. On January

31, 2007, following the lack of agreement on an offer, an auction process was triggered. Following the

conclusion of the auction process (at an unprecedented length of nine rounds) conducted by the Panel in

accordance with Rule 32.5 of the Code (the "Auction"), Tata Steel announced the proposed acquisition of


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Corus Group at 608p per share, that being 5p more than CSN's top offer of 603p. The final valuation of

Corus was thus put at $12.04 Billion. The time line of events is presented inExhibit 3. The final deal

structure was as follows:

$3.5 - $3.8 b infusion from Tata Steel ($2b as its equity contribution, $1-.5-1.8 b through a bridgeloan

$5.6b through a LBO ($3.05b through senior term loan, $2.6 b through high yield loan). A new board consisting of Ratan N Tata (Chairman of Tata Steel), Jim Leng (of Corus Group), B.

Muthuraman (Managing Director of Tata Steel), Ishaat Hussain and Arun Gandhi (Directors of

Tata Sons) was formulated to develop and execute the integration and further growth plans.

Questions

1. What should be the optimum level of capital structure to acquire Corus?2. Why did Corus consider the deal with Tata Steel Ltd?3. How did the finances arranged for the deal?4. How did Tata assign asset valuation before deal?5. What could be the dividend policy post acquisition?


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Exhibit 1

Financial Alternative available


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Exhibit 2 (Excel)

Exhibit 3

18 Oct 2005: Tata Steel closes in on Corus

17 Oct 2006: Corus confirms offer from Tatas for equity acquisition

19 Oct 2006: Corus board recommends Tatas' takeover offer

20 Oct 2006: Tata Steel clinches Corus takeover deal

17 Nov 2006: CSN of Brazil makes overture to Corus

18 Nov 2006: Tatas hold parleys with Corus after CSN bid

28 Nov 2006: CSN begins talks with Corus pension trustees

11 Dec 2006: Corus bid: CSN outbids Tatas' offer

12 Dec 2006: Tata Steel, Corus get US anti-trust nod for takeover deal

15 Dec 2006: CSN drops bid for US firm; sends papers to Corus shareholders

20 Dec 2006: Tata, CSN get Jan 30 deadline for Corus bids

22 Dec 2006: European Commission approves Tata's acquisition of Corus

28 Dec 2006: Bid for Corus may be revised, hints Ratan Tata

11 Jan 2007: EU seeks third-party comments on CSN bid for Corus

21 Jan 2007: Tata, CSN in a fix over revised Corus bid

23 Jan 2007: Takeover panel moving closer to auction; Tata may raise bid


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Exhibit 4

Exhibit 5 (Excel)

Exhibit 6


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Exhibit 7

Exhibit 8


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Exhibit 9


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Exhibit 10


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February, 3

PM

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CF Case Study Group 3 SectionA V3