Mergers and Acquisitions - TATA CORUS DEAL
1
Executive Summary
Mergers and Acquisitions are an important element in corporate strategy for several decades. By studying mergers and acquisitions we are able to determine whether they enhance a company or destroy its wealth. There are ongoing debates on effects of mergers and acquisitions on companies.
The principal behind buying a company is based on the theory that it would create shareholder value over and above the total value of the two companies. The rationale behind mergers and acquisitions is that two companies together are more in value that two companies separate. This rationale is attractive to companies when times are tough. The strong company which will be the bidder will act to buy another company in order to create a more competitive and cost efficient company. Two companies will merge hoping to gain greater market share and to achieve more efficiency. This attractive offer will make target companies often agree to be purchased as they realize they cannot survive alone.
In January 2007, Tata Steel company won the bidding war to purchase Corus. This changed Tata Steel from its rank from being the 56th largest steel producing company to 5th largest steel producer.
The question to be answered is if Tata Steel over paid for the purchase of Corus. The assignment critically examine rationale behind Tata Steel acquisition of Corus.
Table of Contents EXECUTIVE SUMMARY .......................................................................................................2 1.0 INTRODUCTION ...............................................................................................................4 2.0 TATA STEEL – A GENESIS ............................................................................................. 4 2.1 TATA STEEL SWOT ANALYSIS ..........................................................................................6 2.1.1 Strengths .....................................................................................................................6 2.1.2 Weakness ....................................................................................................................7 2.1.3 Opportunities ..............................................................................................................7 2.1.4 Threats ........................................................................................................................8 2.2 CORUS GROUP – THE TARGET COMPANY ...........................................................................8 3.0 THE BIDDING PROCESS ................................................................................................ 9 3.1 STRUCTURING AND PRICING THE DEAL .............................................................................10 3.3 REASONS FOR SALE - CORUS ............................................................................................ 11 3.4 REASONS FOR BUY –TATA STEEL .....................................................................................12 3.5 THE SYNERGY BETWEEN THE TWO COMPANIES .................................................................12 3.6 SHARE MARKET AND ANALYSTS REACTION TO THE DEAL...............................................13 4.0 PRE ACQUISITION PERFORMANCE ANALYSIS ...................................................14 4.1 CORUS STEEL FINANCIAL PERFORMANCE ANALYSIS .......................................................14 4.2 TATA STEEL FINANCIAL PERFORMANCE ANALYSIS ......................................................... 15 4.3 COMPARISON OF SHARE PRICES BEFORE ACQUISITION .....................................................15 4.4 CALCULATION & EVALUATION OF EXCHANGE RATIO .....................................................17 5.0 POST MERGER SYNOPSIS ........................................................................................... 18 5.1 EFFECT OF THE RECENT FINANCIAL CRISIS ON STEEL INDUSTRY .....................................21 6.0 CONCLUSION ..................................................................................................................22 ANNEXURE 1 ......................................................................................................................... 25 ANNEXURE 2 ......................................................................................................................... 26 ANNEXURE 3 ......................................................................................................................... 27 ANNEXURE 4 ......................................................................................................................... 28 7.0 BIBLIOGRAPHY .............................................................................................................30
1.0 Introduction Compared to last decades the present global steel industry is in its top position. The price of steel keeps rising and the demand expectations forecasted shows rapid growth in the next few years. The mergers and acquisitions which buoyed the steel industry shows good results. The global financial crisis may lead to a negative effect in the steel industry but continuous economic growth in countries like China and India will keep the demand afloat. More than 50% of the global steel production is from China, India, Japan and South Korea. Apart from these countries Unites States, United Kingdom and Brazil are major producers as well.
The Global steel industry has witnessed some mega deals in the past few year through mergers and acquisitions. The Tata- Corus acquisition and the Arcelor –Mittal acquisition have changed the dynamics of the global positioning of Indian Steel Industry. A decision for a merger and acquisition can be considered as an investment decision. The decision influences both acquiring company and the target company to be acquired. An acquiring company cannot make crucial decisions related to a merger and acquisition without the incisive analysis made by its corporate managers and financial planners.
The acquiring company should correctly value the firm which it intends to acquire and the target company should get the return of the goodwill created over the years. In the past hostile takeovers done by corporate raiders were prevalent and at present that is replaced by growth of companies through mergers and acquisitions. Impact of mergers and acquisitions are universal. Everyone from employees, directors, shareholders, financial institutions and society are affected by them.
In the case of Tata Steel acquisition of Corus the question which needs to be answered is whether the acquisition of Corus too costly for Tata? Tata Steel with the Corus acquisition would if all planned capacities implemented in year 2015 will be one of the top three steel makers in the world.
2.0 Tata Steel – A Genesis
With the support of Swadeshi Movement in India Jamsetji Tata incorporated Tata Steel Iron and Steel Company Ltd in 1907 as a strategic move in Tata group of companies. The company become India‟s largest private sector steel company and Asia‟s first. The production of steel in 2006-2007 had reached 5 million tonnes and had the distinction of being one of lowest cost producers of steel in the world. Mission statement states it aspires to be the global steel industry benchmark for Value Creation and Corporate Citizenship.
Tata Steel mainly caters to the domestic market. Time lines for strategic growth given in Annexure I. Tata Steel is the fifth largest steel company in the world and has a 28Mn tonne crude steel capacity. It is ranked as 315th on Fortune Global500. It is considered as second most profitable and second largest private sector company in India with consolidated revenue for year ended 31st March 2008 being Rs. 1.321Bn. and net profit of Rs. 123.5Bn as at 31st March 2008.
Tata Steel is listed in the Bombay Stock Exchange as well as National Stock Exchange in India. The main steel plant location is Jamshedpur in India. Tata Steel in its journey to purse globalization and growth had identified strategic levers such as increasing the base in India, mergers and acquisitions in developed and growing markets, investments in raw material assets and more focus on branding. The four major domestic rivals of Tata Steel are JSW, SAIL, ESSAR STEEL and ISPAT. Others are small mills which together take up 30% of the market share.
Tata Steel is in the process of pursing strategic growth through securing access to raw materials and capacity expansions. Tata Steel had made plans for expansion of its operations in Jamshedpur to 10Mn tonnes per annum and at the Orissa Greenfield site 6 Mn tonnes per annum. They are assessing other Greenfield opportunities within Asia and India. The company hopes achieve 100% self sufficiency in India and 50% in the European market segment.
At present the company have signed agreements with Ivory Coast for exploration of iron ore, Mozambique for exploration of coal and Oman for exploration of limestone. Challenges facing the company and the steel industry are the climate change. Tata Steel is committed to corporate social responsibility and will take part to find a solution and minimise the
environmental impact by its operations and products. The company has set a goal to reduce the CO2 footprint at least by 20% by year 2020 as compared to 1990.
To achieve this Tata Steel will continue to improve the current processes followed, invest in technological break through such as Ultra Low Carbon Steel and research and develop new products which would reduce the environmental impact.
Global Steel Output (Million Tonnes) 2005
2006
% change
355.8
418.8
17.7
112.5
116.2
3.3
94.9
98.5
3.8
66.1
70.6
6.8
47.8
48.4
1.3
44.5
47.2
6.1
40.9
44.0
7.6
38.6
40.8
5.7
29.4
31.6
7.5
31.6
30.9
(2.2)
1,028.8
1,120.7
8.9
2.1 Tata Steel SWOT Analysis 2.1.1 Strengths 1. Indian operations are self-sufficient due to its major raw material iron ore‟s in captive mines. 2. Advanced Research and Development department to carry out experiments researches in areas of raw materials, steel making, blast furnace productivity, product development and process improvement etc. 3. A strong retail distribution network in the domestic market and South East Asia. It is a major supplier to the domestic auto industry.
4. Tata Steel is gearing towards reaching crude steel capacity of 10Mn tonnes per annum by year 2011. 5. Adequate internal control procedures and systems to cope with the nature and size of its business. Continuous monitoring done by the Corporate Audit Department of the Company. 6. Accelerated growth with ventures into several markets and geographies through mergers and acquisitions. 7. Modernization plans have ensured that the best technologies are used to ensure costefficient, quality and environment friendly processes.
2.1.2 Weakness 1. Deficiencies of raw material in domestic market for example nickel, Ferro molybdenum are unavailable in India. 2. Raw materials required for steel production are rapidly draining and are nonrenewable. The company has invent a sustainable methods in steel production. 3. Power shortages in India hamper the production of steel. 4. Insufficient transport infrastructure and freight capacity impediments
hamper the
growth domestic steel industry. 5. Labour productivity low in India. Advantages of cheap labour gets even out due to low labour productivity. 6. High cost of inputs and services like electricity cost and freight cost. For example electricity cost 3 cents in the US compared to India which is 10 cents.
2.1.3 Opportunities 1. Enormous scope in the domestic market to increase the consumption of steel. 2. Potential exist to enhance steel consumption in other areas such as automobiles, engineering industries, packaging, irrigation and water supply in India. 3. Estimation that world steel consumption in next 25 year will double.
4. Acquisition of Corus will bring in a tremendous technological advantage and access to global steel industry practices. 5. Boom in infrastructure development has opened up a high demand for steel worldwide. 2.1.4 Threats 1. Rising of environmental costs due to increased concern of Global Warming. 2. It is recognized that the steel industry is a significant contributor to man made greenhouse gas emissions. 3. High raw material cost and scarcity of non-renewable raw material is a threat to the steel industry. 4. The threat of substitutes such as plastic and composite to its biggest market which is the auto mobile industry. 2.2 Corus Group – The Target Company The Corus Group was incorporated as a merger between British Steel and Konninklijke Hoogovens, a Dutch steel company on 6th October 1999. By year 2005 Corus became Europe‟s 2nd largest steel producer with a production capacity of 18.2Mn tonnes and revenue of 9.2Bn Pounds. In 2006 the annual revenue reached 9.7Bn Pounds. Corus has its operating facilities in United Kingdom, Germany, Norway, Netherlands and Belgium and employees over 47,000 people in 40 countries
The production of Corus consists of four main operating divisions; Strip steel products, distribution and building system and aluminum and long products. At the merger of British Steel and Hoogoven, it was assets of an older and less productive British plant and the crown jewel of the industry which was the Dutch plant. As a result there are union issues and pension liabilities of more than 13Bn pounds. Corus developed expertise in offering differentiated products, innovative solutions, sound technical advice and reliable service its global customers. The steel products manufactured were used in automotive, aerospace, rail, construction, metal goods, packaging, mechanical and electrical engineering, oil and gas industries with customers around the world. It was involved in various projects worldwide such as the largest mall in the world Dubai Mall,
Dubai, SouthAfrican Large Telescope (SALT),
and
a five year agreement to supply
aluminum to Airbus.
The main strength of Corus was its Research and Development capabilities. It focused in development of high-value added steel products and manufacturing processes. The ability and expertise to produce high strength steel enabled the collaboration with Ford Motors for manufacturing Galaxy cars. Corus has two teams of research and development. One in United Kingdom and the other in Netherlands. The specialization was to develop advanced low weight high strength steel for the automobile industry. In 2006 Corus was the 9th largest steel producer in the world. In latter part of 2006 Corus opened bids for 100% stake in the company. The two most powerful bidders were CSN and Tata Steel. On 2nd April 2007 it became a subsidiary of Tata- Steel. 3.0 The Bidding Process Tata Steel prior to acquisition of Corus had a production of 5.05Mn tonnes of crude steel in year 2005-2006.The vision was to increase the capacity to 50Mn tonnes by year 2015. The Corus acquisition by Tata Steel was in line with its long- term plans envisaged. On 4th October 2006m, Tata Steel placed a bid to purchase Corus. The offer was 455p per share. This bid was met with a counter bid by CSN (Companhia Siderurgica Nacional) a Brazilian steel company who made an offer of 475p per share. Tata Steel revised their offer to 500p per share and that was out bidden by CSN who raised their offer to 515p per share. Due to this the United Kingdom take over panel on 30th January 2007 initiated an auction to determine successful bidder. On 31st January 2007, Tata steel won the bidding after eight rounds at 608p per share for a net consideration of $12.9Bn as against 603p per share made by CSN. Tata Steel acquired 21.1% stake (199,955,952) shares for $2.4Bn at the final price of 608p per share for ordinary shares. Tata Steel on 15th February 2007 bought 7.136Mn equity shares at 601.75p for $84.38Mn of Corus. It was a 0.8% stake of the company.
CSN before the bid in November had accumulated 3.8% share holding of Corus. It sold 34,072,613 shares to Tata Steel for $402.65Mn at the price of 608p per share. The acquisition and bidding process of Corus by Tata Steel commence on 20th September 2006 and end on 2nd April 2007. The details of the process is given in Annexure 2.
Global Steel Ranking Company
Capacity (Million Tonnes)
Arcelor - Mittal
110.0
Nippon Steel
32.0
Posco
30.5
JEF Steel
30.0
Tata Steel - Corus
27.7
Bao Steel China
23.0
US Steel
19.0
Nucor
18.5
Riva
17.5
Thyssen Krupp
16.5
3.1 Structuring and Pricing the deal Financing structure of India‟s biggest leveraged buy out comprised of US $3.88Bn equity contribution from Tata Steel, a fully underwritten non recourse debt package of US $ 5.63Bn and revolving credit facility for US $669Mn.
As per the plan for the acquisition a fully owned subsidiary by the name of Tata Steel UK would be set up. This would be done by Tata Steel. Acquisition was to be in effect under section 425
of English Companies Act, 1985. It was effective after the approval from the Corus shareholders. The financing structure of the acquisition was to be 100% leveraged buyout funded through cash and loans by Tata Steel. The plan was that Tata Steel UK would arrange for a loan on 1.6Bn pounds through a revolving credit facility and bridge loan and the balance amount from Tata Steel.
Tata Steel had appointed ABN Amro, Credit Suisse and Deutsche Bank to arrange financing of 3.3Bn pounds of financing to be raised. ABN Amro Bank and Deutsche Bank would provide 27.5% each and the balance 45% by Credit Suisse. The US $1.8BN debt which was being raised by Tata Steel in India would be shared by Standard Chartered Bank and ABN Amro Bank. The operations structure was one of the biggest concerns for the Tata Steel executive as there were significant cultural difference between the two companies and whether it would pose operating problems. Corus was a large company operating in a different continent and it had a diverse cultural and operating environment compared to Tata Steel in India. Integrating it would not be a small task. To aggravate this problem Corus itself was a merger of a Dutch Company and an British Company and it had a different culture and profitability. Tata Steel decided to continue with Corus senior management. Accordingly Ratan Tata would be the chairman of Tata Steel and Corus. Jim Leng on the other hand would be the deputy chairman of Tata Steel and Corus. Three board members including the CEO of each company was to serve on the board of the other company.
A strategic and integration committee was set up which comprised of CEO Ratan Tata and senior management of both companies. The aim of this committee was to develop and execute an integration plan and strategize the future growth of the company. 3.3 Reasons for Sale - Corus 1. In 2006, the total debt of Corus was 1.6Bn pounds. 2. The need for a supply of raw materials at a lower cost. 3. For revenue of $18.06Bn the profit was $626Mn compared to Tata‟s revenue of $4.84Bn and the profit of $824Mn.
4. Facilities at Corus comparatively are old with and high cost of production. 5. Employees at Corus cost is 15% compared to Tata Steel 9%. 3.4 Reasons for Buy –Tata Steel 1. To manufacture finished products in European mature markets. 2. Tata Steel was manufacturing low-value flat and long steel products compared to Corus who was producing high-value stripped products. 3. To diversify the product mix and reduce risks and also higher-end products will add to the bottom line. 4. Corus was holding a number of patents and a efficient Research and Development Department. 5. The cost of Corus was lower compared to setting up of a green field plant. 6. Tata Steel has already expanded its capacities in the domestic market. 7. The acquisition will move Tata Steel from 56th place to 5th rank in global steel production. 3.5 The synergy between the two companies The synergy between the two companies arose as one company is a low-cost steel producer and the other company is a high value-added steel producer which has a strong Research & Development Department and a wide international reach. The value creation has come from 3 areas. One is
about sharing manufacturing practices, purchasing and shared services. The second is sharing the common complementary strengths such as Corus has strong Research and Development and has product development capabilities in value added products such as construction, auto and packaging markets. Thos would complement Tata Steel in the growing Asian market. The third is for future options to bring low cost slabs when Tata Steel completes its Greenfield project. The agreed price of 608p per share translates into a $700 per tonne enterprise value. With Corus down stream exposure, a Greenfield project of same size would give a $1200 to $1300 a tonne enterprise value. The acquisition of Corus will overnight add 19Mn tonnes to Tata Steel capacity. In a country like India setting up a Greenfield projects takes about three to five years.
Based on the forecast by the International Iron and Steel Institute which said that 4.9% increase by year 2010 and 4.2% during year 2010 to 2015 Tata steel felt that global steel was on a long term upturn. We expect the synergies to have higher valuation than the earlier $350 million per year indicated earlier The synergies were; 1. Tata Steel is the lowest-cost steel producer and Corus was attempting to keep the cost of production under control. 2. Tata Steel had a strong retail network in South East Asia and domestic marked and Corus would get access in to the Asian market. 3. Both had strong work culture fit and similar work practices which emphasized on continuous improvement. 3.6 Share Market and Analysts Reaction to the Deal The acquisition deal between Tata Steel and Corus was the biggest deal done by any Indian company. It raised a lot of domestic interest to it. Financial Analyst are doubtful about the high cost of debt. The perception by the market was that Tata Steel paid too much for the Corus deal. There was a sharp decrease of over a billion dollar for the stock ever since the first announcement to buy Corus was made in October 2006. The share price of Tata Steel tanked 10.5% on the same day of the announcement and another 1.6% on the next day. Credit Lyonnaise Securities down graded Tata Steel to a „sell‟ rating expecting the equity dilution of 1:5 rights issue and thereby a 20% earnings per share dilution. JP Morgan on the other hand believed that the share would suffer due to the high equity dilution and they rated „overweight‟. Macquaire Research maintained its rating at „Buy‟ on Tata Steel share. Investors were worried of the financial risks involved of such costly deal. Going by the stock market reaction, the acquisition was a big blunder. Tata Steel who are clearly incapable of funding the deal alone had decided to dund it through a combination of preference shares, domestic rights and overseas equity. There was a 50% equity dilution and it raised over Rs. 150Bn. It had a 1:5 rights issue at Rs. 300 a share and it would raise Rs, 37Bn. The convertible preference share raised another Rs. 43.5Bn and 21Bn raised through issue of foreign equity instrument.
Rs
The market analyst had the view that the cost of debt utilized to finance the deal was high. It was to be met from the cash flows of Corus. Corus already was under pressure due to its prevailing debts. Media reaction on the other hand was the opposite. All reports praised the acquisition and one financial newspaper went to the extent of calling it the revenge by natives against its old colonial masters and had a picture of London covered with the Indian national colours. The financial newspapers warned the market pundits not to bet against Tata Steel mentioning previous instances where it proved its skeptics wrong. The Government reaction was no different and the Finance Minister offered help in all possible manner to the Tata Group. The questions that need to be answered is whether the acquisition was too costly for Tata Steel and if the price is the only criteria for evaluating an acquisition? For the Tata Steel shareholders it was a wait and watch scenario.
4.0 Pre Acquisition Performance Analysis
Analysis given below is base on Corus and Tata Steel performances for the financial years 2004, 2005 & 2006 (Refer Annexure 2 for Corus Steel and Tata Steel P&L & Balance Sheet). 4.1 Corus Steel Financial Performance Analysis
Gross Profit (GP) margin of the company declined from 7.1% in 2004 to 4.7% in 2006. Net Profit Margin (NP) declined from 4.7% to 2.4 during the same period. Due to the decline in GP and NP, ROE dropped by 0.14 to 0.05. The main reasons for the decline was due to the increase in production cost which could not compete with the Asian and Chinese low labour production. EPS dropped from 0.13 to 0.06 as a consequence of the NP and GP decline. Liquidity Ratio (LR) is as per industry norms.
4.2 Tata Steel Financial Performance Analysis
GP margin in 2004 was 37.8% and it increased 46.6% by 2006. NP margin increased from 11.25% in 2004 to 18.5% in 2006. Earnings per Share (EPS) drastically increased from 0.28% to 0.63% for the same period. Liquidity ratio for the company is below the industrial norms which is 0.65% in 2004 and 0.81% in 2006. Compared to 2004, in year 2005 ROE increased from 26% to 35% however in 2006 it declined to 28% due to the drop in global steel prices. 4.3 Comparison of Share Prices before Acquisition Refer below the share price movements from 2004 to 2006 for Corus Steel & TATA Steel.
TATA Share Movements 2004 to 2006 700
500 400 Close 300 200 100
Nov-06
Sep-06
Jul-06
May-06
Mar-06
Jan-06
Nov-05
Sep-05
Jul-05
May-05
Mar-05
Jan-05
Nov-04
Sep-04
Jul-04
May-04
Mar-04
0
Jan-04
Share Price (INR)
600
Period 2004 to 2006
Bidding Announcement of Corus Corus Share Movement 2004 to 2006
Plans for Sale Announced
Tata Steel shares traded in for the period of 2004 started with Rs.445 and during the announcement of the Corus acquisition was at Rs. 536 per share. Tata Steel share prices dropped to Rs. 464 at the time of acquisition. One month after the acquisition of Corus the share price went upto Rs. 555 per share. At end of 2007 and beginning of year 2008 the share price of Tata Rs. 830 to Rs. 940 which a double from the price of share at the time of acquisition. Post acquisition shares have shown steady growth in prices and upward movement. Corus shares on the other hand was averaging between 200p to 300p during the period of 2005 to beginning of year 2006. From the beginning of year 2006 there was a steady upward trend of the share prices and went upto 460p per share. At the time of announcement of sale the Corus shared fell to 360p per share. The share price picked after the bidding process and the winning bid for the share by Tata Steel was 608p per share.
4.4 Calculation & Evaluation of Exchange Ratio
Exchange Ration(ER) is considered as the main point of discussion in an acquisition. It is the deciding factor for the number of shares of the bidding company is offered to the shareholders of the target company in place of one share of the target company. The concepts used for calculate is based on Earnings per Share, Book Value per Share (BVS) and Market Value per Share (MVP).
Tata Steel and Corus had considered EPS to calculate ER. As both companies are in the same industry other factors such as MVP and BVP is not considered. This is due to MVP taking into account the present market value and the growth rate of the company. Market manipulations such as insider information can manipulate the market. And BVP computed using net worth per share. This again has the prone to manipulation as different kind accounting practices. Earnings of Corus Number of shares Corus EPS of Corus
GBP 441Mil 3450 Mil GBP 0.06
Earnings of TATA Number of shares TATA EPS of TATA
GBP 453Mil 55340Mil GBP 0.08
Assuming because of the merger the synergy effect is 10% Expected returns after the merger =(Corus earnings + TATA earnings)*Synergy effect = (441Mil + 453Mil)* 1.1 =GBP 983.4Mil EPS of Corus before the acquisition = EPS of TATA after the acquisition 0.06
Expected rate by Corus
=.
983.4Mil . (441mio + 453Mio*ER)
= 3.52
EPS of TATA before the acquisition = EPS of Corus after the acquisition
0.08 =.
983.4Mil . (453mio + 441Mio*ER)
Expected rate by TATA
= 2.68
Based on this TATA will try to negotiate to buy Corus shares less than the expected rate 2.68
5.0 Post Merger Synopsis Tata Steel was very positive three months post signing the deal. The expected synergy valuation was higher than the $350Mn per year as earlier indicated. The Return on Capital Employed (ROCE) and Return on Equity (ROE) will decrease as there is a large increase in asset base in next two years. Operating expenses should be rising marginally. Compared to last year depreciation and interest expense should reduce which would result in a 26.6 % net profit margin which is an increase of 10%. There is an increase in of 8.4% in sales and a 15% increase in fixed assets and resulted in reduction of fixed asset turnover compared to last year. This continues to year 2008 as new assets need more time to generate revenue. Tata Steel should be benefiting from the new machinery from year 2009. Debt equity ratio at Tata Steel remains at 0.69 and interest cover increased for year 2008 to 28.1 and for year 2009 29.0 compared to 27.19 in year 2007. Current ratio is pegged at 1.5 times prior to year ratio. This is due to increase in the inventory holdings and investments. Cash flow ratio should be improving in the next 2 years. Earning per Share (EPS) between year 2007 to year 2008 has increased by 10% compared to previous year.
Therefore
generating good EPS for shareholders due to profitability. Annexure 3 Now that Tata Steel has achieved its strategic objective of becoming one of the major players in the global steel industry and steel demand growth is likely to be robust over the next decade, has the company paid too much for Corus? Even those analysts and industry observers who agree on the positive outlook for steel demand growth and the need to achieve scale believe so
The enterprise valuation for Corus is at around $13.5Bn and it seemed to be too steep as compared to the recent financial performance shown by Corus. The question here is whether the manufacturing assets of Corus so good to command this price? It is a fact in the steel industry that the Corus plants at United Kingdom are the least efficient ones in Europe and they would struggle to break even if there is even a modest decline of steel prices from the current levels Tata Steel formed a seven member integration committee to spearhead the union with Corus. The committee was headed by Ratan Tata the chairman of the Tata group, there were three members from Tata Steel and the other three members from Corus. Tata Steel was represented by its managing director Muthuraman, the deputy managing director Mukherjee and Chief Financial Officer Chatterjee. The three members to represent Corus were the CEO Phillipe Varin, the executive director for finance David Lloyd and the Strip product division director Rauke Henstra. The price paid by Tata Steel for the acquisition was paid in cash. A sum of US $1 2Bn. The price which was paid by Tata Steel represent a very high premium. It was 49% high premium on 4th October 2006 over the closing mid market equity price of Corus. The average closing market of the share price for the twelve month period was a premium of over 68%. Tata Steel financed only US $ 4Bn of the Corus acquisition from its internal company resources. Which indicates that more than two thirds of the deal was finance through loans from different major banks. Tata Steel is four times smaller in size and capacity and in 2006 the operating profit was US $ 840 on sales done of 5.3 Mn tonnes of steel and was very closed to the figure generated by Corus which was Us $860Mn profit for a sale of 18.6mn tonnes of steel.
The debt of Tata Steel due to the acquisition increased to US $8Bn and the at 8% per annum the annual interest charges would be US $640Mn. There is an existing interest debt of Corus which amount s to US $400Mn per annum and the combined interest obligation would amount to US $725Mn after the acquisition.
The present cash flow of Corus can barely cover this even if the synergy gains take place. In a scenario if the international steel prices decline even a small amount, Tata Steel would have to
use its own cash flows or come up with other source such as an equity dilution to service the debt.
Tata Steel would require additional fund to upgrade some plants owned by Corus to maximize the efficiency of them. This would need to be done with out jeopardizing the Greenfield plans which may cost Tata Steel a huge amount of US $20Bn over the same period of 10 years.
The management at Tata steel has acknowledged that the task ahead is not an easy one and for the next five years Corus would need to hold to its own margins without the help of Tata Steel‟s supply of cheaper inputs. If the group can survive this period without any damage, the future would be much easier for the Tata Steel management.
For investors of Tata Steel they may consider that Corus is a burden to Tata Steel until such time when there is perceptible improvement of its margins. This keeps the stock price of Tata Steel subdued and any decline in the global steel market prices would have an negative impact of the Tata share price.
For the long term investors, they need to realize that at present the steel manufacturing assets are costly. Corus was very much a prized target in the steel sector and it made it even more costly. The debate was whether Tata Steel overpaid to acquire Corus? The answer seem certain based on numbers as at the end of the bidding process with CSN Tata Steel ended up paying 68% above the Corus average share price. Tata Steel has taken the plunge. The post merger financials are given in Annexure
Tata Steel & Corus : The Present Capacity (Million tonnes per annum)
Corus Group (UK and Netherlands)
19
Tata Steel - Jamshedpur
5
Nat Steel - Singapore
2
Millennium Steel - Thailand
1.7
Aggregate present capacity
27.7
Tata Steel after its acquisition of Corus can target to achieve its goal to become one of the top three global steel manufacturers by year 2015. Tata Steel if all the plannced Greenfield capacities are on stream can expect an aggregate capacity of 56Mn tonns of steel per annum.
Tata Steel & Corus - Projected Capacity(Million tonnes per annum)
Corus Group (UK and Netherlands)
19
Tata Steel - Jamshedpur
10
Tata Steel - Jharkhand
12
Tata Steel - Orissa
6
Tata Steel - Chhattisgarh
5
Nat Steel - Singapore
2
Millennium Steel - Thailand
1.7
Aggregate projected capacity
55.7
5.1 Effect of the Recent Financial Crisis on Steel Industry From end of last year we have witnessed a global financial crisis. The extent of the crisis or the exact magnitude is yet to be determined. The steel industry was severally affected by the crisis as real estate markets dropped. The market value if the steel industry companies have dropped drastically. In Dubai, U.A.E the price of a billet was US $125 a ton in June 2008 and it dropped to US $ 35 a ton. It was one of the steepest drops. The widespread drop in demand for steel required the steel manufacturing companies to reduce production. This is an
opportunity for the global steel companies to improve their operational effectiveness and efficiency in order to face the demand and growth in the coming years. The Indian government to minimise the effect of global financial crisis on steel sector has withdrawn all export taxes and duties enforced on steel. They have re-introduced the duty entitlement pass book benefits and a 5% import duty on steel and iron items.
The demand for steel declined 26% in United Kingdom and Europe in third quarter of 2008 and more in 4th quarter. This was due to the sharp down turn in private construction projects and low demand in automobile industry.
Aggressive steps are taken by Tata Steel to meet the challenges. The initiatives include process improvement, production rationalization and cost reduction. 6.0 Conclusion The giant leap which Tata Steel took in April 2007 vaulted it from the 56th place to 5th place in the global steel production. Tata Corus‟s new capacity trailing behind Nippon Steel, Posco and J.F.E. Steel by 5 to 7 tonnes to reach number two position behind Arcelor Mittal. Other manufacturers such as Bao Steel, Nucor, US Steel and Thyseen Krupp are aiming for the 5th place in the ranking.
The rationale behind the acquisition by the chairman was that it would take years to build a 19Mn tonne company from the beginning and for such company to have an established market in Europe. According to him the acquisition was a long term strategic move.
The mega deal however was expensive. The price was US $12.1Bn and a debt compound of Corus was US $ 1.5Bn. The share price of Corus was 34% higher than the initial offer made by Tata Steel. Due to the acquisition Tata Steel shares have shed 10% and considered as an under performer compared to its peers.
Investors who have short term plans like one to two years may find the share of Tata Steel unattractive. This is an advantage as there are no short term triggers to drive up the share. Investors will have to weigh their options in the long run. Any meaningful gains from the
acquisition will come by only in year 2009-2010 when Tata can begin exporting low cost slabs to Corus.
If Tata can pull it off even after a decade the acquisition of Corus would be the deal which transformed Tata Steel. The Tata Steel and Corus marriage so far seemed to be sailing smoothly. It remains to be seen if Tata Steel overpaid for the deal with Corus.
“ I believe this will be the first step in showing that Indian industry can step outside the shores of India in an international market place and acquit itself as a global player” Ratan Tata
Annexure 1 Time-Line 1907: Tata Steel was established by Indian Parsi businessman Jamsetji Tata. 1924: Commencement of manufacturing of Steel by Duplex Process. 1935: Commencement of the production of high-tensile steel. 1940: Starting the new 100 tonne Blast Furnace operation. 1961: Obtaining an industrial license Alloy Steel project. 1963: Approval from government for principle expansion by One-Million tonnes during the fourth Plan. 1974: Amalgamation for coal mine operation with West Bokaro Limited. 1979: 5 year rural development programme to uplift the villages near Jamshedpur. 1981: Ratan Tata appointed as chairman for Tata industries. 1985: J.R.D. Tata becomes the chairman of Emeritus after guiding Tata Steel for 46 years. Russi Mody is appointed as chairman Tata Steel. 1991: Ratan Tata takes over as chairman of Tata Group. 1993: Commissioning of the new 1Mn tonne capacity "G" Blast Furnace. 1997: Received Prime Minister‟s trophy for the Best Integrated Steel Plant for the year 199596. 2000: Mr. Tata was honored by the Government of India with the Padma Bhushan on 26th January 2000, on the occasion of the 50th Republic Day of India. The company was recognised as the world's lowest-cost producer of steel. 2004: Acquisition of NatSteel Signapore 2005: Acquisition of Millennium Steel Company, Thailand. Entering into a 50:50 partnership with Blue Scope Steel Australia and forming of Tata Bluescope Steel Ltd. Invest in Carborough coal project in Queensland Australia in 2005. 2007: Acquisition of Corus and be the 5th largest producer of steel in the world.
Annexure 2 1. 20th September 2006 – Corus decided to acquire a tactical partnership with a steel company which was a low cost steel producer. 2. 5th October 2006 – Tata Steel the Indian steel manufacturing giant wanted to expand its business further. 3. 6th October 2006 – Tata Steel’s initial offer was considered as too low by Corus and analyst. 4. 17th October 2006 - Tata Steel keeps its offer to 455p per share. 5. 20th October 2006 - Corus accepts the 4.3Bn take over bid and the terms made by Tata Steel. 6. 27th October 2006 – CSN, a Brazilian steel manufacturer hires an investment bank to offer advice on a possible counter offer to Tata’s bid for Corus. 7. 3rd November 2006 – Severstal, the Russian steel company officially makes an announcement that it would not be bidding for Corus. 8. 18th November 2006 – CSN approach Corus board with a counter offer of 475p per share. 9. 27th November 2006 – Corus board decided to give additional time to CSN to satisfy the preconditions of the offer. 10. 18th December 2006 – Tata Steel increase its offer to 500p per share and CSN immediately increase it to 515p per share. 11. 31st January 2007 - Britian’s Take Over panel decides to agree on the Tata Steel 608p per share as against 603p CSN’s offer. 12. 2nd April 2007 - Tata Steel’s acquisition of Corus becomes successful.
Annexure 3 Profit & Loss & Balance Sheets Corus Steel Ltd 000s Pounds Date Type of Statement Turnover Gross Profit Profit Before Int & Tax(PBIT) Profit After Tax Dividend Payout Profit after Tax & Dividend
31/12/2004 Audited 9,332 662 567 441 0 441
31/12/2005 Audited 10,140 680 580 451 0 451
31/03/2006 Draft 9,733 457 313 229 0 229
Date Type of Statement Current Assets Fixed & Other Assets Total Assets Current Liabilities Term & Other Liabilities Equity Total Liabilities & Equity
31/12/2004 Audited 3,714 3,577 7,291 2,397 1,836 3,058 7,291
31/12/2005 Audited 4,446 3,496 7,942 2,467 2,097 3,378 7,942
31/12/2006 Draft 4,412 3,668 8,080 2,348 1,798 3,934 8,080
Profit & Loss & Balance Sheets TATA Steel Ltd Rupees in Crores Date Type of Statement Turnover Gross Profit Profit Before Int & Tax(PBIT) Profit After Tax Dividend Payout Profit after Tax & Dividend
31/12/2004 Audited 10,702 4,040 2,984 1,572 368 1,204
31/12/2005 Audited 14,493 7,014 5,709 3,258 719 2,539
31/03/2006 Draft 15,135 7,055 5,701 3,521 719 2,802
Date Type of Statement Current Assets Fixed & Other Assets Total Assets Current Liabilities Term & Other Liabilities Equity Total Liabilities & Equity
31/12/2004 Audited 2,808 10,206 13,014 4,278 4,221 4,515 13,014
31/12/2005 Audited 4,083 11,758 15,841 5,214 3,568 7,059 15,841
31/12/2006 Draft 4237 14,187 18,424 5,197 3,472 9,755 18,424
Ratio Analysis Corus (in Ponds) 2004 2005 2006 GP Margin (Gross Profit/ Net Revenue) NP Margin (Net Profit / Net Revenue) ROE (Net Profit/ Shareholder Equity) EPS (Net Income – Pref. Dividend)/ Number of Common Shares) PE (Price per Share/ Earning per Share) Current Ratio (Total Current Assets/ Total Current Liabilities) Debt/ Equity (Total Liability/ Total Equity) Total Asset TO (Net Sales / Total Assets) No of Shares (Millions) Closing Share Price
7.1% 4.7%
6.7%
4.7%
4.4%
2.4%
TATA (in Crores) 2004 2005 2006 37.8% 48.4% 46.6%
11.25%
17.5%
18.5%
0.14
0.13
0.058
0.26
0.35
0.28
0.13
0.13
0.06
0.28
0.58
0.63
20.3
23.8
89.3
1375
653.4
765.1
1.55
1.80
1.88
0.65
0.78
0.81
1.38
1.35
1.05
1.88
1.24
0.88
1.27 3,392 2.64
1.27 3,394 3.10
1.20 3,450 5.36
0.82 5,534 385
0.91 5,534 379
0.82 5,534 482
Annexure 4
Ratio Financial Year ROE %
2006 2007 2008 44.6 37.4 32.8
ROCE %
44.2
51.4
46.3
0.7 1.0 0.3 34.3 0.8
Current Ratio Fixed Asset Turnover Debt/Equity EBITDA/Interest Cash Flow Ratio
0.5 1.1 0.7 27.2 -0.6
1.3 1.0 0.7 28.1 0.0
Valuation Financial Year EPS (US $) Y O Y Growth (%) CEPS (US $) PE Price EV/Sales EV/EBITDA
2006 2007 2008 1.6 1.8 2.6 4.4 15.3 0.2 1.7 -1.8 2.0 8.5 6.2 7.0 3.0 1.9 2.7 2.1 2.0 3.3 5.5 5.2 8.4
7.0 Bibliography
Details Anon. 2006. Reports & Accounts 2006, [Online], Available from< http://www.corusgroup.com/file_source/StaticFiles/Functions/Financial/2006_Annual_ Report.pdf> [Accessed: 25th October 2009]. Anon. 2006. Tatas more bullish on Corus synergy [Online]. Available from< http://www.thehindubusinessline.com/2007/04/18/stories/2007041805000200.htm>. [Accessed 26th October 2009].
Source Web
Web
Anon. 2007. Analyst Meet, [Online] Available from < Web http://www.tatasteel.com/investorrelations/an200607/AnalystMeetFY-0718May07.pdf,> [Accessed: 21st October 2009].. Anon. 2007. Markets react violently to big deal acquisitions [Online]. Available from < Web http://www.moneycontrol.com/india/news/market-edge/markets-reactviolently-to-bigdeal-aquisitions/266722> [Accessed 26th August 2009]. Anon. 2007. Tata buys 21.1% Corus stake for $2.4 bn [Online], Available from< http://www.rediff.com/money/2007/feb/01corus7.htm>. [Accessed: 21st October 2007]
Web
Anon. 2007. Tata Steel on S&P Credit Watch after unleashing Merger and Acquisition mania over bidding on UK-based Corus [Online]. Available from< http://www.indiadaily.com/editorial/15355.asp> [Accessed: 15th October 2009]. Anon. 2007. Tata Steel ups stake in Corus to 21.9 % [Online], Available from< http://www.rediff.com/money/2007/feb/15corus1.htm>. [Accessed: 15th October 2009]. Anon. 2007. Tata-Corus deal becomes effective [Online], Available from< http://www.rediff.com/money/2007/apr/02corus.htm>. [Accessed: 21st October 2007]
Web
Anon. 2007. Transcript of Press conference for Corus Acquisition [Online]. Available from< http://www.tatasteel.com/newsroom/corus-transcripts.asp> [Accessed: 15th October 2009]
Web
Bnet Editorial . 2009. “Calculating Return on Assets” [Online]. Available from < http://www.bnet.com/2410-13240_23-66469.html > [Accessed June 22th 2009].
Web
Web
Journal
Bnet Editorial . 2009. Calculating Return on Assets [Online]. Available from < Journal http://www.bnet.com/2410-13240_23-66469.html > [Accessed 26th August 2009]. Boyd, T; Cortese-Danile, T.M. 2001. “A Better Understanding of Earnings Per Share”. Journal Commercial Lending Review no. 16 (Spring), 58. Ehrhardt.M.C; Brigham.E.F. 2003. Corporate Finance- A Focused Approach. India: Cengage Learning India Pvt Ltd. Gary, K. 2006. Analysis of Financial Data. UK: Chichester, Hoboken, NJ John Wiley & Sons, Ltd Gilreath, D. 2004. “Nifty calculation leads to understanding stock value”. Indianapolis Business Journal no. 25(August), 36.
Book Book Journal
McClure.B. [n.d]. Understanding The Subtleties Of ROA Vs ROE [Online]. Available from< http://investopedia.com/articles/basics/05/052005.asp > [Accessed: 28th October 2009] Pierre.V; Pascal.Q. 2005. Corporate Finance: Therory & Practice. UK: John Wiley & Sons, Ltd. Rodrigues.C. 2007. A century of achievements [Online].. Available from [Accessed; 20th October 2009] Singh,P. 2007. Tata Corus-Making Corus work [Online]. Available from < http://www.businessworld.in/content/view/297/337> [Accessed 26th August 2009] Vernimmen, P; Quiry, P. 2005. Corporate Finance:Theory and Practice. UK: Chichester, Hoboken, NJ John Wiley & Sons, Ltd
Web
Book Web
Journal Book
