A Short-Circuit Of A Giant Acquisition

(A TATA-CORUS STUDY) PRESENTED BY :

TOM THOMASMATHEW

IVAN GODWIN A THOMAS

BALA

TATA STEEL - EUROPE

INTRODUCTIONAbout CORUS Group•  It is Europe's second largest steel

producer with annual revenues of over $18 billion and a production of 19 million tons per annum.• Steelmaking operations are primarily in the 2 sites of UK and 1 in Netherlands• Provides innovative solutions to the construction, automotive, packaging, mechanical engineering and other markets worldwide• World’s 9th largest steel producer in 2005.

ABOUT THE ACQUISITION

• Date: 31st January 2007• Amount: $12 billion• Bidder: Tata Steel• Target: Corus

Acquisition ProcessParticula

rsCorus

Currency: (Rs in Million)Tata Steel LTD

Currency: (Rs in Million)

Year 2006 2005 2004 2006 2005 2004

Assets 582750.00 533925.00 467775.00

205450.70

177033.10

147988.70

Debts 98100.00 105525.00 96000.00 45932.70 42073.10 39982.90

Liabilities 231300.00

178425.00 155475.00

30492.10 33146.80 32665.90

Revenue 760500.00

699900.00 596475.00

202444.30

159986.10

101294.40

Net Income

33900.00 33450.00 -(22875.00

)

37346.20 36032.60 17887.80

WHY THIS ACQUISITION BENEFICIAL FOR TATA STEELConsistent with Tata Steel's stated objective of growth and globalization• Creates world’s fifth largest steel company• Tata Steel’s entry into European market• Lowest cost position in two continents – Western Europe and Asia• Market presence in automotive, construction and packaging• Growth through new, higher end-markets and a more sophisticated customer base

…CONT• Powerful combination of low cost upstream production in India with the high end downstream processing facilities of Corus will improve the competitiveness of the European operations of Corus significantly• Combination will also allow the cross-fertilization of research and development capabilities in the automotive, packaging and construction sectors and there will be a transfer, from Europe to India, of technology, best practices and expertise of senior Corus management• Retain access to low cost raw materials and slab for the enlarged group

  

….CONT• Benefit from high growth in emerging markets and price stability in developed markets• Belief of high degree of cultural compatibility• Manufacturing will be organized so as to produce slabs/ primary steel in low-cost facilities and produce high-end products in proximity to client base - in both Europe and India• Utilize combined enlarged distribution network

MAKET REACTION Corus Stock Price moved upwards as the bids moved upward

 Tata steel stock moved downwards showing some volatility.

 From the announcement date till the deal completion, Corus stock gained 67% and Tata Steel stock lost around 12%.

SYNERGIES SUMMARY• This report provides information about the

value of Corus and synergies Tata Steel might generate after the acquisition. First, we see that market believed that probability of deal going through was 100%. Tata Steel valued Corus at higher EBITDA multiple compared to Arcelor Mittal deal. While valuing the deal we find that Corus EBITDA margin was lower 7% compared to Tata steel’s 30%.

• Since Corus revenues are huge at $16.7 billion, we find that there is a good opportunity for Tata Steel to generate synergies by increasing EBITDA margin which makes Tata Steel justify its higher EBITDA multiple compared to other deals. But after the deal was announced Tata Steel stock price was lower indicating that the market expected lower synergies.

• Our standalone valuation of Corus by projecting its future financial statements is close to the market value. Since Corus is operated as a separate company after the acquisition, we assume all synergies occur in Corus operations and value them calculating the new WACC for Corus using debt-equity ratio used for acquisition.

• We then find the allocation of synergies between the share holders of two companies. Then we find the performance of the deal from the three quarters of post deal financial statements which indicate that Tata Steel is able to generate some synergies in this period.

THE RACE IS ON

• TATA Steel Europe continues to make improvements in profits and performance, but the 4,000 employees in Scunthorpe have been told the “race is on” if the local works is to break even by March 31.• This week the Indian owners reported

the European arm’s operational profits for the first nine months of 2013-14 had risen to $390 million – a near 13-fold increase on the figure for the same period a year earlier.

• The company also announced turnover rose by 2.5 per cent to $9.89 billion and the production of liquid steel between October and December last year increased by 19 per cent from a year ago to 3.91 million tonnes.• It was the largest volume of liquid

steel on a like-for-like basis for more than five years.

INTEGRATION ATTEMPT

• Well outside of structural inefficiencies (resulting from logistical factors) at the UK operations, the root problem for the European operations lies in its inability to pass on high-raw material costs to the end-consumer given the weak demand scenario.• In an attempt to insulate the

European arm from volatile input costs, Tata Steel has in the past five years invested in iron ore and coking coal mines in Canada, Africa and Australia. These moves are expected to begin boosting margins of the European operations over the next two years.

• The European shake-up coupled with contractual buyers walking away from a deal had also pushed Tata Steel to act quickly and sell its unprofitable three-million-tonne-a-year Teesside Casting operations for a bargain price of about $700 million.• A range of other assets has also been

sold off including Corus' aluminium and chemical businesses. Incidentally, one of Tata Steel's backward integration moves to secure iron ore also resulted in a windfall gain.

• Australian miner Riversdale yielded an unexpected gain when the company was taken over by Rio Tinto earlier this year, Tata Steel doubled its investment in this company when it cashed out of the parent company.• Tata Steel's current cash reserves of

around Rs 20,000 crore (compared with Rs 8,400 crore in 2009) are now crucial to funding its domestic expansion plans. Domestic capacity additions are a key step to better insulating Tata Steel from volatile global raw material costs.