ABV-INDIAN INSTITUTE OF INFORMATION TECHNOLOGY & MANAGEMENT, GWALIOR

Mergers & Acqsition Acquisition of Corus by TATA Steel

Submitted To: Prof. R. Sahu

Submitted By: Jitesh Maharwal (2004IPG44)

Nikhil Garg (2004IPG29) Sunny Tyagi (2004IPG71)

Harendra Singh (2004IPG83)

12/9/2008

Merger and Acquisition

Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate

finance and management dealing with the buying, selling and combining of different companies that

can aid, finance, or help a growing company in a given industry grow rapidly without having to create

another business entity.

M&A Activities in India:

In 2007, there were a total of 676 M&A deals and 405 private equity deals, in 2007, the total value of

M&A and PE deals was USD 70 billion, Total M&A deal value was close to USD 51 billion, Private

equity deals value increased to USD 19 billion

Growth Drivers:

• Globalisation and increased competition

• Concentration of companies to achieve economies of scale

• Cash Reserves with corporate

Trends:

• Cross-border deals are growing faster than domestic deals

• Private Equity (PE) houses have funded projects as well as made a few acquisitions in India

Major M&A Deals Undertaken Abroad by India Inc.

Tata steel buys Corus Plc : 12.1$ billion

Hindalco acquired novelis: 6$ billion

Tata buy jaguar and land rover : 2.3$ billion

Essar steel buys Algoma Steel: 1.58$ billion

Vodafone buys hutch : 11$ billion

POSCO to invest in building steel manufacturing plants and facilities in India by 2016

Goldman Sachs Plans investment in private equity, real estate, and private wealth management

In year 2008..

• M&A deals in India in 2008 totaled worth USD 19.8 bn

• Less compared to last year which stood at 33.1 bn $.

• Decline of M&A activity was in line with the global activity.

• Cross border M&A totaled 8.2 bn $ compared to 18.7 bn $.

Tata Motors: Acquisition of Jaguar &

Land Rover

Ford Motors Company

Location: Dearborn, Michigan; Founded: 1903 by Henry Ford; Competitors: General Motors, Toyota;

Brand names: Lincoln, Mercury, Volvo, Mazda, Jaguar and Land Rover, CEO: Alan Mulally.

1913 - Assembly Line: “low priced, mass-produced automobile with standard interchangeable

parts.” Hiring of African Americans, Virtual manufacturing, focus on safety, Advantage through fuel

efficiency

Top Seven Auto and Truck Manufactures Organized by Market Capitalization

Jaguar: The ups and downs:

1922 - Founded in Blackpool as Swallow Sidecar company

1960 - Jaguar name first appeared in 1935

1975 - Nationalized in due to financial difficulties

1984 - Floated off as a separate co in the stock market

1990 - Taken over by Ford

A statement of ultra luxury, Holds Royal warrants, Rarely advertised, Ford‟s formula one entry since

1990s

1948: Land Rover is designed by the Rover Car co

1976: One millionth Land Rover leaves the production line

1994: Rover Group is taken over by BMW

2000: Sold to Ford for £1.8 billion

The case of Land Rover:

Known for superior off-road performance, Used by military for projects and expeditions, Safe but less

reliable, Makeover in recent times

Key issues:

• Ford acquired Jaguar for $2.5 billion in 1989.

• Ford acquired Land Rover for $2.75 billion in 2000.

• But the US auto major put the two marquees on the market in 2007 after posting losses of $12.6

billion in 2006 - the heaviest in its 103-year history.

The Deal Process: - 12/06/2007- Announcement from Ford that it plans to sell Land Rover and

Jaguar. August 2007 - Major bidders are identified

Likely buyers: Tata Motors, M&M, Ceribrus capital Management, TPG Capital, Apollo Management

• India‟s Tata Motors and M&M arrive as top bidders ($ 2.05b & $ 1.9b)

• 03/01/2008 – Ford announces Tatas as the preferred bidders

• 26/03/2008 - Ford agreed to sell their Jaguar Land Rover operations to Tata Motors.

• 02/06/2008 – The acquisition is complete

TATA MOTORS – A SNAPSHOT

TATA GROUP is 150 year old, Previously Tata Engineering and Locomotive Company, Telco.

Tata Motors‟s break-even point for capacity utilization is one of the best in the industry worldwide

Listed on the New York Stock Exchange in 2004.

Making Waves Internationally

• NANO will mark the advent of India as a global centre for small-car production and represent a

victory for those who advocate making cheap goods for potential customers at the 'bottom of

the pyramid' in emerging markets.

• International praise came from Standard & Poor’s, which in December 2006 expressed the

view that the “policy to support its companies and the improved financial profile of its entities

also enhances the overall financial flexibility of Tata Motors.”

Why is Ford selling?

• Reports said losses at Jaguar stood at USD 715 million in 2006. Jaguar has been a dog i.e. it has

not been able to provide any profit for ford because of the high manufacturing costs provided in

the United Kingdom.

• The strong boy Land Rover's profit, on the other hand, was driven by the record sale of 2.26

lakh vehicles, an 18% YoY growth in 2007..

• Bringing down production costs and turning around the company successfully will be the

challenge,” analysts said. It‟s a test that Ford failed.

• Ford is combining both the brands since the products and manufacturing of vehicles for Land

Rover and Jaguar is so intertwined.

What Ratan Tata says?

• We aim to support their growth, while holding true to our principle of allowing the

management and employees to bring their experience and expertise to bear on the growth of the

business.„

• 'We have enormous respect for the two brands and will endeavor to preserve and build on their

• Heritage and competitiveness, keeping their identities intact,' he said in a statement.

Why acquire JLR?

• Long term strategic commitment to automotive sector.

• Opportunity to participate in two fast growing auto segments.

• Increased business diversity across markets and products.

• Land rover provides a natural fit for TML‟s suv segment.

• Jaguar offers a range of “performance/luxury” vehicles to broaden the brand portfolio.

• Benefits from component sourcing, design services and low cost engineering

Tata and the dream

NEED FOR GROWTH

• In the past few years, the Tata group has led the growing appetite among Indian companies to

acquire businesses overseas in Europe, the United States, Australia and Africa - some even

several times larger - in a bid to consolidate operations and emerge as the new age

multinationals.

• Tata Motors is India's largest automobile company, with revenues of $7.2 billion in 2006-07.

With over 4 million Tata vehicles plying in India, it is the leader in commercial vehicles and

the second largest in passenger vehicles.

COMPETITIVE ADVANTAGE

• Tata Motors is vulnerable to greater competition at home. Foreign vehicle makers including

Daimler, Nissan Motor, Volvo and MAN AG have struck local alliances for a bigger presence.

• Tata Motors, which has a joint venture with Fiat for cars, engines and transmissions in India, is

also facing heat from top car maker Maruti Suzuki India Ltd, Hyundai Motor, Renault and

Volkswagen.

Analysts pick

• Analysts indicate that Tata Motors can comfortably finance the acquisition of Jaguar and Land

Rover. The Indian automaker is sitting on a cash pile of over Rs 6,000 crore and generated free

cash of over Rs 1,000 crore during FY07. It can easily use these reserves to raise more funds

without endangering its finances. At the end of last financial year, Tata Motors‟ debt-to-equity

ratio was a low 0.56, giving it ample head room to raise more funds.

• Over the next 3-4 years, Tata Motors plans to invest Rs 12,000 crore in setting up new units for

a small car, trucks and SUVs and also to expand the capacity of its existing units.

• challenge for Tata Motors. These marquee brands have very high production costs and require

phenomenally high engineering and research capabilities as they compete with likes of BMW

and Audi. “Taking over the brand is easy, bringing down production costs and turning around

the company successfully, will be the challenge,” analysts said. It‟s a test that Ford failed.

WHAT IS TATA PAYING FOR????

FINANCING WAYS

• Low leverage of the auto biz provides funding flexibility

• Currently financed the purchase through a $3bn, 15month bridge loan

– It intends to refinance the loan through long-term funds

• valuable stakes in group companies

– owns $400m of Tata Steel at current prices

– owns stake in Tata Sons (Tata Group‟s holding company) worth at least $600m

Valuation of deal :

Cost synergies –

1. Material costs and not manpower key to better margins.

Investors concerns on manpower costs misplaced

– Investors apprehensive that TAMO has agreed to continue with plants in UK

Purchasing basket offers bigger opportunity for cost reduction

– It is more important to manage the material & sourcing costs to improve margins – Material Cost is

4-6x the wage cost for high-end products such as Land Rover

2. Tata Group has multiple levers

Tata Auto Comp (TACO) - TATA group has a a rich ecosystem of JVs with leading players in

Auto ancillary space held through TACO.

TCS, Corus and Tata Technologies have varied competencies in the Auto space

We believe an improvement of 50-70bps in EBITDA margin possible in JLR over the next 2

years (current EBITDA margin)

- We estimate CY2007 EBITDA margin of JLR at around 6.5% – This could make the acquisition

PAT accretive in CY2009/FY10E

Revenue synergies - A long-term possibility

1. Revenue synergies limited in the medium term (2-3 years)

• In the long-run Tata Group and Tata Motors‟ footprint in South-East Asia should

help Jaguar/Land Rover diversify their geographic dependence from US (30% of

volumes) and Western Europe (55% of volumes)

TAMO + JLR: Leverage and Valuation ratios

Leverage increases but coverage ratios reasonable

• Headline Debt/Equity of TAMO would increase to 2.5x from 1x

• Excluding the vehicle finance biz, leverage would go to 1.2x

• EBITDA/Interest remains at 5.0

TAMO is trading inline/modest discount to global peers

• EV/Sales (1-yr forward) of 0.5x against 0.4x for global peers

• P/E (1-yr forward) of 6.5x against 8.5x for global peers

•

TAMO + JLR: Proforma P&L

TAMO + JLR: Proforma Balance Sheet (CY2008/FY2009E)

TAMO + JLR: Proforma Cashflow(CY2008/FY2009E)

Funding: a few possibilities for TAMO

Sale of Tata Steel Shares

• TAMO holds $400m worth of Tata Steel shares (4.3% of outstanding shares)

• Tata group holds 33.7% in Tata Steel leaving room for some reduction in group stake

Stake sale / IPO of Telcon, HV Axles, HV Transmissions

• We value Telcon at around $1bn (13xFY09E EPS); TAMO holds 60% stake in it

• HV Axles and HV Transmissions are 100% owned by TAMO (est value $200-250m)

Sale of Vehicle Finance business (Tata Motor Financial Services Ltd)

Since 3QFY07, TAMO‟s incremental vehicle finance biz is housed in this subsidiary

We estimate total loan receivables (TMFSL + TAMO) at cRs 120bn by end-FY08E

Any sale of veh finance biz will significantly de-lever TAMO‟s balance sheet

Tata group has recently floated a new company called Tata Capital with a mandate which

includes Vehicle Financing.

We also do not rule out an LBO structure to finance the purchase

We estimate JLR EBITDA at around $1bn against capex of $600-700m

This leaves excess cash flow to service at least $1bn of debt