Tata Steel Acquisition of Corus

Prepared By:Abdurrahman Ozen

Rajan Thakur

Trends in Global Steel Industry Growth After Decades of Stagnation and Low Profitability

World Crude Steel Production

Sources: IISI, World Steel in Figures 2007; Geographic Information Systems

Production Volume(Million tons)

0

200

400

600

800

1000

1200

1400

50 55 60 65 70 75 80 85 90 95 00 05 06

1,244

60

80

100

120

140

160

180

200

50 55 60 65 70 75 80 85 90 95 00 05 06

Production per Capita(Kg / Capita)

191

-2

0

2

4

6

8

10

12

50 55 60 65 70 75 80 85 90 95 00 05

Compound Annual Growth Rate(Average % for 5 year periods)

06*

* 2006/2005

Expected Trends in Global Steel Industry

• Analysts View1. The massive post-war infrastructure build in

western countries led to sustained steel demand during the 30-year period between 1945 and 1975.

“The coming decades would see similar infrastructure spending in emerging economies and steel demand would continue to grow.”

Effect of Demand on Global Steel Prices

* Constant dollars (July 2007)** 2006 cost plus iron-ore price increase (9.5% abril 07)

Supply DrivenPrivatization

Cost Based

Demand DrivenConsolidationPrice Based

Source: CRU / WSD

0

100

200

300

400

500

600

700

800

900

HRC US* HRC Europe*China HRC Estimated Costs(w/o General Expenses)

208

370 384

Asian Crisis

Russian Crisis

Steel Crisis

China + Global GDP Sep ’07 = 573 (USA)

0

100

200

300

400

500

600

700

800

900

US$ / ton

US$

/ to

n

**

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

HRC CIS*

China has Been the Main Driver Behind Growth, Changing the Industry Structure

11%

10%

9%

34%

13%

4%

3%

16%

North America

CIS

Japan

Other

China

EU 25

Central &SouthAmerica

India

1,244 Million Tonnes

19%

22%

16%5%

11%3%

23%

1%India

NorthAmerica

USSR

WesternEurope

China

Other

Japan

Central & SouthAmerica

World Crude Steel Production

644 Million Tonnes

Source: IISI, World Steel in Figures 1976, 2007

1975 2006

Global Concentration Lagging Behind Other Metals, Suppliers and Key Customers

81%

66%

49%

40% 38%

28%

20%

Iron Ore Nickel Alumina Aluminum Copper Zinc Steel

Sources: Morgan Stanley Research, 16 Feb 2007 IISI, World Steel in Figures 2006 JD Power

Industry Concentration, Top 5 Producers(%)

72%

Automotive

Top 7

The Other Driver Behind Growth & Profitability has been Industry Consolidation

53

71 73

2004 2005

24 28

68

2004 20052006 2006

Source: Bloomberg, Completed Deals

Number of Steel Industry M & A’s Amount (US$ Billions)

Impact Of Industry Consolidation will Become More Apparent in Coming Years

• Scale economies and synergies • Better balanced steel inventories• Optimization of Cost / Production / Logistics • Global production / Local customer service• Optimal plant location• Optimal use of resources — capital, physical,

labor• Faster response to market volatility and trends• Better balance with suppliers and customers• Increased competition among large, efficient

producers

TacticalLevel

StrategicLevel

Tata Steel Background

• Tata Steel a part of the Tata group, one of the largest diversified business conglomerates in India.

• In the mid- 1990s, Tata steel emerged as Asia’s first and India’s largest integrated steel producer in the private sector.

• In February 2005, Tata steel acquisition the Singapore based steel manufacturer NatSteel, let the company gain access to major Asian markets and Australia.

• Tata steel acquired the Thailand based Millennium Steel in December 2005.

• Tata Steel generated net sales of 5 billion in the financial year 2006-07.

• The company’s profit after tax in the same year was 1.5 billion while its profit after tax was 1.1 billion.

SWOT AnalysisStrengths :

Low Debt to equity ratio. Lowest cost producer in world. TATA group has successfully

acquired some companies in the past

Opportunities:

Exposure to global steel market. Consolidation trend in Steel industry.

Weakness

Corus was triple the size of TATA steel in terms of production

Threats

CSN Brazilian bidder. Severstal Russian bidder. No committed financers to support

the deal .

Corus Background• Hoogovens 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.

• On October 06, 1999, Hoogovens(38.3%) merged with British Steel Plc(61.7%) to form Corus Group Plc.

• Philippe Varin(CEO) and Jim Leng chairman of Corus, both worked to revive the company’s business.

• The company reduced debt by selling its aluminum business to a US based company, Aleris, for £ 570 million.

• From April 2003 onwards, the share price moved up and it stood at 390 pence before the company’s merger with Tata Steel

SWOT Analysis

Strengths : World’s ninth largest and Europe’s

second largest steel producer. Wide range of products Operating facilities spread in whole

Europe

Opportunities Consolidation trend in Steel

Industry. To get right price at a time when

market is less volatile.

Weakness Corus was in bad shape because of

high operational cost. Section 201 tariff imposed by Bush

administration in 2002 led to loss in Corus clientele.

Threats Huge pension liability might have led

to collapse of the deal. Disagreement of Labor and

government due to possibility of job cut.

The Highlights: Bidding war

• 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.

• CSN(Companhia Siderúrgica Nacional) reacted quickly making a counter bid of 475 pence per share on November 17, 2006.

• So an auction was initiated, after nine rounds of bidding on January 31, 2007 Tata emerged winner in the auction with its final bid of 608 pence per share for Corus. (US$ 13.70 billion)

Valuing the AcquisitionMethod used Enterprise Value Multiple.Enterprise value (EV) represents a company's economic value --

the minimum amount someone would have to pay to buy it outright.

EV = Mkt Cap. + Pref. Stcks + Min. interest + Long Term debt – Cash & cash Equivalent

Valuing the Acquisition

EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of Financing and accounting decisions.

• EBITDA = Revenue- Expenses( Excluding tax, interest, depreciation and amortization)

EBITDAMultipleEnterprise

Value Enterprise

Valuing the Acquisition

EV = Mkt Cap. + Pref. Stcks + Min. interest + Long Term debt - Cash Equivalent = 3.5 billion + 0 + 26 million + 1308 million –

871 million =£ 3.963 billion. EBITDA = £ 947 Million(From Con. Operations) times

18.4

Value Enterprise

EBITDAMultipleEnterprise

Why Enterprise Multiple ratio ???• EV/EBITDA is not affected by the capital

structure of a company; it allows fair comparison of companies with different capital structures.

• We have a transnational comparison in our case and EV/EBITDA ignores the distorting effects of individual countries taxation policies.

Why Enterprise Multiple ratio ???• EV/EBITDA is usually inappropriate for

comparisons of companies in different industries, as their capital expenditure requirements are different.

• EV/EBITDA also strips out the effect of depreciation and amortization. These are non-cash items, and it is ultimately cash flows that matter to investors.

FINANCING THE ACQUISITION Break-up of Tata Steel Mode Amount Equity contribution (In $ Billion) (In $ million) Tata Steel UK - Non-recourse Debt 6.14 Tata Steel Asia (Singapore SPV) 2.66 Tata Steel Equity Contribution 4.9 Cash Reserves 700 External Commercial Borrowings 500 Preference shares to Tata sons 640 Right issue 862 Convertible preference shares 1400 Foreign issue of Equity instruments 798 Sub-total 4900 Grand Total 13.7

SWOT Analysis

• Strengths1. Corus takeover catapults Tata Steel from its

current 65th place to No. 5 spot, with a combined capacity of 23.5 million.

2. Cost advantage of operating from India can be leveraged in Western markets and differentiation based on better technology from Corus can work in Asian Markets.

SWOT Analysis

• Weakness1. Corus EBITDA at 8% was much lower than that of Tata steel

which was at 30% in the financial year 2006-07.2. The merger requires high level of integration, for technology

transfer and coordinating supply chains.3. Where the Tata’s too keen??? The fact that Tata’s determination to acquire a British steel

maker, symbol of Britain’s industrial power, was fuelled by patriotic passion against the old hegemonic order, and rechristening it Tata Corus.

SWOT Analysis

• Opportunities1. Chinese Steel plants dependence on imported

raw material, limit their pricing power.2. Corus strong research and technology

development, would add to the competitive strength for Tata Steel.

3. The acquisition would open new markets and product segments for Tata steel, it would have access to some of the largest steel buyer

SWOT Analysis

• Threats1. Capacity additions by China, Russia and Brazil

may outrun the demand growth and lead to subdued steel prices.

2. If the business performance of Corus declines, the company’s cash flows would reduce leading to a default on the loan taken

A Financial take on the Acquisition.

1. Valuation Tata Steel is paying 7 times EBITDA of Corus enterprise value

for 2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006.

In comparison, Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that Arcelor has much superior assets, wider market reach and is financially much stronger than Corus.

The price paid by Tata Steel looks almost obscenely high.

Reply to the criticism about the price paid being too high.

• Ratan Tata chairman Tata group said, “ We have 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. Over bidding or not is subjective when it comes to judgment calls”.

A Financial take on the Acquisition

2. Interest charges• Tata’s new debt amounting to $8 billion due to the

acquisition, financed with Corus cash flows is expected to generate up to $640 million in annual interest charges (8% annual interest cost).

• This amount combined with Corus existing interest debt will amount to approximately $725 million after the acquisition.

If the international steel prices decline moderately, Tata Steel would have to dip into its own cash flow or find other sources like an equity dilution to service the debt.

• Key Ratios

If the projected synergies do not work to the tune expected, it may turn out to be a value destroying project

2006 2007 2008E 2009E

Debt / Equity

0.3 0.7 1.8 1.6

Return on Equity

41.8 36.5 22.1 24.8