Case study

Acquisition of Corus by Tata Steel Bhargav Pandya

The Mega Deal

Tata steels takeover of Anglo-Dutch steel giant Corus is a major milestone in the history of Indian business. The $13.7 billion deal, corporate Indias biggest takeover to date, reaffirms the arrival of India as a big player in the globalization game.

MEN OF STEEL: From left: Tata chief B Mutharaman, chairman Ratan Tata, Corus chairman James Leng and chief executive Philippe Varin Source: thisismoney.co.uk

Tata Steel acquired Corus, which was four times its size and the largest steel

producer in the U.K. The acquisition has propelled Tata Steel into the big league. From being in the fifty-sixth position in the world , Tata Steel, along with Corus and other subsidiaries, is now the fifth largest steel maker by capacity, with an annual capacity of 28 million tonnes, and output of 24 million tonnes. It is, so far, Indias largest ever transborder acquisition.

Highlights of the Acquisition

Highlights of the Acquisition

It is a classic case of a leveraged

buyout with over 70 per cent of the US$13.7 billion tag being financed through debt. Over the five years prior to Corus acquisition by Tata Steel Indian companies had made global acquisitions for over $10 billion; the Tata bid exceeded all of them put together.

The Victory
On 31 January 2007, Tata steel Limited acquired the Anglo-Dutch steel producer Corus for US$12.90 billion. Before this victory, however, Tata Steel had to lock horns with another suitor, the Brazilians Companhia Siderurgica Nacional (CSN) in nine rounds of bidding. Initially, on 5 October 2006, Tata Steel had offered a much lower price of 455 pence per share valuing the deal at US$7.6 billion. However, in the auction that was held on 31 January 2007, it made a final offer of 608 pence share to pip CSN whose final offer was just a shade lower being at 603 pence per share.

History of TATA Steel

Tata Steel is a part of the Tata Group, one of the largest diversified business conglomerates in India. In 1907, Jamshedji Tata established Tata steel at Sakchi in West Bengal. With the liberalization in the Indian economy in early 1990s, Tata Steels business grew rapidly to become the Asias first and Indias largest integrated steel producer in the private sector. In February 2005, Tata Steel acquired the Singapore-based steel manufacturer NatSteel Limited. Tata Steels Indian operations generated net sales of Rs 17,552 crore in the financial year

History of Corus

The history of Corus can be traced to the early 20th century when Koniklijke Hoogovens was founded by the Government of Netherlands on 20 September 1918. After several acquisitions over the decades, Hoogovens had become one of the major players in the European steel industry.

One of the major achievements on the business front in 1998 was Hoogovens selection as the only long-term European supplier to Boeing.

History of Corus

On 6 October 1999, Hoogovens merged with British Steel plc to form Corus Group Plc, the worlds third largest steel producer during that time. However, the merger did not succeed.

In 2006, corus reported an annual turnover of 9.7 billion pound but with a much lower PBT of 313 million pound.

History of the deal

CSN and Corus had planned an allshares in 2002, but the deal eventually broke up. With dwindling profitability in 2006, Corus had, by September 2006, decided to join hands with a low-cost steel producer. On 5 October 2006, Tata Steel made an offer. Of 455 pence a share in cash for the entire shareholding of Corus which translated into a total deal value of US$7.6 billion. Corus positively responded to the offer on 20 October 2006. Agereeing to the takeover by Tata Steel at that price.

History of the deal

CSN and Corus had planned an allshares in 2002, but the deal eventually broke up. With dwindling profitability in 2006, Corus had, by September 2006, decided to join hands with a low-cost steel producer. On 5 October 2006, Tata Steel made an offer. Of 455 pence a share in cash for the entire shareholding of Corus which translated into a total deal value of US$7.6 billion. Corus positively responded to the offer on 20 October 2006. Agereeing to the

History of the deal

On 18 November 2006, CSN made a counter bid for acquiring Corus with a price of 475 pence per share. In the light of offers and counter offers from Tata Steel and CSN, the Takeover Panel, the United Kingdoms watchdog on mergers and acquisitions set the deadline of 30 January 2007, for both the companies to make their final offer. The panel also stipulated that if no outright winner emerged, an auction would be conducted. Even by 30 January 2007, none of the companies had declared their final offer.

History of the deal

The Takeover Panel then asked for an auction to be held at 4:30 p.m GMT on 31 January 2007.

After nine rounds of bidding on 31 January, Tata steel emerged the winner in the auction with its final bid of 608 pence per share.

Industry Scenario
Global steel industry overview The global crude steel production in 2007 was 1344 million tonnes, showing an increase of 100 million tonnes over the 2006 level of 1244 million tonnes. crude steel-producing nations Top six

Industry Scenario
Indian steel industry review In the decade leading to 2007, Indian steel industry had experienced a robust growth in demand, fuelled particularly by the demand for steel in China.
Production (Figures in Million Tonnes) Consumption FY07 18 26 44 Percentage of Change 16 12 14

FY08 FY07 Percentage FY08 of Change Flat Products Long Products Total 20 28 48 19 26 45 5 8 7 21 29 50

Source: Tata Steel Annual Report 2007

Industry Scenario
Fragmented nature of global steel industry Only 17 per cent of the total world production in 2007 was contributed by top five companies of the world. This indicates that the global steel industry is highly fragmented.

Top ten Global Steelmakers

Funding of the Corus-TATA deal

Tata Steel Ltd

Tata Steel Asia Holding Pte. Ltd (100%)

Tata Steel UK Ltd (100%)

Corus Group Plc (100%)

Rationale behind the acquisition Tata Steels compelling need to globalize To have production capacities in the export markets To avail many synergies between Tata and

Corus- Tata Steel is the lowest cost producer of steel in the world, Corus is a player with a large presence in value added steel segment To avail strong distribution network of Corus in Europe Post acquisition Tata would be able to supply semi-finished steel to Corus for converting into high value added products Joint procurement of raw materials

The Flip Side

Outcome and effects on Tata Steels performance

Corus EBITDA at 8 per cent was much lower than that of Tata
Steel

Valuation and funding of the deal

Significant equity dilution of Tata Steel post Coruss

acquisition

Tata Steel would no longer remain as the lowest-cost

producer in the world

Corus itself did not have access to any iron ore or coal
reserves

In the first two years, the potential synergies might be lower

The Road Ahead

Epilogue
On 11 May 2009, The Times of India, Mumbai reported as follows: London: In a candid admission, perhaps for the first time, Ratan Tata has said his two mega acquisitionsAnglo Dutch steelmaker Corus and British marquee Jaguar Land Roverwere done at an inopportune time and his company might have gone too far too fast.