Summary
Tata Steel acquired Corus Group in April 2007 for £6.2bn. Tata Steel is India’s largest private sector steel company with 2005/06 revenues of US$5.0 billion and crude steel production of 5.3 million tons across India and South-East Asia. Corus Group is Europe's second largest steel producer with annual revenues of over £9.2 billion and a crude steel production of 18.2 million tons in 2005. This is an interesting acquisition as the acquired company was almost four times the size of the acquirer in terms of revenue. The combined entity became the fifth largest steel company in the world. The acquisition allowed Tata Steel entry into the European market. This deal follows the merger of Arcelor-Mittal forming world’s largest steel company. It is the biggest deal ever from an emerging market. The deal is a powerful combination of low cost upstream production in India with the high end downstream processing facilities of Corus. The deal occurred through 9 rounds of competitive bidding between Tata Steel and Brazilian Steel Maker CSN. The final deal valued Corus at 607 pence per common share which was 67% higher than the price of Corus before the deal was announced. It was an all cash deal and financing was done by a mixture of debt and equity.
Characteristics of the Steel industry
• Steel industry is often considered to be an indicator of economic progress because of the critical role played by steel in infrastructural and overall economic development
• Steel is a global market
• World steel production stood at 1,244 million metric tons in 2006 with 2005-06 growth of 9%
• Steel prices are volatile – mergers seen as response to lower breakeven levels
• Undergoing consolidating in this decade with the merger of Arcelor-Mittal forming the world’s largest steel company more than thrice the size of the second biggest
• Some of the key suppliers of raw materials to the industry have already made moves toward consolidation giving more strong reasons for consolidation (bargaining power)
About Corus Group
• Europe's second largest steel producer with annual revenues of over £9.2 billion and a crude steel production of 18.2 million tons in 2005
• Steelmaking operations primarily in the UK and the Netherlands
• Provides innovative solutions to the construction, automotive, packaging, mechanical engineering and other markets worldwide
• World’s 9th largest steel producer in 2005
• Lowest cost in Europe
About Tata Steel (Prior to Acquisition)
• Tata Steel is one of the few steel companies in the world that is Economic Value Added (EVA) positive
• Ranked the "World's Best Steel Maker", for the third time by World Steel Dynamics in its annual listing in February, 2006
• World’s 55th largest steel producer in 2005
• Tata Steel is India’s largest private sector steel company with 2005/06 revenues of US$5.0 billion and crude steel production of 5.3 million tonnes across India and South-East Asia
• Tata Sons, Tata Steel and other Tata companies had combined revenues in 2005/06 of approximately US$22 billion
• Second largest steel producer in India after SAIL
• Acquired Singapore-based steel company, NatSteel for $486m in 2005
• Acquired 67.5% in Thailand-based steel company, Millennium Steel in 2005
• Acquisitions are core part of company’s strategy for growth
About CSN
• largest fully-integrated steel producer in Brazil and one of the largest in Latin America in terms of crude steel production
• CSN and Corus had planned to merge in the year 2002. Corus had bid 2.7 billion pounds for CSN. But the bid failed to come through.
• CSN already owned 3.8% of those shares through purchases on the open market
Reasons for Merger
• Consistent 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
• 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
• 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
Acquisition of Corus (Timeline)
Market 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%.
Deal Terms
• All Cash Deal
• Leveraged Buy Out
• The Acquisition is proposed to be made by Tata Steel U.K., a wholly-owned indirect subsidiary of Tata Steel, recently incorporated in the United Kingdom for the purpose of completing the Acquisition. The said Acquisition is proposed to be effected by means of a scheme of arrangement under Section 425 of the (English) Companies Act 1985; subject to High Court of Justice in England and Wales and Corus' shareholders approvals being obtained.
• Acquisition is proposed to be funded through its own cash resources and loans raised by Tata Steel and its subsidiary companies formed for the purpose of this acquisition
• The long term financing pattern for the net acquisition consideration of Corus would be USD 12.9 billion and Tata Steel UK would be funded in the long term from the following sources:
Equity Capital from Tata Steel Ltd - USD 4.10 billion
Long-term debt from consortium of banks - USD 6.14 billion
Quasi - Equity funding at Tata Steel Asia Singapore - USD 1.25 billion
Long term Capital funding at Tata Steel Asia Singapore - USD 1.41 billion
Total USD - 12.90 billion
Sources of funding for Tata Steel's investment of USD 4.1 billion (about Rs.17,750 crores) in its wholly-owned subsidiary Tata Steel Asia Holdings (Singapore) Ltd. which would in turn invest the same in Tata Steel UK which has acquired CORUS plc. U.K.
• Internal Generation - Rs.3,000 crores (USD 700 million).
• External Commercial Borrowings - Rs.2,170 crores (USD 500 million).
• Funds from the Preferential Issues of equity shares to Tata Sons Ltd. of Rs.2,770 crores (USD 640 million)
• Rights Issue of equity shares to the shareholders in the ratio 1:5 at a price of Rs.300 per share involving issue of equity shares of Rs.3655 crores (USD 862 million)
• Un-linked Rights Issue of Convertible Preference Shares in the ratio of 1:7 having a coupon rate of 2% with conversion into equity shares after two years at a price in the range of Rs.500 to Rs.600 per share as may be determined at the time of the issue. This issue would provide a total amount of about Rs.4,350 crores (about USD 1000 million)
• A foreign issue of an equity-related instrument upto an amount of upto USD 500 million in such form as may be considered appropriate. This issue would be made on an ex-Right basis and on terms as may be determined at the time of the issue subject to approval of the shareholders.
• The post-tax cost of this total financing package on completion is expected to be around 4.3% per annum
Synergies Summary
This report provides information about the value of Corus and synergies Tata Steel might generate after the acquistion. 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 £10 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 acquistion, 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.
Standalone Valuation of Corus
WACC Calculation:
Risk-free rate: 4.5%
Risk Premium: 7%
Beta: 2.17
Cost of Equity = 4.5% + 2.17*7% = 19.7%
Cost of Debt = 6%
Tax Rate = 25.5%
Debt/Equity Ratio = 15%
WACC = (1-0.255)*(15/115)*(0.06) + (100/115)*(0.197) = 17.9%
WACC = 17.9%
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