Global Steel Industry
Steel was an alloy of iron and carbon containing less than 2 per cent carbon and 1per cent manganese and small amounts of silicon, phosphorus, sulphur and oxygen. Steel was the most important engineering and construction material in the world. It was used in every aspect of our lives, from automotive manufacture to construction products, from steel toecaps for protective footwear to refrigerators and washing machines and from cargo ships to the finest scalpel for hospital surgery. Most steel was made via one of two basic routes: 1.
Integrated (blast furnace and basic oxygen furnace). 2. Electric arc furnace (EAF). The integrated route used raw materials (that is, iron ore, limestone and coke) and scrap to create steel. The EAF method used scrap as its principal input. The EAF method was much easier and faster since it only required scrap steel. Recycled steel was introduced into a furnace and re-melted along with some other additions to produce the end product. Steel could be produced by other methods such as open hearth. However, the amount of steel produced by these methods decreased every year.
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Of the steel produced in 2005, 65. 4per cent was produced via the integrated route, 31. 7percent via EAF and 2. 9 percent via the open hearth and other methods. At a steel mill, the crude steel production process turned molten steel into ingots, blooms, billets or slabs. These were called semi-finished products. Semi-finished products were solid blocks of steel, usually with a square or rectangular cross section. A flat steel product was typically made by rolling steel through sets of rollers to produce the final thickness. There were two types of flat steel products- Plate products and Strip products.
Supply of raw materials was a key issue for the world steel industry. IISI managed projects which looked at the availability of raw materials such as iron ore, coking coal, freight and scrap. Scrap iron was mainly used in electric arc furnace steelmaking. Apart from scrap arising in the making and using of steel, obsolete scrap from demolished structures and end-of life vehicles and machinery was recycled to make new steel. About 500 million tons of scrap was melted each year. Iron ore and coking coal were used mainly in the blast furnace process of iron making. For this process, coking coal was turned into coke, an lmost pure form of carbon which was used as the main fuel and reductant in a blast furnace. Typically, it took 1. 5 tons of iron ore and about 450kg of coke to produce a ton of pig iron, the raw iron that came out of a blast furnace. Some of the coke could be replaced by injecting pulverized coal into the blast furnace. Iron was a common mineral on the earth‘s surface. Most iron ore was extracted in opencast mines in Australia and Brazil, carried to dedicated ports by rail, and then shipped to steel plants in Asia and Europe. Iron ore and coking coal were primarily shipped in capsize essels, huge bulk carriers that could hold a cargo of 140,000 ton or more. Since the World War II, the steel industry had experienced three distinct phases- growth (195073), stagnation (1974-2001) and boom (2002-2006)3. The demand for steel grew at an annual rate of 5. 8per cent during 1950-73 as the industrializing nations were building their civil infrastructure. The oil shocks of 1973 through 1979 slowed consumption in the second phase. The production of crude steel grew at 0. 6per cent p. a. over the entire period. Steel prices declined by 2-3 per cent p. a.
During 1999-2001 the industry‘s overcapacity hovered near 25per cent globally. Only a few companies were able to sustain. Since 2002 the annual steel production had grown at 7-8per cent driven almost entirely by the double digit growth in China. The huge demand from China had caused a commensurate leap in steel prices. The industry had experienced a drop in the over capacity from 23per cent in 2001 to about 17per cent from 2003-2005. But the demand from China had also witnessed a structural change. From 2002-2004 China‘s capacity for producing crude steel increased on average by 55per cent. By 2005 China became a net exporter of steel.
In the first half of 2006 China overtook Japan, Russia and the EU 25 to become the world‘s largest steel exporting country. In June 2006 that winning companies in the steel industry would have somewhere between 150m-200m tons of annual capacity by 2015 and that scale was crucial in the pursuit of value. Shanghai Baosteel, which, although founded in 1998, had already become the world‘s fifth largest steel maker producing 22. 7 m tons in 2005. The potential acquisition of Corus by Tata Steel would create a new entity with a production volume close to Baosteel‘s.
Contribution of Countries to Global Steel Industry
The countries like China, Japan, India and South Korea are in the top of the above in steel production in Asian countries. China accounts for one third of total production i. e. 419m ton, Japan accounts for 9% i. e. 118m ton, India accounts for 53m ton and South Korea is accounted for 49m ton, which all totally becomes more than 50% of global production. Apart from this USA, BRAZIL, UK accounts for the major chunk of the whole growth. The steel industry has been witnessing robust growth in both domestic as well as international markets. In this article, let us have a look at how has the steel industry performed globally in 2007.
About Tata & Corus
“Tata Steel has always believed that the principle of mutual benefit - between countries, corporations, customers, employees and communities - is the most effective route to profitable and sustainable growth. ” Tata Steel Limited is a multinational steel company headquartered in Mumbai. It was established by Jamsetji Tata in year 1907 and changed its name TISCO to Tata Steel in 2005. It is the tenth-largest steel producing company in the world and the largest private-sector steel company in India measured by domestic production with an annual crude steel capacity of over 28 million tonnes per annum.
It is now one of the world's most geographically-diversified steel producers, with operations in 26 countries and a commercial presence in over 50 countries. They were world's 56th largest and India's 2nd largest steel company with an annual crude steel capacity of 3. 8 million tonnes. Based in Jamshedpur, India, it was part of the Tata group of companies. Tata Steel’s larger production facilities include those in India, the UK, the Netherlands, Thailand, Singapore, China and Australia.
Operating companies within the Group include Tata Steel Limited (India), Tata Steel Europe Limited (formerly Corus), NatSteel, and Tata Steel Thailand (formerly Millennium Steel). Tata Steel’s vision is to be the world’s steel industry benchmark through the excellence of its people, its innovative approach and overall conduct. Underpinning this vision is a performance culture committed to aspiration targets, safety and social responsibility, continuous improvement, openness and transparency. Corus Group is a multinational steel-making company headquartered in London.
It is the world's seventh largest and second-largest steel-maker in Europe and now a subsidiary of Tata Steel. Corus Group was formed through the merger of Koninklijke Hoogovens and British Steel in 1999 forming the third largest producer of steel behind POSCO of South Korea and Nippon Steel of Japan and was a constituent of the FTSE 100 Index until it was acquired by Tata in 2007. In 2010 Corus announced it was changing its name to Tata Steel Europe and adopting the Tata corporate identity. British Steel Corporation was a large British steel producer, consisting of the assets of former private companies which had been nationalized.
In 1988 the company was privatized as a result of the British Steel. Koninklijke Hoogovens was a Dutch steel producer founded in 1918, located in Ijmuiden. The Corus was having leading market position in construction and packaging in Europe with leading R&D. The Corus was the 9th largest steel producer in the world.
Generally, there are many forms of combination of two companies, such as acquisition, merger, takeover and hostile takeover etc.. They are different terminologies used under different situations.
Though there is a thin line difference between them but the impact of each kind are completely different. Merger: A merger is when two companies which are about the same size or strength come together to form a single company. They combine their respective resources for mutual gains or to reduce competition. In such a case, the deal gets finalized on a friendly terms and both the companies share equal profits in the newly created entity. Acquisition: When one company acquires the other and rules all its business operations, it is known as acquisitions. In this process of restructuring, one company overpowers the other company.
Among the two companies, the one that is financially stronger and bigger in all ways establishes it power. Then we can know that acquisition is usually happen when the company is different in size, and both the acquiring company and subsidiary want the combination in the meantime, in another word, the subsidiary company is not resisted to the combination. It is frequently used to describe more friendly acquisition, or used in conjunction with the word merger, where the both companies are willing to join together. Takeover: Takeover also occurs when one company purchases another, it is the similar with acquisition, but takeover enerally happens when a company buys another company which is not doing well or has gone bankrupt, and when the transaction is done in an unfriendly manner in more or less a forceful way in which the company being acquired is resisting. The acquiring company usually initials the combination. Accounting Method: Pooling of interests: This is generally accomplished by a common stock swap at a specified ratio. For example: When M&I Bank merged with National City Bank Corporation, the common stock of the two companies were swapped at a ratio between . 55 and . 5363 shares of M&I for every share of National City. Such mergers are only allowed if they meet certain legal requirements. Purchase acquisition: This involves one company (the acquirer) purchasing the common stock or assets of the target company. The acquiring company offers to purchase the target company‘s stock at a given price in cash, securities or both. This offer is called a tender offer because the acquiring company offers to pay a certain price if the target‘s shareholders will surrender or tender their shares of stock.
Generally, this offer is higher than the stock‘s current price to encourage the shareholders to tender their stocks. The difference between the share price and the tender offer is called the acquisition premium. Consolidation: The existing companies are dissolved and a new company is formed to combine the assets of the existing companies. Both companies’ stocks are surrendered and new stock is issued in its place. E. g. both Daimler-Benz and Chrysler ceased to exist when the two firms merged and a new firm DaimlerChrysler was created. Some other related terms are horizontal, vertical and conglomerate mergers.
Horizontal mergers happen when a company merges with another company which is a direct competitor in the same product lines and markets. A vertical merger occurs when the company merges with the suppliers or customers. Conglomerate mergers occur when the companies combined have no relationship to one another. It’s a friendly takeover and 100% acquisition was done by TATA steel. For the consolidation, TATA used acquisition method. TERMS: Following are some key terms of the transaction: 1. Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal cumulatively valued at $12. 4 billion. The deal was the largest Indian takeover of a foreign company and made Tata Steel the world’s fifth-largest steel group. And a wholly owned subsidiary, called Tata Steel UK would be set up by Tata Steel. 2. TATA financed its acquisition not only through its own equity contribution but a package of market securities: a) Equity Capital from Tata Steel Ltd USD4. 10 billion. b) The non-recourse debt from a consortium of banks USD6. 14 billion from. c) Quasi–Equity funding at Tata Steel Asia Singapore USD1. 25 billion. d) Long term Capital funding at Tata Steel Asia Singapore USD1. 1 billion. 3. A new board for the new entity after acquisition: This consists Ratan N. Tata, chairman of Tata Steel, Jim Leng of the Corus group, Muthuraman, Managing Director of Tata Steel, Ishaat Hussain and Arun Gandhi, directors of Tata Sons was formulated to develop and execute the integration and further growth plans. It is the group of top managers from both companies; it can help the new entity fit in much quickly with different culture. Investors in a company that is aiming to take over another one must determine whether the purchase will be beneficial to them.
In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them: 1.
Comparative Ratios - The following are two examples of the many comparative metrics on which acquiring companies may base their offers: Price-Earnings Ratio (P/E Ratio) - With the use of this ratio, an acquiring company makes an offer that is a multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring company good guidance for what the target's P/E multiple should be. ? Enterprise-Value-to-Sales Ratio (EV/Sales) - With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of the price-to-sales ratio of other ompanies in the industry. ? 2. Replacement Cost In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment.
This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop. 3. Discounted Cash Flow (DCF) A key valuation tool in M, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (operating profit + depreciation + amortization of goodwill – capital expenditures – cash taxes - change in working capital) are discounted to a present value using the company's weighted average costs of capital (WACC).
Admittedly, DCF is tricky to get right, but few tools can rival this valuation method. Synergy: The Premium for Potential Success For the most part, acquiring companies nearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy. Let's face it, it would be highly unlikely for rational owners to sell if they would benefit more by not selling.
That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The equation solves for the minimum required synergy: In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which discussed often, prevent the expected benefits from being fully achieved.
Alas, the synergy promised by deal makers might just fall short.
Reasons for Merger
Synergies from the TATA-CORUS Deal I. Tata Steel would get an access to the European market. Corus has already a welldefined network in European Market. If Tata Steel had independently entered the European market, it would have taken a considerable time to develop a wellestablished network. In the post deal scenario it will become a global player with the balanced presence in developed European market and fast growing Asian Market. II.
Tata Steel will have a strong position in construction, automotive and packaging market sector. III. It will have a low cost position in Europe and South East Asia. IV. It can double the size and profitability V. The deal has expanded scale from 7 MTPA to 25 MTPA and reaps significant economies of scale. VI. The merged entity would become world’s 6th largest steel company with 25. 6 MTPA of crude steel production. VII. The combined entity will have more efficient operations through enhanced optionality to optimize asset base and material flow, including sourcing of raw materials, and semi-finished steel.
Better equipped to race intensifying competition arising from consolidation in the industry globally. IX. Both Tata Steel and Corus are a strong cultural fit. X. Tata Steel would benefit from Corus’s pan-European distribution network. XI. The acquisition gets with Tata Steel’s stated objective of having a global distribution network. XII. There a strong cultural fit both the two companies. Both Tata Steel and Corus have strong commercial relationship.
Objectives of the Merger
Tata’s objectives for buying Corus 1. Tata is looking to manufacture finished products in mature markets of Europe. . At present manufactures low value long and flat steel products while Corus produces high value stripped products 3. A diversified product mix will reduce risks while higher end products will add to bottom line. 4. Corus holds a number of patents and R & D facility. 5. Cost of acquisition is lower than setting up a green field plant and marketing and distribution channels 6. Tata is known for efficient handling of labour and it aims at reducing employee cost and improving productivity at Corus 7. It had already expanded its capacities in India. . It will move from 55th in world to 5th in production of steel globally. 9. Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to some of the largest steel buyers open new markets and product segments for Tata Steel, which would help the company to de-risk its businesses through wider geographical reach. 10. A presence in mature markets would also provide Tata Steel an opportunity to go further up the value chain as demand for specialized and high value-added products in these markets is high. 11.
Corus is also very strong in research and technology development, which would add to the competitive strength for Tata Steel in future. 12. As stated by Tata, the initial motive behind the completion of the deal was not Corus’ revenue size, but rather its market value. Even though Corus is larger in size compared to Tata, the company was valued less than Tata (at approximately $6 billion) at the time when the deal negotiations started. Corus’ objectives for selling 1. Corus needs supply of raw material at lower cost 2. Total debt of Corus is 1. 6bn GBP 3.
Though Corus has revenues of $18. 06bn, its profit was just $626mn (Tata’s revenue was $4. 84 bn & profit $ 824mn) 4. Corus facilities were relatively old with high cost of production 5. Employee cost is 15 %( Tata steel- 9%) 6. From Corus’ point of view, the basic reason for supporting this deal were the expected synergies between the two entities. Corus has supported the Tata acquisition due to different motives. With the Tata acquisition Corus has gained a great and profitable opportunity to make an exit as the company has been looking out for a potential buyer for quite some time.
Benefit for the Tata’s stakeholders: Any advantage and profits from this deal will merge only when Tata Steel would be in a position to export low-cost slabs toCorus.
• There may be restraints to exports as Tata Steel will need to heed the requirements of its other acquired companies in South East Asia of NatSteel and Millennium Steel.
• This effect may change if the Tatas can acquire businesses in the low-cost regions such as Latin America, opening up an assured source of slab-making that can be exported to Corus’s plants in the UK.
• Iron ore policy in India undergoes a major change in the coming years. If global consolidation becomes possible with the merger of Thyssen Krupp with Nucor or Severstal with Gerdau or any the top five players. The possibility of pricing stability may ease the performance pressures on Tata-Corus and moderate the risks of restructuring at high cost plants in UK.
• If Tata considers global listing say in London it may help the group commands a much higher price-earning multiple and give it more flexibility in managing its finances. Objectives – Achieved or not: Going by the stock market reaction initially, the acquisition was a big blunder.
The stock tanked 10. 5 per cent after the deal was announced and another 1. 6 per cent. Investors were worried about the financial risks of such a costly deal. But after successfully acquiring Corus, Tata Steel became the fifth largest producer of steel in the world, up from fifty-sixth position. There were many likely synergies between Tata Steel, the lowest-cost producer of steel in the world, and Corus, a large player with a significant presence in value-added steel segment and a strong distribution network in Europe.
Among the benefits to Tata Steel was the fact that it would be able to supply semi-finished steel to Corus for finishing at its plants, which were located closer to the high-value markets. Managing the obstacles: Coping with a merger can create many problems, some of which are, i. Can make top managers spread their time too thinly and neglect their core business, spelling doom. ii. Potential difficulties seem trivial to managers caught up in the thrill of the big deal. iii. The chances for success are further hampered if the corporate cultures of the companies are very different. iv.
The companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. In view of the Tata- Corus acquisition, the main obstacles were, 1. The acquisition was not cheap for Tata. The price that they paid represents a very high 49% premium over the closing mid market share price of Corus on 4 October, 2006 and a premium of over 68% over the average closing market share price over the twelve month period.
Moreover, since the deal was paid for in cash automatically makes it more expensive, implying a cash outflow from Tata Steel in the amount of ? 1. 84 billion. 2. Tata has reportedly financed only $4 billion of the Corus purchase from internal company resources, meaning that more than two - thirds of the deal has had to be financed through loans from major banks. 3. The day after the acquisition was officially announced, Tata Steel’s share fell by 10. 7 percent on the Bombay stock market. 4.
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). 5. Corus had existing interest debt charges of $400 million on an annual basis which implies that the combined entity’s interest obligation will amount to approximately $725 million after the acquisition. 6. Corus, being the second largest steelmaker in Europe, would provide Tata Steel access to some of the largest steel buyers. The acquisition would open new arkets and product segments for Tata Steel, which would help the company to de-risk its businesses through wider geographical reach.
There has been a great deal of suspicion on how well the two entities, Tata Steel and Corus would integrate post acquisition. This concern has been expressed since the culture and perspectives of the two companies and the people are seemingly very different from each other. Ratan Tata however, has been confident that the post-acquisition management will not be too difficult as the two organizational cultures will be effectively integrated.
Ratan Tata has said he is confident the two companies will have “a cultural fit and similar work practices. ” Tata Corus has made developed some management structure to deal with the smooth operation of the two entities. It has also adopted several system integrations in both the entities to smoothen the transactions between the two entities. Tata Steel has formed a seven- member integration committee to spearhead its union with Corus group. While Ratan Tata, chairman of the Tata group, heads the committee, three of the members are from Tata Steel and the other three are from Corus group.
Members of the integration committee from Tata Steel include Managing Director B Muthuraman, Deputy Managing Director (steel) T Mukherjee, and chief financial officer Kaushik Chatterjee. The Corus group is represented in the committee by CEO Phillipe Varin, executive director(finance) David Lloyd, and division director (strip products) Rauke Henstra. The company has also created several Taskforce Teams to ensure integration of specific set of activities in the two entities for smoother transaction. For instance, the company has created a task force to integrate the UK/EU model in construction to the Indian market.
To achieve, a taskforce comprising of following executives from both the entities was formed. Members from Corus Mr. Matthew Poole (Director Strategy Long Products Corus) Mr. Colin Ostler (GM Corus Construction Centre) Mr. Darayus Shroff (Corus International) Members from Tata Steel: Mr. Sangeeta Prasad (CSM South, Flat Products) Mr. Pritish Kumar Sen (Market Research Group) Mr. Rajeev Sahay (Head Planning & Scheduling, TGS) The scope of the taskforce will be to: 1. Ensure smooth market knowledge exchange between Tata Corus and Tata Bluescope and identify Knowledge gaps. . Complete mapping of construction sector for Indian market using external resource if necessary. 3. Understand key drivers for construction through knowledge gained from stakeholders of the construction community. 4. Map key competencies of Tata Corus against market drivers/ requirements. 5. Develop a five- year strategy. The reasons why cultural integration is a huge challenge are: 1. Corporate culture is an amalgamation of: National culture, Religious culture, and professional culture. These cultural dimensions are often invisible - but ever present & relevant. 2.
Need to balance the local needs and the global needs during the post-acquisition period. These needs may be the local community demands, business demands, investor’s demands etc. 3. Need to meet the high expectations of the shareholders post-acquisition. Often times these acquisitions are financed through LBO or debt, and this needs good cash flows to sustain. In addition, the management will be under pressure to show the benefits of acquisition as promised before the acquisition 4. Lack of Experience in dealing with a different culture. This applies equally to Indian & foreign company managers.
Most managers lack the cross-cultural skills needed during the post-acquisition integration.
Post Acquisition Tata
Tata Steel has formed a seven-member integration committee to spearhead its union with Corus group. While Ratan Tata, chairman of the Tata group, heads the committee, three of the members are from Tata Steel and the other three are from Corus group. The acquisition by Tata amounted to a total of 608 pence per ordinary share or ? 6. 2 billion (US $12 billion) which was paid in cash. First of all, the general assumption is that the acquisition was not cheap for Tata.
The price that they paid represents a very high 49% premium over the closing midmarket share price of Corus on 4 October, 2006 and a premium of over 68% over the average closing market share price over the twelve month period. Moreover, since the deal was paid for in cash automatically makes it more expensive, implying a cash outflow from Tata Steel in the amount of ? 1. 84 billion. Tata has reportedly financed only $4 billion of the Corus purchase from internal company resources, meaning that more than two-thirds of the deal has had to be financed through loans from major banks.
The day after the acquisition was officially announced, Tata Steel’s share fell by 10. 7% on the Bombay stock market. Despite its four times smaller size and smaller capacity, Tata Steel’s operating profit for 2006, earning $840 million on sales of 5. 3 million tonnes, were very close in amount to those generated by Corus ($860 million in profits on sales of 18. 6 million tons). 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 charges of $400 million on an annual basis implies that the combined entity’s interest obligation will amount to approximately $725 million after the acquisition. The debate whether Tata Steel has overpaid for acquiring Corus is most likely to be certain, since just based on the numbers alone it turns out that at the end of the bidding conflict with CSN Tata ended up paying approximately 68% above the average price of Corus’ shares.
Another pressing issue resulting for this deal that has created a dilemma between experts and analysts opinions is whether this acquisition for the right move for Tata Steel in the first place. The fact that Tata has managed to acquire a British steel maker that has been a symbol of Britain’s industrial power and at the same time its dominion over India has been perceived as quite ironic. Only time will show whether Tata will be able to truly benefit from the many expected synergies for the deal and not make the typical mistakes made in many large M&A deal during this beginning period.
Outcome of the Merger – Success or Failure
Many financial analysts felt that Tata Steel overpaid for the Corus acquisition. Immediately after the acquisition announcement, Tata Steel‘s share price fell by 10. 7 percent to Rs. 463. 95 on the Bombay Stock Exchange. According to Martin Stanley, London based head of spread betting at the brokerage firm of GFT Global Markets, ? The consensus view seems to be that Tata have probably overpaid, but if further consolidation in this sector occurs going forward then this will look like very fair value? International Herald Tribune, 1/30/07). Additional concerns were raised about the debt liability of Tata Steel which borrowed more money to fund the acquisition. According to Standard & Poor‘s analyst Anushkant Taneja, ? The size of the Tata acquisition and the potential cash outflow in Tata Steel‘s offer for Corus could have an adverse impact on its financial risk profile. Standard & Poor‘s rating service in India, Crisil, placed Tata Steel on the ? negative implications watch list after its Corus acquisition.
The contention was that Tata Steel had overstretched itself due to execution risk and lack of experience by Indian companies in acquiring international businesses (Range, 2007, April 26). Moody‘s Investor Services downgraded Tata Steel‘s rating from Baa2 (investment grade) to Ba1 (speculative grade). The primary reason cited was Tata Steel‘s weakened balance sheet liquidity and financial profile resulting from its largely debt-funded acquisition of Corus. Moody‘s Senior V. P. Alan Greene stated Tata Steel‘s current high leverage constrains its financial strength and flexibility and ? he main challenge facing management is to de-risk the large capital structure while not neglecting existing operations and opportunities for rapid growth in Asia.? He further stated that ? Tata Steel‘s ambitious capacity expansion plan will lead to higher project execution risk over several years and materially elevate financial leverage unless it is deferred.? (Businessline, 2007, July 7). According to Sreesankar, head of research at Il&Fs investments in Mumbai, ? They (Tata Steel) wanted the company and they have got it. But we have to see how the finding happens and how the integration progresses.
One distinction is that EBITDA (earning before income taxes and depreciation allowance) margins for Tatas are about 40 percent and for Corus is about 7 percent.? Clearly, the financial industry analysts were skeptical about the long-term financial viability of this acquisition. According to Shriram Iyer, head of research at Edelweiss in mumbai, ? …the time horizons of investors and of the company may not be aligned
Management’s Point of View
This proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with our strategy of growth through international expansion.
This creates a well balanced company, strategically well placed to compete in an increasingly competitive global environment. (Ratan Tata quoted in Financial Express; 2007, February 13) The Tata Steel board of directors approved the project to acquire Corus, as it was consistent with stated objectives of growth and globalization. Although Tata Steel ended up paying more for Corus than its original bid, its management felt that there were many favorable strategic and financial outcomes to be realized. To begin with, this acquisition would position the combined group as the fifth largest steel company in the world by production output.
The new entity would have a meaningful market presence in both Europe (where Corus was a well established brand name) and Asia (where Tata was a well established brand name). Combining the low cost upstream production in India.
Financial Indicators: Key Milestones of the Tata Corus Deal
September 20, 2006:-Corus Steel has decided to acquire a strategic partnership with a Company that is a low cost producer October 5, 2006:- The Indian steel giant, Tata Steel wants to fulfill its ambition to Expand its business further. October 6, 2006:- The initial offer from Tata Steel is considered to be too low both by Corus and analysts.
October 17, 2006:- Tata Steel has kept its offer to 455p per share. October 18, 2006:- Tata still doesn’t react to Corus and its bid price remains the same. October 20, 2006:- Corus accepts terms of ? 4. 3 billion takeover bid from Tata Steel. October 23, 2006:- The Brazilian Steel Group CSN recruits a leading investment bank to offer advice on possible counter- offer to Tata Steel’s bid. October 27, 2006:- Corus is criticized by the chairman of JCB, Sir Anthony Bamford, for its decision to accept an offer from Tata. November 3, 2006:- The Russian steel giant Severstal announces officially that it will not make a bid for Corus.
November 18, 2006:- The battle over Corus intensifies when Brazilian group CSN approached the board of the company with a bid of 475p per share. November 27, 2006:- The board of Corus decides that it is in the best interest of its will shareholders to give more time to CSN to satisfy the pre- conditions and decide whether it issue forward a formal offer December 18, 2006:- Within hours of Tata Steel increasing its original bid for Corus to500 pence per share, Brazil's CSN made its formal counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steel's Offer.
January 31, 2007:- Britain's Takeover Panel announces in an e- mailed statement that after an auction Tata Steel had agreed to offer Corus investors 608 pence per share in cash April 2, 2007:- Tata Steel manages to win the acquisition to CSN and has the full voting support form Corus’ shareholders
Steel prices, raw material supplies and interest costs on the $8-billion debt have been raised to fund the deal. Soon they may also have to deal with the sensitive issue of possible job There is no doubt that Tata has pulled off a coup — Corus makes nearly four times more steel than Tata Steel.
Together, the combine becomes the fifth largest producer in the world and the second in Europe. But to make the most of the deal, Tata has to manage several variables including cuts in Corus’s manufacturing plants. There are also the usual sets of integration challenges that come with such large buyouts. The deal may be done, but the hard work is just beginning. In the run up to the auction, Tata had maintained a low profile despite CSN’s aggressive stance. They underestimated our firepower,” says Gandhi, who admits that even bankers to the transaction — ABN Amro and Deutsche Bank — were in the dark as to how far Ratan Tata was willing to go. The only blip, though, was the way the stock markets reacted. Tata Steel has lost a billion dollars in market capitalization since it first announced its intention to buy Corus in October last year. (The BSE Sensex rose 18 per cent during the same period. ) The market perception is that the Tata Group paid too much for this acquisition.
Several brokerage houses have pointed out that the deal implies a high enterprise value/ earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple of 9 for Corus versus 4. 6 for Tata Steel. (L. N. Mittal paid 5. 8 times EBITDA for Arcelor. ) Ratan Tata disagrees: “We believe that, looking back in time, the price today will prove to be one that was worthwhile because the price of steel companies is likely to be even higher in the coming year. ” But tying up the funding is the immediate priority. The Corus acquisition is being routed through a special purpose vehicle (SPV) called Tata Steel, UK. A similar structure was used for the Tetley buy in 2000. ) So far, the Tatas have indicated that group holding company Tata Sons will pump in $4. 1 billion as equity into the SPV. The balance $8 billion will be raised by junk bonds and senior term loans (part of it has been tied up with banks like ABN Amro, Deutsche Bank and CSFB). These loans will be serviced out of Corus’s profits; Tata Steel need not repay this. This has effectively ring-fenced Tata Steel shareholders. Few will disagree. The Tata Steel managing director is likely to look for more acquisitions as he aims to increase the company’s total capacity to 100 mt by 2015.
To reach that destination, a lot will depend on whether the group can make Corus fly.
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