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Mergers & Acquisitions
Case Analysis

Gandhali Inamdar
Section SA

Tata Steel was established in 1907. Tata Steel is India’s largest steel company with the capacity
of 25.6 million tones annually. It was also Asia’s first such enterprise. It is among the lowest cost
steel producer world wide. The capive raw material resources and state-of-the-art 5 million ton
plant at Jamshedpur, Jharkand, gives it a competitive edge over other steel players.

In order to be a global major, Tata Steel has acquired Corus (18 million ton), Natsteel Asia (2
million ton) and Millennium Steel( renamed Tata Steel Thailand-17 million ton) and is planning
more mergers and acquisitions in future. The plant at Jamshedpur will also be expanded to 7
million tons by June 2008 and 10 million ton by December 2010. The company will have a
capacity of 50 million ton by 2015 through organic growth.

The case discusses the various options Tata Steel (TSL) had towards financing this acquisition
and funding its capital expenditure for plant expansion. In order to discuss the best option
available, we conduct a due-diligence on both the parties, analyze the industry, and critique all
financing options in the new light.

Indian Scenario

After liberalization, there have been no shortages of iron and steel materials in the country.
Apparent consumption of finished (carbon) steel increased from 14.84 Million tonnes in 1991-92
to 39.185 million tonnes (Provisional) in 2005-06. The steel industry which was facing a
recession for some time has staged a turn around since the beginning of 2002. Demand has
started showing an uptrend on account of infrastructure boom. The steel industry is buoyant due
to strong growth in demand particularly by the demand for steel in China.

Tata Steel Ltd (TSL)

Tata steel, India’s largest private sector steel company was established in the 1907.The
Tata steel which falls under the umbrella of Tata sons has strong pockets and strong financials to
support acquisitions. Tata steel is the 55th in production of steel in world. The company has
committed itself to attain global scale operations.
production capacity of Tata Steel was totally 28MT before Corus which gave an additional of
The product mix of Tata steel consist of flat products and long products which are in the lower value
chain. The Tata steel is having a low cost of production when compared to Corus. The Tata steel was
already having its capacity expansion with its indigenous projects to the tune of 28 million tones.
The Corus was created by the merger of British Steel and Dutch steel company, Hoogovens.
Corus was Europe’s second largest steel producer with a production of 18.2 million tonnes and
revenue of GDP 9.2 billion (in 2005). The product mix consisted of Strip steel products, Long
products, Distribution and building system and Aluminum. With the merger of British Steel and
Hoogovens there were two assets the British plant asset which was older and less productive and
the Dutch plant asset which was regarded as the crown jewel by everyone in the industry. They
have union issues and are burdened with more than $ 13 billion of pension liabilities. The Corus
was making only a profit of $ 1.9 billion from its 18.2 million tonnes production per year
(compared to $ 1.5 billion form 8.7 million tone capacity by Tata).

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. It opened its bid for
100 % stake late in the 2006.

Synergy is the magic force that allows for enhanced cost efficiencies of the new business.
Synergy takes the form of revenue enhancement and cost savings. That said, achieving synergy
is easier said than done - it is not automatically realized once two companies merge.

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. The following equation offers a good way to
think about synergy and how to determine whether a deal makes sense. 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.

Corus decides to sell (Why?):

 Total debt of Corus is 1.6bn GBP

 Corus needs supply of raw material at lower cost
 Though Corus has revenues of $18.06bn, its profit was just $626mn (Tata’s revenue was
$4.84 bn & profit $ 824mn)
 Corus facilities were relatively old with high cost of production
 Employee cost is 15 %( Tata steel- 9%)

Tata Decides to bid (Why?):

 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
 A diversified product mix will reduce risks while higher end products will add to bottom line.
 Corus holds a number of patents and R & D facility.
 Cost of acquisition is lower than setting up a green field plant and marketing and distribution
 Tata is known for efficient handling of labour and it aims at reducing employee cost and
improving productivity at Corus
 It had already expanded its capacities in India.
 It will move from 55th in world to 5th in production of steel globally.
Financing options
Internal Benefits
Cash Fast
Working Capital Less disclosure required
Existing debt
Rights Issue
External Benefits
Senior bank debt More options
Capital Notes External expertise
IPO Competitive rates
Private Equity

Following are some of the possible transaction structures:

 Financed from firm’s own cash resource- All cash deal
 Financed from firm’s own cash resource- by issuance of stock
 Through exchange of stock- all stock deal
 Combination of cash & stock- mixed deals
 Financed through issue of debt- leveraging
 Leveraged cash transaction, financed through debt issue
 Majority of equity replaced by debt- leveraged buyout
 Offering debt to selling company shareholders- debt transaction
 Mixed deal involving cash/debt
 Issuance of preferred stock

A bridge finance scheme was created to buy out Corus’s shareholders and debtors via a SPV
that would take over Corus's assets, financed by fresh equity and new non-recourse debt, raised
against Corus's cash flows. Despite of very weak debt market, the company got success in
securing $6.2 billion of debt financing in a volatile market. The average life of debt was 5 years.
In place of securing the non-recourse debt on Tata Steel, the Company raised the financing based
on servicing capability of Corus cash flows. The Company further raised around USD 875
million in Convertible Alternate Reference Securities (CARS) which is a 5 years convertible
instrument with a coupon of 1% and a conversion premium of 35% to the prevailing market price
in August 2007. As a result of the above, TSL raised around USD 10 billion during the year and
completed the long term financing for the Corus acquisition (Tata Steel Annual Report 2008).

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 Investment of 12.90 billion.

 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).

The post-tax cost of this total financing package on completion is expected to be around
only 4.3% pa.