Strategy of Tata Corus Acquisition

On April 2, 2007, Tata Steel Ltd. (Tata Steel) completed its acquisition of the Corus Group (Corus) for US$ 12. 1 billion.

The combined company went on to become the fifth largest steel producer in the world and had a crude steel production of 27 million tonnes in 2007. 1 The acquisition was driven by the need to gain access to better technology and to new markets. The synergy arising out of the acquisition was valued at US$76 million for the financial year 2007-08. Further, joint integration teams were formed for key areas and this team identified synergies worth US$ 450 million to be realized by the year 2010. 

Analysts felt that the acquisition of Corus would lead to cross fertilization of the research and development capabilities in the automotive, packaging, and construction sectors and technology transfers from Europe to India. Tata Steel was also expected to gain from the best practices and expertise of senior Corus management.

The combination of Tata Steel’s low cost upstream production in India with the high end downstream processing facilities of Corus was likely to improve the competitiveness in the European operations, analysts said. Tata Steel was expected to retain access to low cost raw materials and exposure to high growth in emerging markets, and to achieve price stability in developed markets.

As a result of large scale consolidation, synergies were expected in joint procurement. 

Economies of scale were likely to result during raw material purchase negotiations and also while implementing product price changes. These synergies were expected to increase the merged entity’s profitability. After the acquisition, the top management team of Corus was retained as Tata Steel believed that a high degree of cultural compatibility existed between the two companies. This was expected to facilitate an effective integration of business over a period of time, according to analysts.

Tata Steel’s manufacturing strategy was to produce slabs/ primary steel in low cost countries and produce high end products close to the client base both in Europe and in India. It also intended to sell low profit Corus assets and aimed to increase its return on invested capital to 30 percent. Some analysts, however, criticized the Corus deal on account of the likely outcome and effects on Tata Steel’s performance. Corus’EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) was 8 percent, which was much lower than Tata Steel’s 30 percent in the financial year 2006-07. 4 Some financial analysts were of the opinion that Corus was overvalued at approximately 7.

7 times the EV (enterprise value) to EBITDA. 5 Analysts expressed concerns that the Corus acquisition would result in significant equity dilution of Tata Steel. 

The company would also become highly leveraged due to the significant increase in debt in its capital structure. The US$ 6. 14 billion debt6 that was raised to finance the acquisition had been secured by the assets of Corus and would be serviced by the cash flows generated by Corus.

Financial experts pointed to the risk taken by Tata Steel as it passed the debt burden on to Corus. | There was danger that if the business performance of Corus declined, the company’s cash inflows would reduce, leading to a default on the loan taken. Q1) What in your opinion, were the advantages accruing to Tata Steel through the acquisition of the Corus Group? Q2) What are the risks or limitations associated with the acquisition of the Corus Group by Tata Steel? `

Tata Steel Tata Steel is a part of the Tata Group, one of the largest diversified business conglomerates in India. Tata Group companies generated revenues of Rs. 967,229 million in the financial year 2005-06.

The group’s market capitalization was US$ 63 billion as of July 2007 (only 28 of the 96 Tata Group companies were publicly listed). In 1907, Jamshedji Tata established Tata Steel at Sakchi in West Bengal.

The site had a good supply of iron ore and water.

Tata Steel Vs CSN: The Bidding War There was a heavy speculation surrounding Tata Steel’s proposed takeover of Corus ever since Ratan Tata had met Leng in Dubai, in July 2006. 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. Corus responded positively to the offer on October 20, 2006.

Agreeing to the takeover, Leng said, “This combination with Tata, for Corus shareholders and employees alike, represents the right partner at the right time at the right price and on the right terms. ” In the first week of November 2006, there were reports in media that Tata was joining hands with Corus to acquire the Brazilian steel giant CSN which was itself keen on acquiring Corus. On November 17, 2006, CSN formally entered the foray for acquiring Corus with a bid of 475 pence per share. In the light of CSN’s offer, Corus announced that it would defer its extraordinary meeting of shareholders to December 20, 2006 from December 04, 2006, in order to allow counter offers from Tata Steel and CSN.

Financing the Acquisition By the first week of April 2007, the final draft of the financing structure of the acquisition was worked out and was presented to the Corus’ Pension Trusties and the Works Council by the senior management of Tata Steel. The enterprise value of Corus including debt and other costs was estimated at US$ 13.

billion (Refer Table I for fund raising mix for the Corus’ acquisition).

The Integration 

EffortsIndustry experts felt that Tata Steel should adopt a ‘light handed integration’approach, which meant that Ratan Tata should bring in some changes in Corus but not attempt a complete overhaul of Corus’systems (Refer Exhibit XI and Exhibit XII for projected financials of Tata-Corus). N Venkiteswaran, Professor, Indian Institute of Management, Ahmedabad said, “If the target company is managed well, there is no need for a heavy-handed integration. It makes sense for the Tatas to allow the existing management to continue as before.

The Road Ahead

Before the acquisition, the major market for Tata Steel was India. The Indian market accounted for sixty nine percent of the company’s total sales.

Almost half of Corus’ production of steel was sold in Europe (excluding UK). The UK consumed twenty nine percent of its production. After the acquisition, the European market (including UK) would consume 59 percent of the merged entity’s total production (Refer Table III for the spread of Tata-Corus markets before and after the acquisition).

The Synergies 

Most experts were of the opinion that the acquisition did make strategic sense for Tata Steel. 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.

The Pitfalls 

Though the potential benefits of the Corus deal were widely appreciated, some analysts had doubts about the outcome and effects on Tata Steel’s performance. They pointed out that Corus’ EBITDA (earnings before interest, tax, depreciation and amortization) at 8 percent was much lower than that of Tata Steel which was at 30 percent in the financial year 2006-07.

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