The process of mergers and acquisitions has gained substantial importance

in today's corporate world. This process is extensively used for restructuring

the business organizations. In India, the concept of mergers and acquisitions

was initiated by the government bodies. Some well known financial

organizations also took the necessary initiatives to restructure the corporate

sector of India by adopting the mergers and acquisitions policies. The Indian

economic reform since 1991 has opened up a whole lot of challenges both in

the domestic and international spheres. The increased competition in the

global market has prompted the Indian companies to go for mergers and

acquisitions as an important strategic choice. The trends of mergers and

acquisitions in India have changed over the years. The immediate effects of

the mergers and acquisitions have also been diverse across the various

sectors of the Indian economy.

TATA CORUS DEAL

In a giant leap, Tata Steel's acquisition of the Anglo-Dutch steel major Corus

vaulted the former to the fifth position from 56th in global steel production

capacity. With the exception of Arcelor Mittal, which has combined

production capacities of 110 million tonnes, Tata Corus, with a capacity of

23.5 million tonnes, will be only 5-7 million tonnes short of the next three

players — Nippon Steel, Posco and JFE Steel.

VALUATON FOR DEAL

This hotly-contested mega deal had, however, came at a stiff price of $12.1

billion in equity value and with a debt component of around $1.5 billion

Corus as an enterprise is worth $13.6 billion. That takes the winning final

bid for the shares of Corus 34 per cent higher than the initial offer the Tatas

made earlier.

SETTLEMENT OF DEAL

50% of the cost of acquisition was funded through equity contribution by

Tata Steel and rest by debt. Lloyds bank, along with a couple of other banks

like Deutsche Bank and ABN Amro funded the borrowings and they

dispatched the share loan certificates. The payment was made by Tata Steel

(UK), the 100% subsidiary of Tata Steel.

FINANCING

$4.1 billion of the total consideration was from Tata Steel/Tata Sons by way

of debt and equity contribution by these two and the balance $8 billion, was

raised by a special investment vehicle created in the UK for this purpose.

Preliminary indications from the senior management of Tata Steel suggested

that the debt-equity ratio will be maintained in the same proportion of 78:22.

Equity:

1) Promoters (Tata Sons) had, on April 18 2007, converted preferential allocation of 2.85 crore warrants to ordinary shares at Rs 484.2 a share. That's a net amount of Rs. 1380 cr.

2) Rights issue at 1:5 (five for every one share held) at Rs. 300 per share. This is a 40% discount to current prices of Rs. 500 per share. They raised 3,660 cr. this way, giving out 12.2 crore shares.

3) Preference shares of 1:7 (1 share for every 7 you own) for Rs. 4350 cr. at 2% interest, convertible at a rate between Rs. 500 and 600 after two years. At assumed price of Rs. 550. That's an additional 7.91 cr. shares.

4) A foreign issue of equity for about $500 million (Rs. 2100 cr.) Let's also assume a price of Rs. 550, and this yields another 3.82 crore shares issued for this.

5) A "quasi-equity" issue (meaning: We are going to dilute) by Tata Singapore, for $1.25 billion. Let's assume Rs. 550 per share for this, gives us an equity dilution of 9.77 cr. shares.

Internal Accruals:

1) Own cash of Rs. 3000 cr. ($700 million)

Debt:

1) External Commercial Borrowing of $500 million (Rs. 2170 cr)2) UK Debt, already taken and with no recourse to Tata Steel: $6.14 billion, about Rs. 26,400 cr.3) Tata Singapore had taken on debt of $1.41 billion (Rs. 6063 cr)

SYNERGY

Spelling out the rationale for the deal, Mr. Ratan Tata, Chairman, Tata Sons,

had claimed, "... it will take several years for us (Tatas) to build a 19-

million-tonne enterprise from scratch, leave alone establishing it in Europe

with a brand name." In that sense, it is obviously an important strategic

move for Tata Steel with long-term global implications in a consolidating

sector.

LONG TERM SYNERGY

Whenever a strategic move of this scale is made (where a company takes

over a global major with nearly four times its capacity and revenues), it is

clearly a long-term call on the structural dynamics of the sector.

Over a long time-frame, the management of the combined entity has far

greater room to manoeuvre, and on several fronts.

Progress on low-cost slabs: Research shows that steel-makers in India and

Latin America, endowed with rich iron ore resources, enjoy a 20 per cent

cost advantage in slab production over their European peers. Hence, any

meaningful gains from this deal will emerge only by 2009-10, when Tata

Steel can start exporting low-cost slabs to Corus.

Second, there may be further constraints to exports as Tata Steel will also be

servicing the requirements of Nat Steel, Singapore, and Millennium Steel,

Thailand, its two recent acquisitions in Asia.

Restructuring at Corus: The raison d'etre for this deal for Tata Steel was

access to the European market and significantly higher value-added

presence. In the long run, there is considerable scope to restructure Corus'

high-cost plants at Port Talbot, Scunthorpe and the slab-making unit at

Teesside.

Research capabilities:

Corus has high research and development capability which India

lacks, though Tata Steel has some R&D expertise. But Tata Steel has

a lot to gain in improving and understanding the technology to derive

more from its assets. 

The strategic fit is high.

PRESENT SCENARIOPOST-CORUS, TATA GROUP REVENUE CROSSES US$ 50 BILLION

It reported consolidated revenues of Rs 31,154 crore in quarter ending 30

June, a 442% jump from the previous year on January 2008.

The Tata group, one of India's largest business houses consisting of around

100 firms in seven sectors, crossed the $50 billion (Rs1.97 trillion) revenue

mark in 2007, following the acquisition of Corus Group Plc. The group

reported $28.8 billion as the revenue for 2006-07. Tata Steel Ltd acquired

Europe’s second largest steel producer Corus on 31 January for $13.65

billion. Corus started contributing to the group’s revenue from April.

Tata Steel doesn’t break out Corus revenue. It reported consolidated

revenues of Rs31, 154 crore in quarter ending 30 June, a 442% jump from

the previous year. Tata Steel reported Rs4, 197 crore as total revenue for the

June quarter. It had Rs26, 957 crore revenue from its subsidiaries and bulk

of that came from Corus.

ANALYSIS PRE AND POST MERGER

.

Number of shares (post merger) 94.60 cr. .

.

Profit Analysis (Rs. cr.) .

Tata Steel NP 3901.76 .

Corus NP 3012.8 .

Extra Interest cost 1489.305 4.30% .

Added up NP 5,425.26 .

.

Current Price April 2007 505 .

EPS P/E .

Current 67.21 7.51 .

Post merger 57.35 8.81 17.20%

Number of shares (pre merger) 58.05 cr.

CIA II

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