TATA CORUS DEAL

By Rasieek Jain

TATA STEEL HISTORY

Name:- Tata Steel Type:- Public Ltd. Industry:- Steel Founder(s):- Dorabji Tata Founded:- 1907 Headquarters:- Mumbai Chairman:- Mr. Cyrus Pallonji Mistry Parent:- Tata Group Subsidiaries:- Nat Steel, Tata Steel

Europe,Tata Steel Thailand. NSE:- TATASTEEL, BSE: 500470

CORUS HISTORY

Founded:- 1999 Formation:- Merger of British steel corp.

& koninklijke N.V.

Type:- Subsidiary Industry :- Steel Parent:- Tata steel,Tata Group.

SWOT ANALYSIS TATA STEEL

Quality of steel was not as per International StandardLack of R & DLack of Technology

World Leader in steel by having Competitive advantage in cost & High quality steel

Competition from World Leaders

SWOT ANALYSIS

Introduction Of Corus

London based Corus group is the worlds one of the largest producer of steel & aluminum.

Corus was formed in 1999 following the merger of Dutch group koninclijike Hoogovens N.V. with UK’s British Steel Plc. On October 6,1999 .

It employees 47300 people worldwide & 24000 people in UK.

It had revenue of £9.2 billion in the year 2005,i.e.Rs. 64,400 CR.

Corus provide Innovative solutions in construction ,automotive packaging, mechanical engineering worldwide.

SWOT ANALYSIS OF CORUS

Worlds ninth largest & Europe's second largest companyWide range of products of high technology

Lack of access to Raw MaterialHigh Operational Cost

To get access to raw material through MergerTo decrease the Overlapping Cost of Value chain

Increase in losses result in winding up of company

SWOT ANALYSIS

Timelines Of Deal

On October 20, 2006, Tata Steel announced that it had agreed to pick up a 100% stake in the Anglo-Dutch steel maker Corus at 455 pence per share in an all cash deal, cumulatively valued at GBP 4.3 billion (USD 8.04 billion).

On November 19, 2006, the Brazilian steel company CSN launched a counter offer for Corus at 475 pence per share, valuing it at $8.4 billion.

On December 11, 2006, Tata preemptively upped the offer to 500 pence, which was within hours trumped by CSN's offer of 515 pence per share, valuing the deal at $ 9.6 Billion. The Corus board promptly recommended both the revised offers to its shareholders.

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On December 11, 2006, CSN announced a formal offer for the Company at an offer price of 515 pence per Corus Share, valuing the deal at $ 9.6 Billion

on December 19, 2006, UK Watchdog the Panel on Takeovers and Mergers announced that the last date for each of Tata and CSN to announce revised offers for the Company, should they wish to do so, is 30 January 2007. They also warned that it would begin an auction procedure if the two remained in competition.

On January 31, 2007 Tata Steel won their bid for Corus after offering 608 pence per share, valuing Corus at $11.3bn

How The Deal Financed

Total TATA-CORUS deal of US $ 13.7 billion Equity Component-US$ 7.56 billion using Rights

issue,Preferencial issue along with other financial methods.

Debt Component-US $ 6.14 billion through mezzanine & long term loan arrengement with Citi Group,Standard Chartered,ABN AMRO bank.

For immmediate financing Tata Steek UK raised 2.66 billion bridge loans.

Acquisition was completed through Tata Steels UK Special Purpose Vehicle named Tata Steel UK.

Deal

Why Did TATA STEEL Bid For Corus

There is recognition that for indian economy to continue its growth, its companies must look to compete on a global scale.

Globally Tata steel was only 56 th largest steel producer.

Buying Corus will leapfrogs it to fifth largest steel producer in world.

Acquisition of Corus provide Tata steel of its production line & technology.

Economies of scale To tap europeon market. Corus hold No. of patents & R & D facilities. Cost of acquisition is lower than setting up

green field project & marketing & distribution channel

Why Corus Accepted The Deal The main reason is backward integration. Saturated market of europe. Decline in market share & profit. Lower net profit to sales ratio i.e.Revenue

US$18.06 billion & N.P.only $626 million. Employee cost of Corus was 15% & Tata only

9%. Loan of Corus was £ 1.6 billion.

Why Cash Deal

A really confident acquirer will tend to pay for the acquisition by cash and the markets historically have been rewarding this confidence by responding through rise in share value, a stock buy out could (almost certainly) take the opposite direction if they sense that the stock is overvalued. In about 75% of the cases, the stock value of acquirer has taken a dip soon after the deal is announced. The cash buyout also makes sure that its shareholders do not give up any merger gains to the acquired companies shareholders.

Immediate takeover was required Share swap deal would have been less attarctive

to Corus Shareholder.

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Share swap deal may diluted the TataSteels share base which was not in favor of Tata Steels share holder.

Cost of acquisition Debt i.e.8% was less than cost of equity i.e.15%.

Share swap deal means FDI & lot of regularity which might have not been accepted by Corus Shareholders.

What Happened After Deal

There were a lot of apparent synergies between Tata Steel which was a low cost steel producer in fast developing region of the world and Corus which was a high value product manufacturer in the region of the world demanding value products. Some of the prominent synergies that could arise from the deal were as follows :

Tata was one of the lowest cost steel producers in the world and had self sufficiency in raw material. Corus was fighting to keep its productions costs under control and was on the look out for sources of iron ore.

Tata had a strong retail and distribution network in India and SE Asia. This would give the European manufacturer an in-road into the emerging Asian markets.

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Powerful combination of high quality developed and low cost high growth markets

There would be technology transfer and cross-fertilization of R&D capabilities between the two companies that specialized in different areas of the value chain

There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and ethics. Tata steel's Continuous Improvement Program ‘Aspire’with the core values :Trusteeship,integrity,respect for individual, credibility and excellence. Corus's Continuous Improvement Program ‘The Corus Way’ with the core values : code of ethics, integrity, creating value in steel, customer focus, selective growth and respect for our people.

Tata Steel Revenue & share Price Volatility after Deal

The Following Laws Regulating The Mergers and Acquisitions in India:Companies Act 1956

Section 391 to 394 contains major provisions for mergers and acquisitions. The provisions also deal with the compromise or arrangement with or without merger. Presently High court enjoys the power of sanctioning amalgamation matters under sec. 394.. The following procedure shall be followed

i. Examine the MOA of the company. The object clause should permit to regulate, if not so provided in the clause amend accordingly.

ii. Convey board meeting to approve and draft the scheme of amalgamation and for authorization of filing application to the High court.

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. File application to High court to issue directions to convey the general meeting.

iv. The High court pass the necessary directions which shall include time and place of the meeting, chairman of the meeting, procedure to be followed in the meeting and time to submit the report of the meeting to the court.

v. Send notices to shareholders and creditors, Stock Exchanges and also advertise the notice of the meeting in the two daily news paper one in English and other in the regional language.

vi. Hold the general meeting as per court’s direction. The scheme shall be approved by 3/4th majority.

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vii. File the report of the meeting to the court and stock exchanges within 7 days.

viii. File resolution with the ROC. ix. File petition to the court for sanctioning

of the scheme. x. Within 30 days of sanctioning the scheme

file courts order with ROC.

Income Tax Act 1961 Provisions

Section 2 (IB): Amalgamation means merger of either one or more companies with another company or merger of two or more companies to form one company in such a manner that:

i. All the properties and liabilities of the transferor company/companies become the properties and liabilities of Transferee Company.

ii. Shareholders holding not less than 75% of the value of shares in the transferor company (other than shares which are held by, or by a nominee for, the transferee company or its subsidiaries) become shareholders of the transferee company.

Section 47 (vi): Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company is not regarded as transfer and not chargeable to tax.

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Section 47 (vii): The transfer of shares by the shareholders of the transferor company in lieu of shares of the transferee company on merger is not regarded as transfer and hence gains arising from the same are not chargeable to tax in the hands of the shareholders of the transferee company.

Section 49 (2): In case of merger, cost of acquisition of shares of the transferee company, which were acquired in pursuant to merger will be the cost incurred for acquiring the shares of the transferor company.

Section 72A: Government can allow carry forward of losses and unabsorbed depreciation provided the amalgamated company carry on the business of the amalgamating company for at least 5 years.

No Sales tax on mergers and amalgamation.

Sebi Act, 1992 Regulations

The objective of the Takeover code is to regulate in an organized manner the substantial acquisition of shares and take over of a company whose shares are quoted on a stock exchange

Regulations regarding limits according to which shares shall be acquired:

The regulation for the minimum amount of shares to be acquired and a public announcement to be made in accordance with it are given under regulations 10, 11 and 12.

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a)Regulation 10- According to this regulation, no person either alone or with someone acting with the same intention shall acquire shares in a company that would enable the person or persons to practice more than 15% voting rights. The regulations further say that, this could only be done by a person who has made public announcement to acquire such shares in accordance with the regulations. In other words a person by himself or with a person acting with the same intention shall make a public offer to acquire a minimum of 20% of shares in accordance with the regulation.

b)Regulation 11- This regulation talks about an Acquisition by a person or two or more persons acting together with common intention, who have already acquired 15% or more but less than 55% of share or voting rights, which would enable them

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to exercise further 5% but not more voting rights in the same financial year ending on 31st March. Though this can be done if the acquirer makes a public offer to acquire such shares in accordance with the regulations. The regulation further talks about acquirers who already have 55% or more shares but less than 75% shares of the target company but intend to acquire more shares, this can only be done if the acquirer makes a public announcement in this regard

c)Regulation 12- The regulations further say that, any control over the company shall not go into the hands of the acquirer irrespective of whether acquisition of shares or voting rights has taken place or not, until a public announcement to acquire such shares has been made in accordance with the regulations.

Fema Act,1999 Provisions

Foreign Exchange Management Act 1999

FEMA is regulating the cross border mergers and acquisitions. The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing outside India) Regulation, 2000 issued by RBI vides Notification No. FEMA 20 /2000-RB dated 3rd May, 2000. These regulations contained general provisions for inbound and outbound cross border mergers and acquisitions in India.. Under these provisions once the scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company or new

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company is allowed to issue share to the shareholders of the transferor company resident outside India subject to the condition that:

i. The percentage of shareholding of person’s resident outside India in the transferee or new company does not exceed the sectoral cap.

ii. The transferor company or the transferee or the new company is not engaged in activities, which are prohibited in terms of FDI policy.

Major Acquisitions

Global Steel Ranking

CONCLUSION

On July 23, 2007, Tata Steel stock reached a 52-week high close of 721.00 on the Bombay Stock Exchange’s (BSE) 30-stock Sensex after hitting a low of 399.00 on March 8, 2007.

Tata Steel was one of the market leaders for the BSE Sensex up 27% in 2007.

Standard & Poor’s Ratings Services cut its credit rating to BB from BBB and removed them from the negative watch list on which they were placed after the financing structure for the acquisition of Corus was announced.

The rating was changed to a positive outlook. If after acquisition,if this deal will able to acquire all the

synergies,then TATA STEEL-CORUS can be within top 3 companies by the year 2015.

References

www.bbc.co.uk Wikipedia Business Standard www.corusgroup.com www.thehindubusinessline.com

THANK YOU

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