Operation Corus.

This article is about Tata Steel taking over Corus of the UK. This makes the Tata Group company the 5th largest steel producer in the world. Several analysts are pondering over the need for such a takeover. Possibilities include to guard against future hostile bids, acheive scale, entry into the European market and so on.
From various sources including DNA ,Economic Times and Zee News

In the biggest foreign takeover by an Indian company, Tata Steel and Corus Group on Friday reached an agreement on the acquisition of the European steel giant by the Indian firm for 4.3 billion pounds (Rs 36,500 crore).

The board of directors of both the companies approved the acquisition of Corus at a price of 455 pence per share in cash, paving the way for creating the world`s fifth largest steel entity with a capacity of 23.5 million tonnes per year.

"Corus directors consider the terms of the acquisition to be fair and reasonable, so far as shareholders are concerned. The directors intend to unanimously recommend that Corus shareholders vote in favour of the scheme," a joint statement released by Tata Steel and Corus said.

The acquisition will be made by Tata Steel UK, a wholly-owned indirect subsidiary of Tata Steel. The Indian firm has also been able to satisfactorily address the concerns of Corus` two main pension funds.

"This proposed acquisition represents a defining moment for Tata Steel and is entirely consistent with our strategy of growth through international expansion," Tata Group chief Ratan Tata said.

"We have compatible cultures of commitment to stakeholders and complimentary strengths in technology, efficiency, product mix and geographical spread," he said.

Corus Chairman Jim Leng said the combination with Tata represented "the right partner at the right time at the right price and on the right terms.

"This creates a well balanced company, strategically well placed to compete in an increasingly competitive global environment," Leng said.

The Tata-Corus deal comes close on the heels of the acquisition of Luxembourg-based Arcelor by Rotterdam-based Mittal Steel, owned by India-born industrialist L N Mittal. Arcelor-Mittal is now the world`s largest steel company with a combined output of about 110 million tonnes per year.

"The combined entity would be better equipped to remain at the leading edge of the fast changing steel industry," Ratan Tata said.

Leng said the deal with Tata followed talks with a number of Brazilian and Russian companies over the past one year.

The price of 455 pence per Corus shares is a premium of 26.2 per cent to the average closing price of 360.5 pence per Corus share for the twelve months period ended October 4, when the two sides first confirmed of the negotiations.

Tata Steel would fund the deal through its own cash resources and loans. The company is likely to raise about 1.8 billion pounds on its own and would get a loan of about 3.3 billion pounds from Deutche Bank, ABN Amro and credit issue.

As per the deal, at least 75 per cent Corus shareholders must tender their shares for Tata Steel to complete the transaction. The Indian firm has also been able to address the concerns of Corus` two pension schemes - the Corus Engineering Steels pension scheme and British Steel pension scheme - by increasing its contribution rate and paying additional funds.

Corus is Europe`s second largest steel producer, after Arcelor-Mittal, with revenues of 9.2 billion pounds in 2005 and steel output of 18.2 million tons in UK and Netherlands.

Tata Steel is India`s largest private sector steel firm with revenues of 5.0 billion dollars in 2005-06 and steel production of 5.3 million tonnes across India and South-East Asia. Tata Sons, Tata Steel and other Tata firms had combined revenues of about 22 billion dollars in 2005-06.

Tata Steel shares up 4%

Tata Steel stocks surged across the board on the bourses on Friday, on massive buying by funds and investors triggered by reports that Anglo-Dutch steelmaker Corus has accepted the company`s 4.3 billion pounds (Rs 36,500 crores) takeover bid.

Country`s largest steel maker, Tata Steel stocks shot up by Rs 19.30, or about 4 per cent at rs 521 at noon with over 55 lakh shares changing hands on the bourses.

The counter also recorded 112 block deals, placing the benchmark Sensex higher by 88 points at 12,811.59.

Tata Steel to be 40 mt company by 2012

Exuberant over acquisition of Corus, Tata Group said it would make Tata Steel a 32 billion dollar entity by 2011-12 with a combined capacity of 40 million tonnes annually from about 24 million tonnes now.

The acquisition of Anglo-Dutch giant Corus would not affect Tata Steel`s massive ongoing expansion programme in India and abroad, Tata Group Chairman Ratan Tata said after announcing the acquisition agreement.

"While financing the deal, it has been taken care that no plan either in India or expansion in Jamshedpur and overseas expansion will be affected," he said, adding the deal is expected to be completed by the middle of January next year.

Tata Steel has a capacity of 5 million tonnes per year at present, while Corus has a capacity of 18.2 mtpa. The combined entity becomes the world`s fifth largest steel producer.

Elaborating on the financing, company officials said Tata Steel would pump in 3.88 billion dollar through its subsidiary - Tata Steel UK. The balance of about 5.63 billion dollars would be raised as debt from financial institutions including ABN Amro Bank, Deutsche Bank and credit issue.

Under the agreement, Ratan Tata would become Chairman of Corus Group. Jim Leng, who is currently the Chairman, would be the Deputy Chairman of Corus and Tata Steel.

Tata Steel Managing Director B Muthuraman, Tata Sons Director Ishaat Hussain and Arun Gandhi would join Corus board, while the European firm would also have three representatives in the board of Tata Steel.

On the apprehensions raised by credit rating agencies that the deal may affect Tata Steel`s financial risk profile, Tata said, "we believe that the offer we have made is right and at fair value. We believe it is the right offer."

Upbeat over an agreement reached by Tata Steel for acquiring Corus Group in an $8.09 billion deal, the biggest by an Indian company abroad, domestic steel players hailed the takeover as a stamp of authority of Indian entrepreneurs in overseas market.
According to India's largest steel producer Steel Authority of India Limited, the takeover shows the confidence of Indian entrepreneurs.
"It shows the competitive and financial strength of Indian entrepreneurs to go overseas and acquire assets," Sushil Maroo, Director (Finance), Jindal Steel and Power Limited said, similar feelings were echoed by SAIL Chairman SK Roongta who added that it shows the confidence of Indian entrepreneurs in overseas markets.
Consolidation of steel businesses by NRI steel tycoon LN Mittal and now by Tata Group will help the steel industry to tide over fluctuations in the market. "This is good for the sector and also for the country," Maroo added.
Corus Group's Board backed Tata Steel's 455 pence a share bid to takeover the Anglo-Dutch steelmaker. The deal valued at $8.09 billion would make Tata Steel the world's fifth largest steel producer.
Maroo of JSPL said that the Tata-Corus deal would also fire ambitions of many other Indian entrepreneurs.

TATA Steel and Corus may find it difficult to achieve the synergies and cost reductions they are hoping to generate by combining their operations into the world's fifth-biggest entity , analysts warned on Wednesday.

"The strategic rationale is difficult to comprehend ," Merrill Lynch said in a report on Wednesday . "Despite an arguably attractive offer of 455 pence per share, the potential Corus acquisition does not offer cost synergies or a growing market ," the note added.

"While the acquisition can quickly catapult Tata Steel towards global scale, with little immediate benefits visible, we expect concerns on likely dilution , integration issues, longer-term opportunity loss to weigh on the stock price in the near term," brokerage firm CLSA Asia Pacific Markets said.

Tata Steel on Tuesday said that it has made an indicative, non-binding , all-cash bid for Corus at 455 pence per share, valuing the European giant at an enterprise value of about $10bn. A final offer is expected sometime soon.

On Wednesday, Standard & Poor's (S&P ) placed Tata Steel's BBB corporate long-term corporate credit rating on credit watch with negative implications. S&P also placed Tata Steel's BBB foreiogn currency rating on credit watch with negative impications. "In S&P's view, the size of the acquisition and the potential cash outflow of about $10bn that Tata Steel may make in its offer to Corus could have an advser impact on its financial risjk profile," said S&P credit analyst Anshukant Taneja. A successful acquisition, however, can potentially improve the business profile of the merged entity. In resolving the Creditwatch placement, S&P will seek further information on the progress of the offer and the potential means of financing.

Analysts tracking the sector said the "extended timescale for visible benefits" is likely to affect the stock price performance. Tata's main purpose behind the acquisition is to help Corus cut costs by providing it access to cheap raw materials such as iron ore and steel slabs. Corus has little access to iron ore mines and its steel slab-making facilities turn out products that are more expensive than those in developing countries. Tata's acquisition gameplan has been to use its low-cost mines and slab-making facilities to supply to plants near growing markets around the world. According to World Steel Dynamics, Indian steel slab producers have a 22% cost advantage over European companies . While it takes $78 per tonne in India, the cost in Europe is about $100 per tonne.

However, Tata Steel does not have any spare slab-making capacity. It is establishing new capacity of about 1.8mt, but that is completely dedicated to NatSteel of Singapore and Millennium Steel of Thailand. Tata's new slab plant is likely to come up only by about '10 when the 6mt Orissa plant gets commissioned. Till then, analysts say, there will be little benefits. Even if Tata Steel finds a way to export slabs, freight costs from India to Europe are higher than those from Russia to Europe. This means that Tata Steel could be better off setting up a slab-making facility on the fringes of EU than in far away India.

There is also a problem with iron ore. A huge controversy is raging in the country over whether or not to ban exports of iron ore. Several domestic companies, including Tata Steel, have said ore exports should be banned and the mineral should be used to make value-added steel.

The government, analysts say, is unlikely to allow iron ore exports in large quantities. Plus Tata Steel itself would need new iron ore mines which could take about three years or so.

Corus is a high-cost operation and its plants, especially in the UK, are not considered very efficient . Tata Steel may face a difficult choice in dealing with this issue even as a whisper of plant closures or job losses is likely to produce a public outcry.

Corus, at the price of 455 pence per share, is valued higher than Tata Steel, though its earnings performance has been considerably weaker. As of '06-07 , Corus at the takeover price is valued 11.3 times price-to-earnings ratio and 6.5 times at EV/EBITDA per tonne, compared with Tata Steel's 7.4 times PER and 4.2 times.

Since the proposed Tata Steel special purpose vehicle (SPV) is likely to be merged with Tata Steel, that could dilute equity. Tata Steel also, thanks to this acquisition, will have to dilute equity further for raising money for its new expansion plans in Orissa and Jharkhand.

"As Tata will pay significantly high valuation for acquiring Corus and will have to dilute at lower valuation it may result in value destruction for existing shareholders," Mumbai-based Brics Securities said in a report.