TATA STEEL CORUS ACQUISITION FINANCIAL

DETAILS
. Analysis of Corus Acquisition by Tata Steel1. Executive Summary Tata acquired Corus on
the 2nd of April 2007 for a price of $12.1 billion making the Indian company the worlds fifth
largest steel producer. This acquisition process has started long back in the year 2005. This
process started in the year 2000 and with Tata it came to an end. In 2005, when the deal was
started the price per share was 455 pence. But during the time of acquisition held in 2007, the
price per share was 608 pence, which is 33.6% higher than the first offer. The high cost of
acquisition posed several risks for Tata Steel Demand will reduce in case of global recession.
High cost of acquisition may result in significant financial constraints which may adversely
affect Tata Steels capital expenditure. Corus has experienced losses. To obtain any synergy
plus benefits of acquisition, Tata Steel had to turn around the company drastically to make it
profitable. Considering the risks mentioned, we have tried to analyse how Tata Steel has done
post acquisition and if the acquisition of Corus has actually added value to the firm or reduced
the overall value. However, the annual report in Tata Steel mentions clearly that they expect to
capture around $450 million worth of synergy between Tata Steel and Corus operations. Analysts
mention that Tata has a great history of making deals work and hence the Corus acquisition will
be successful. However, we have taken a neutral stance on the Corus acquisition by Tata Steel
and have done a thorough financial statement analysis to justify if Tata Steel has overpaid for the
acquisition or not. To achieve our objective, we did reformulation of Tata Steel and Corus
balance sheet and income statement to calculate the intrinsic value of Tata Steel and Corus pre
and post acquisition. We have also done some key ratio analysis to find out how the deal has
affected operations of the firm and the return on capital employed for the shareholders before and
after the acquisition.3|Page
. Analysis of Corus Acquisition by Tata Steel2. Introduction Tata Steel (part of the Tata
Group) acquired the Anglo-Dutch steel firm Corus after a four month bidding war with Brazils
CSN (Companhia Siderurgica Nacional) for US $13.75 billion (Rs. 52,000 crores) - this was the
biggest acquisition by an Indian firm. Tatas acquisition of Corus made it the fifth largest global
steel producer with an annual capacity to produce 25 million tons of steel. The acquisition was
intended to give Tata Steel access to European markets and to achieve potential synergies in the
areas of manufacturing, procurement, R&D, logistics, and back office operations. Analysts
claimed that the acquisition price at 608 pence per share was substantially higher than an earlier
offer of 455 pence per share. Additionally, analysts felt that it would take several years for
potential production and operational synergies to materialize that would yield significant cost
savings. Following the acquisition, Tata Steels stock suffered a significant decline in price
causing Standard & Poors to place it on a credit watch list with negative implications. By
analysing the financial statements of both Tata Steel (before and after the acquisition) and Corus
(before the acquisition), the question that we are trying to answer is what was Coruss intrinsic
value at the time of acquisition and therefore conclude whether Tata Steel overpaid (or
underpaid) for this acquisition. In the process we also intend to analyse the impact on the
intrinsic value of Tata Steel due to Coruss acquisition.3. Background to the Acquisition 3.1.
Tata Steel A Background Tata Steel Limited, the flagship company of Tata Group, is the largest
manufacturer of steel in India with 25.6 million tonnes of steel capacity. The company produce

HR and CR coils and sheets, galvanized sheets, tubes, wire rods, construction rebars, rings and
bearings. 3.2. Corus Plc Ltd A Background Corus (as of 2007) was Europes second largest
steel producer with annual revenues of Rs. 82,674 crores (9.7 billion) and crude steel
production of 18.3 million tonnes in 2006. Corus had a presence in nearly 50 countries, including
its global network of4|Page
. Analysis of Corus Acquisition by Tata Steel offices and service centers. Corus was formed
on October 6, 1999 following the merger of Koninklijke Hoogovens and British Steel. Corus
main steelmaking operations were located in the UK and the Netherlands with other plants
located in Germany, France, Norway and Belgium. As of 30 December 2006, Corus was the
ninth largest steel producer in the world and produced 18.3 mt of crude steel in 2006 (equivalent
to 18.8 mt of liquid steel). Corus had four main operating divisions - Strip Products, Long
Products, Distribution & Building Systems and Aluminum. Corus had sales offices, stockholders,
service centers and joint venture or associate arrangements in a number of markets for
distribution and further processing of steel products. These were supported by various agency
agreements. There was an extensive network in the EU while outside the EU Corus has sales
offices in around 30 countries, supported by a worldwide trading Corus delivered innovative
solutions, differentiated products, reliable service and sound technical advice to its customers
around the world. Principal end markets for Corus steel products are the construction,
automotive, packaging, mechanical and electrical engineering, metal goods, and oil and gas
industries. Construction was the largest market sector for Corus, with a strong position in
commercial and industrial construction. Corus was a leading supplier to the automotive sector
and was the third largest supplier to this sector in Europe. Europe, principally the EU, was the
most important market for Corus, accounting for 80% of total turnover in 2006. 3.3. Tata-Corus
Synergy The leveraging of low cost intermediate products from India with further processing
at Corus to produce high-end finished products, along with several operation-related initiatives
will improve the competitiveness of Corus in the European markets while India will benefit from
high-value, sophisticated finished products developed in Corus R&D facilities. Further, the
combined entity will foster cross fertilization of Research & Development personnel, and
domain expertise in the automotive, packaging and5|Page
Analysis of Corus Acquisition by Tata Steel construction sectors, in addition to the exchange
of technology, best practices and expertise. The combination of Tata Steel (worlds lowest cost
producer of steel) and Corus will move towards the next level of strategic transformation through
access to low cost steel production and high growth markets globally. 3.4. Final Price - The
Bidding War On 20th October 2006, the Boards of Tata Steel, Tata Steel UK and Corus reached
an agreement on the terms of a recommended acquisition of the entire issued and to be issued
share capital of Corus, at a price of 455p in cash for each Corus share. Subsequently, a
competitive situation emerged when CSN subsequently approached Corus with a proposal to
make a cash offer. While Tata Steel revised its offer to 500p per share, CSN made a binding offer
at 515p per share in December 2006. The Board of Corus recommended CNSs offer to the
shareholders. As the process got extended, the Panel on Takeovers and Mergers in the UK set a
deadline of 30th January, 2007 as the final date by which Tata Steel and CSN could revise their
offers for Corus Group plc. The Panel subsequently announced in January 2007 that in order to
provide an orderly resolution to this competitive situation, an auction process would be held on
30th January, 2007 to establish final bids from both Tata Steel and CSN. This auction process
began in the evening of 30th January and ended in the early hours of 31st January, 2007 when
the Panel announced that Tata Steel has won the auction to acquire Corus at a price of 608p per

share. The Board of Corus subsequently recommended the Tata Steel offer to its shareholders
who voted to approve Tata Steels Scheme of Arrangement, at an Extra-Ordinary General
Meeting held on 7th March, 2007. Corus shares were subsequently suspended from trading on
each of the London, New York and Amsterdam Stock Exchanges and the Scheme became
effective on 2nd April, 2007.6|Page
Analysis of Corus Acquisition by Tata Steel4. Deal Financing Total enterprise value of
Corus is USD 13,751 million. Tata Steel would contribute USD 4,100 million as equity to its
wholly owned Deal Structure subsidiary Tata Steel Asia Holding Tata Steel Limted (India)
(Singapore) Limited, which would in turn 100% invest the same in Tata Steel UK, which has
Tata Steel Asia Holdings Pte. Limited acquired Corus plc. U.K. Singapore Internal Generation:
USD 1,267 million Tulip UK Holdings UK External Commercial Borrowings: 100% USD 500
million Tata Steel UK Limited Proceed from Right Issue: USD UK 1,888 million 100%
Foreign Equity Offering: USD 445 Corus Group Plc UK million The company has arranged
USD 6,143 million non-recourse debt financing by a consortium of bank directly at Tata Steel
UK. This refinancing provides significant benefits and flexibility over the term of financing to
the group. The refinancing facility comprises a five- year USD 3,236 million amortizing loan and
a seven-year minimally amortizing term loan of USD 2,907 million. Corus net debt amounting to
USD 846 million has been taken over by the company. The balance amount of USD 2,662
million has presently been raised in the form of bridge finance in Tata Steel Asia Singapore as
quasi equity. Tata Steel would be raising additional equity share capital (face value) in the range
of about Rs. 2500 2800 million, depending on the final pricing of the various issues. This
increase in equity capital will come into effect only in stages during the three financial years
FY2008-FY2010, therefore easing the burden of servicing. The refinancing of debt will enable
the company to save around USD 100 million per annum and USD 1,000 million over the life of
the loan purely on interest cost.7|Page
Analysis of Corus Acquisition by Tata Steel5. Corus Reformulation For this reformulation,
we referred to the Corus Annual reports for 2006 and 2005, which gave us complete financial
data for 3 years 2004-2006. Here are some significant notes during the process of
reformulation: Financial year for Corus was 1st January to 31st December All numbers are in
million pounds, unless stated All page number references are from Corus Report & Accounts
2006 For the income statement Group Turnover is consider Revenues from Sales as
Note 1 (pg 89) shows income from each of the four divisions. Restructuring charge, disposal of
assets, income from joint ventures & associates, other operating income are all separate line
items that is normally adjusted to obtain Revenue from Sales. The Costs for Sales is arrived at
by adjusting the Total operating Cost figure by removing restricting charges, profits from
disposal of PPE and profit from disposal of group undertakings (Note 2, Table 2, pg 95). Tax
on operating income is arrived at using the normal adjustments of impact of tax on other
operating income and finance costs (Notes 2, 5 and 6). Other operating income is calculated
from Notes 1 and 2. All items under Restructuring & Impairment costs are clubbed together.
Tax Rate is assumed at 35%, as the marginal rate is not mentioned in the notes to financial
statements. The effective tax rate as a weighted average tax rate for the group undertakings is
given in Note 6, Table 2, pg 99 but it is not helpful for adjustments in reformulation. Financial
Costs and Financial Income are taken as is, since all items in Note 5 are financial items, so there
was no need to take each line item separately for reformulation. Minority Interest was deducted
to obtain the net profit available for common shareholders. The final figure for Net profit

available to common was matched against the figures in Income statement and found to be
correct.8|Page
Analysis of Corus Acquisition by Tata Steel Most of the balance sheet items were easily
classified as operating or financial. Only items that required consideration from notes are
mentioned below. Trade & other receivables contain a small component that is financial
derivative instruments. According to Note 17 and 24, it is clear that this is a very small number
and it is hedge for operating transactions and future cash flow. Hence we chose to classify it as
operating assets. Similarly, Trade & other payables has a component for financial derivative
instruments as a hedge for operating activities. So considering Notes 20 & 24, we classified these
as operating liabilities. Cash and short-term deposits were split as follows all cash was
considered operating and short-term deposits were considered financial (note 18). The
Consolidated Statement for Shareholders Equity was not reported in the Annual report, and
reconciliation data was available in Note 30. We did not recreate the SSE as we didnt find the
relevant information. The number of outstanding shares was obtained from Note 9 for per share
computations.6. Corus Valuation & Sensitivity Analysis We attempted both SF2 and SF3
valuation models to find the value of equity for Corus, using the reformulated financial
statements. The weighted average cost of capital is taken as 9.5%, as given in the annual report.
Using SF2 valuation model, we get the equity value as 2473 million pounds, which is 276 pence
per share. We compare this value with the price offered by Tata Steel to acquire Corus and see
that both the initial and final offers are more than the intrinsic value. Using SF3 valuation model,
we get a negative intrinsic value as the Core RNOA is only 6%, whereas cost of capital is 9.5%.
So why did Tata pay for a Corus if it has negative intrinsic value? While a simple forecast model
like SF3, does not capture all the fundamental aspects of equity valuation, we can still do a
sensitivity analysis and see where the deal may make sense9|Page
Analysis of Corus Acquisition by Tata Steel for Tata. Corus was in a bad shape as it has both
RNOA and Core RNO lower than required rate of return, but Tata Steel has been the lowest cost
producer globally and its management has the skills and experience to manage costs. So, if
Tata Steel can decrease costs, thereby increasing RNOA and Core RNOA, plus manage growth
in ReOI, the price paid (5441 million pounds) can make sense for them. From the Valuation Grid,
we can see that if any of the combination of growth in ReOI and core RNOA in green is
achieved, the price paid by Tata can be justified. Sensitivity Analysis - Valuation Grid Core
RNOA -8495.47 8% 9% 10% 11% 12% 13% 0% 3,188.4 3,682.8 4,177.2 4,671.6 5,166.1
5,660.5 2% 2,990.6 3,616.9 4,243.1 4,869.4 5,495.7 6,121.9 growth (g) 4% 2,649.0 3,503.0
4,357.0 5,211.0 6,065.0 6,919.0 6% 1,917.0 3,259.0 4,601.0 5,943.0 7,285.0 8,627.0 7% 1,111.8
2,990.6 4,869.4 6,748.2 8,627.0 10,505.8 8% -767.0 2,364.3 5,495.7 8,627.0 11,758.3 14,889.7
9% -10,161.0 -767.0 8,627.0 18,021.0 27,415.0 36,809.07. Tata Steel Reformulation For this
reformulation, we referred to the Tata Steel Annual reports for 2007-08 and 2006-07, which gave
us complete financial data for 3 years 2005-2007. Here are some significant notes during the
process of reformulation: Financial year for Tata Steel was 1st April to 31st March All
numbers are in Crore Rupees Cash including checks in hand and remittance in transit were
considered as operating asset[schedule I Pg 236] All balances in Current and Deposit accounts
have been assumed to be financial assets The assets miscellaneous expense corresponds to part
of the Employee separation scheme which has not been expensed in the current year1 Unpaid
and Proposed dividend have been added as part of Shareholders equity1 Schedule M pg 23510 |
Page

 Analysis of Corus Acquisition by Tata Steel Interest accrued but not due which was part of
current liabilities has been assumed to be due to outstanding financial liabilities Tax rate
assumed to be 36% Sports infrastructure expenditure added this year is a part of Coruss
corporate Social responsibility Minority Interest was deducted to obtain the net profit available
for common shareholders. The final figure for Net profit available to common was matched
against the figures in Income statement and found to be correct. Tax on operating income is
arrived at using the normal adjustments of impact of tax on other operating income and finance
costs8. Tata Steel Valuation Here are some significant notes during the process of valuation:
Risk Free Rate has been obtained from the 91-day Treasury Bill rate as of Jan07 and Jan08.
Market Rate of Return has been taken from the Sensex 5-year return as of Dec06 and Dec07. The
5 year market rate of return has been taken since the value of synergy was assumed by 2010.
Since the long term borrowing rate was not mentioned in the annual report, we have assumed it
to be 12% Beta values have been fetched for Tata Steel from Capitaline database as of Jan
31st07 and Jan 31st08. Growth rate has been taken as 6% as it was mentioned in Tata Steel
annual report 2006-07. Share prices are being taken as of 31st Jan07 - the day of agreement of
deal between Tata Steel and Corus.11 | P a g e
. Analysis of Corus Acquisition by Tata Steel9. Ratio Analysis Looking at the Ratios for Tata
Steel and Corus, some insights can be found: For Corus, RNOA is 7.48% that is less than NBC
12.65% and WACC 9.5%, hence we see that ROCE 6.12% is lower than RNOA as the SPREAD
become negative. In 2006, RNOA has fallen from 12% to 7.48%, hence the company was
struggling and an acquisition target in a consolidating steel industry. A low RNOA indicates
that traditional valuation methods may give very low or negative value as the company is losing
value. We see that in SF3 valuation, when we get negative value. For Tata Steel, we see the
impact of external financing for the acquisition as the FLEV jumps to 79.25% and CSE increases
by 123.78%. The SPREAD decreases as the analysts downgrade Tata Steel, and its net
borrowing cost goes up to 23.5% from 8.6%. The core RNOA decreases slightly from 22.22%
to 21.47%, but the RNOA increases from 26.19% to 32.7%. This could be due to other
adjustments and increased effects of operating liability leverage. OLLEV increases from 38.04%
to 55.88%. Overall ROCE for Tata Steel jumps from 30.55% to 47.08% after the merger. This
is mostly due to financial and operating leverage, as the operations are merged. But since the fall
in Core RNOA is very small, we can conclude that the first year of consolidation has not eroded
value for the shareholders.12 | P a g e
Analysis of Corus Acquisition by Tata Steel10.ConclusionFrom the analysis of Corus and
Tata Steel financial statements, we can conclude that Tata Steel paid more than 120% premium
over the intrinsic value (using SF2 model). The model can be refined by forecasting ReOI
considering the steel industry data and outlook. But there will still be a significant premium over
intrinsic value. From the sensitivity analysis, we can assume that Tata is relying on its
competence to manage costs and access to low cost raw materials. Increasing Core RNOA is the
shortest path to increasing the value of Corus operations. Also looking at the Tata Steel
valuations, we can see that there is a jump in value from Rs 12,399crores to Rs 51,893 crores
from consolidated statements analysis. Tata paid 42,444 crores for Corus a year before, so
reconciling we get (51893-12399) = 39494 crores difference is approximately from Corus which
cost shareholders 42,444 crores in an all cash deal. So approx.2950 crores is value lost for
shareholders in first year of integration of Corus with Tata Steel. As we didnt value effect of

other components of Tata Steel (only looked at consolidated statements)we cannot attribute the
loss to Corus operations.13 | P a g e
. Analysis of Corus Acquisition by Tata Steel11.References Corus Annual Report 2005
(http://www.tatasteeleurope.com/file_source/StaticFiles/Functions/Financial/2005_Re
portAccounts_20-F.pdf) Corus Annual Report 2006
(http://www.tatasteeleurope.com/file_source/StaticFiles/Functions/Financial/2006_A
nnual_Report.pdf) Tata Annual Report 2007 (http://www.tatasteel.com/investors/pdf/100Annualreport.pdf) Tata Annual Report 2008 (http://www.tatasteel.com/investors/annual-report07-08/annual-report-07-08.pdf) Tata Prevails in the Corus Battle. Dated: 31st January 2007
http://www.forbes.com/2007/01/31/corus-tata-steel-update-markets-equitycx_cn_rd_0131markets12.html S&P downgrades Tata Steel on Corus Debt. Dated: 12th July
2007 http://www.forbes.com/2007/07/12/tata-corus-downgrade-markets-equitycx_rd_0712markets3.html The Tata-Corus Saga http://www.rediff.com/money/tatacorus.html
Tata Steel Company Profile http://www.tata.com/company/profile.aspx?
sectid=jsA69xFbDUA=12.Exhibits Excel spreadsheet tables attached.14 | P a g e