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    Tata Steel Acquisition of Corus

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    Pratap Singh Neil
    Tata Steel acquired Corus Group in a bidding war that ended with Tata's final bid of 608 pence per share, valuing the deal at $13.7 billion. Tata valued the acquisition using an enterprise value to EBITDA multiple of 4.18 times Corus' EBITDA from continuing operations of £947 million. However, some financial analysts argued that Tata paid an extremely high price, around 7-9 times EBITDA, compared to Mittal Steel's acquisition of Arcelor at around 4.5 times EBITDA, and that the large debt from the acquisition could strain Tata Steel's cash flows if steel prices declined.

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    Tata Steel Acquisition of Corus

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    Pratap Singh Neil
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    Tata Steel acquired Corus Group in a bidding war that ended with Tata's final bid of 608 pence per share, valuing the deal at $13.7 billion. Tata valued the acquisition using an enterprise value to EBITDA multiple of 4.18 times Corus' EBITDA from continuing operations of £947 million. However, some financial analysts argued that Tata paid an extremely high price, around 7-9 times EBITDA, compared to Mittal Steel's acquisition of Arcelor at around 4.5 times EBITDA, and that the large debt from the acquisition could strain Tata Steel's cash flows if steel prices declined.

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    Tata Steel acquired Corus Group in a bidding war that ended with Tata's final bid of 608 pence per share, valuing the deal at $13.7 billion. Tata valued the acquisition using an enterprise value to EBITDA multiple of 4.18 times Corus' EBITDA from continuing operations of £947 million. However, some financial analysts argued that Tata paid an extremely high price, around 7-9 times EBITDA, compared to Mittal Steel's acquisition of Arcelor at around 4.5 times EBITDA, and that the large debt from the acquisition could strain Tata Steel's cash flows if steel prices declined.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    26 views12 pages

    Tata Steel Acquisition of Corus

    Uploaded by

    Pratap Singh Neil
    Tata Steel acquired Corus Group in a bidding war that ended with Tata's final bid of 608 pence per share, valuing the deal at $13.7 billion. Tata valued the acquisition using an enterprise value to EBITDA multiple of 4.18 times Corus' EBITDA from continuing operations of £947 million. However, some financial analysts argued that Tata paid an extremely high price, around 7-9 times EBITDA, compared to Mittal Steel's acquisition of Arcelor at around 4.5 times EBITDA, and that the large debt from the acquisition could strain Tata Steel's cash flows if steel prices declined.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    Tata Steel Acquisition of Corus

    Tata Steel Background


    Tata Steel a part of the Tata group, one of the largest diversified business conglomerates in India. In the mid- 1990s, Tata steel emerged as Asias first and Indias largest integrated steel producer in the private sector. In February 2005, Tata steel acquisition the Singapore based steel manufacturer NatSteel, let the company gain access to major Asian markets and Australia. Tata steel acquired the Thailand based Millennium Steel in December 2005. Tata Steel generated net sales of 5 billion in the financial year 2006-07. The companys profit after tax in the same year was 1.5 billion while its profit after tax was 1.1 billion.

    Corus Background
    Hoogovens had good access to the sea for the supply of raw materials and export of finished goods. The company was established at Ijmuiden, a town on the north sea coast with good access inland via the North Sea Canal. On October 06, 1999, Hoogovens(38.3%) merged with British Steel Plc(61.7%) to form Corus Group Plc. Philippe Varin(CEO) and Jim Leng chairman of Corus, both worked to revive the companys business. The company reduced debt by selling its aluminum business to a US based company, Aleris, for 570 million. From April 2003 onwards, the share price moved up and it stood at 390 pence before the companys merger with Tata Steel

    The Highlights: Bidding war

    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. CSN(Companhia Siderrgica Nacional) reacted quickly making a counter bid of 475 pence per share on November 17, 2006. So an auction was initiated, after nine rounds of bidding on January 31, 2007 Tata emerged winner in the auction with its final bid of 608 pence per share for Corus. (US$ 13.70 billion)

    Valuing the Acquisition


    Method used Enterprise Value Multiple. Enterprise value (EV) represents a company's economic value -the minimum amount someone would have to pay to buy it outright. EV = Mkt Cap. + Pref. Stcks + Min. interest + Long Term debt Cash & cash Equivalent

    Valuing the Acquisition


    EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of Financing and accounting decisions. EBITDA = Revenue- Expenses( Excluding tax, interest, depreciation and amortization)

    Enterprise Value EnterpriseMultiple EBITDA

    Valuing the Acquisition


    EV = Mkt Cap. + Pref. Stcks + Min. interest + Long Term debt - Cash Equivalent = 3.5 billion + 0 + 26 million + 1308 million 871 million = 3.963 billion. EBITDA = 947 Million(From Con. Operations)
    Enterprise Value EnterpriseMultiple 4.18 times EBITDA

    Why Enterprise Multiple ratio ???


    EV/EBITDA is not affected by the capital structure of a company; it allows fair comparison of companies with different capital structures. We have a transnational comparison in our case and EV/EBITDA ignores the distorting effects of individual countries taxation policies.

    A Financial take on the Acquisition.


    1. Valuation
    Tata Steel is paying 7 times EBITDA of Corus enterprise value for 2005 and a higher 9 times EBITDA for 12 months ended 30 September 2006. In comparison, Mittal Steel acquired Arcelor at an EBITDA multiple of around 4.5. Considering the fact that Arcelor has much superior assets, wider market reach and is financially much stronger than Corus.

    The price paid by Tata Steel looks almost obscenely high.

    A Financial take on the Acquisition


    2. Interest charges Tatas new debt amounting to $8 billion due to the acquisition, financed with Corus cash flows is expected to generate up to $640 million in annual interest charges (8% annual interest cost). This amount combined with Corus existing interest debt will amount to approximately $725 million after the acquisition.

    If the international steel prices decline moderately, Tata Steel would have to dip into its own cash flow or find other sources like an equity dilution to service the debt.

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