Cae Study: Tata Steel & Corus

Case Study: Tata Steel & Corus

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Table of Content

I.        EXECUTIVE SUMMARY        3

II.        TIME-HISTORICAL BACKGROUND OF ACQUISITION        5

Corus        5

Corus – Weaknesses        5

Corus – Strengths        6

Tata Steel        6

Tata Steel – Weaknesses        7

Tata Steel – Strengths        8

Synergies        8

III.        THE STEEL INDUSTRY: PRESENT & FUTURE        8

Steel Industry: Consolidation On the Rise        12

IV.        THE MERGER: CHRONOLOGY & BACKGROUND        13

V. RATIONALES FOR ACQUISITION        16

Tata Steel’s Perspective        16

Corus’ Perspective        17

Synergetic Perspective        17

V.        VALUATION OF TARGET FIRM: CORUS STEEL        19

VI.        EVENT STUDY & ABNORMAL RETURN ANALYSIS        24

Event Study Analysis        24

Abnormal Return Analysis        25

Abnormal Return Calculation        27

VII.        DESCRIPTION OF DEAL STRUCTURE        29

Financing Structure        30

Transaction Structure        30

VIII.        TATA STEEL’S INTEGRATION APPROACH        32

IX.        IMPACT OF TATA STEEL-CORUS DEAL        35

X.        REASONS FOR ACQUISITION’S FINANCIAL FAILURE AFTER MERGER OF OPERATIONS        37

XI.        CONCLUSION        39

XII.        REFERENCES        40

REFERENCES FOR TIMELINE        42

XIII.        APPENDIX        44

1. EXECUTIVE SUMMARY

        Tata Steel, a fully owned subsidiary of the Indian Tata Group, acquired the Anglo-Dutch Corus Group for GBP 6.2 bn in April 2007. When this acquisition took place, revenues of Tata Steel aggregated to USD 5 bn, with crude steel production amounting to 5.3 m ton in the fiscal year of March 2005/2006, and with an operational focus across India and Southeast Asia. Contrary, Corus prioritized Europe where it evolved to the second largest steel producer, and ninth largest worldwide, with revenues adding up to GBP 9.2 bn and steel production of 18.2 m tons for 2015. The combined firm (Tata Steel Europe Ltd.) became the fifth largest steel producer in the world, including a presence in 42 countries.

        Tata Steel took over Corus with the ambition to gain access to the European market. In this context, this acquisition aimed at providing growth opportunities through higher-end markets, and demand from more sophisticated customers. Moreover, Tata Steel was of the opinion to create additional strategic value by synergistically combining Tata’s low cost intermediate products from India with Corus’ processing capabilities to transform these intermediate inputs to high-end finished products. Furthermore, Tata assumed to take advantage from combined R&D, technology, and best practices in order to further strive in the automotive, packaging, and construction sector. On top of that, Tata observed Corus lacking raw materials, which is why Tata sensed the chance to step in, assisting Corus with low cost, but high quality iron ore from India.

        The acquisition happened during a time period in which the steel industry was about to be consolidated. This consolidation trend was predominantly fostered by remarkable growth (prospects) of the BRICS countries, particularly China. Increased demand, together with subsequently rising sales and cash holdings opened up particular reinvestment opportunities for steelmakers. However, increased demand resulted in tightening supply capacities, which explains rising steel- and iron ore prices. According to that, vertical upstream integration seemed to be a very attractive option to hedge against rising commodity prices. On top of that, the aforementioned economic rise of emerging markets, especially in Asia, further intensified competition, thereby initiating additional M&A transactions in order to capture market power and scale in the global steel market.

        At the time of the announcement of the acquisition (31 January 2007), the corresponding event study analysis reveals cumulative abnormal returns (CARs) of 22.9% for Corus, but -11.03% for Tata Steel. According to that, we conclude that the market associated the respective takeover bid with an unprofitable investment for Tata. The deal finally comprised an offer of 608 pence per share, 34% higher than the original bid. This higher bid can be most likely derived from a counter offer from Brazilian CSN. The payment was valued at USD 12.1 bn in an all-cash deal, of which more than half was funded through debt. It has to be mentioned here that Corus was almost four times the size of Tata, with Tata drawing upon a significantly better profitability ratio.

        Retrospectively, Tata was unable to turnaround Corus’ profitability; respectively integrate Corus within its organization. The last quarter of 2015 accounted for a loss of GBP 68 m. As a result of this, Tata started to sell parts of the Corus Group (April 2016). In September 2017, Tata reached an agreement to merge its remaining European steel business with the German steel manufacturer ThyssenKrupp to form a joint venture headquartered in Amsterdam.

1. TIME-HISTORICAL BACKGROUND OF ACQUISITION

Corus

        The history of the Corus Group dates back to 1999, the year in which Koninklijke Hoogovens, a Dutch steel producer, and British Steel Plc. merged. This merger symbolized a meaningful initial spark of the consolidation trend within the steel industry, giving birth to the largest steel producer in Europe and the third largest player worldwide.