|Friendly takeover: (From left) B. Muthuraman,
Managing Director, Tata Steel; Ratan Tata, Chairman, Tata
Group; Jim Leng, Chairman, Corus; and Philippe Varin, CEO,
Corus shake hands and cement a giant deal
November, Tata group chairman Ratan Tata played host to Jim Leng,
Chairman of Corus Steel PLC, who was in Mumbai on a rare visit.
The meeting was held in the Tata bastion in Mumbai, Bombay House.
To most people, it could have just passed off as a routine meeting
between two senior executives. Leng was accompanied by his CEO,
Philippe Varin, at this meeting. Leng and Tata met again in July
this year except that this time it was in Dubai. Besides being
midway between London and Mumbai, Dubai was considered a safe
neutral ground for both of them. It was here that the seeds were
first sown for a possible multi-billion dollar deal. Tata was
kept company by his senior colleagues from Tata Steel who in a
couple of months would be ironing out the finer points of what
would become a historic transaction.
Not too many people were still convinced
that Tata Steel could, in fact, buy out Corus simply because the
numbers were astoundingly large. During fy06, Tata Steel had gross
sales just in excess of Rs 17,000 crore, which seemed minuscule
compared to Corus Group's turnover of £10.1 billion (over
Rs 85,000 crore). Indeed, the turnover of the Tata Group, comprising
as many as 96 companies, stands at a shade under Rs 1,00,000 crore.
If the deal did indeed fructify, Tata Steel would be acquiring
a player that was more than five times its own size. Even to die-hard
optimists, such a deal would seem very tough to execute. An investment
banker who was closely involved in the deal says that "it
was not smooth all the way".
Cut to August this year. Leng called up Tata
and quite literally asked, "Ratan, what's happening?"
Says the banker, "Quite obviously, Tata was taking his time.
After all, it was important for him to buy into the strategy."
Meanwhile, the Corus management began exploring other options-joint
ventures, new factories and even ways of transferring technology
to others in the steel industry. But eventually, it was back to
the option of going with the Tatas-which Leng thought was the
best solution for Corus' future.
| A MARRIAGE OF ICONS
Both Tata Steel and Corus are old steelmakers.
| If Tata Steel
and Corus sign the dotted line in January 2007, the deal would
entwine the business and destinies of two of the oldest players
in the global steel industry. Tata Steel's history dates back
to the days of the British Raj in India. Established in 1907,
the company produced its first cast of pig iron in 1911 and
steel in the following year. What's remarkable is the fact
that Corus itself was the product of another merger between
two European steel giants-British Steel and Dutch major Koninklijke
British Steel was created in 1967 when the 'Iron and Steel
Act' nationalised about 90 per cent of British steelmaking.
British Steel was formed from the merger of UK's 14 main
steel producing companies. The idea was to revive the extremely
fragmented industry, which was plagued by years of insufficient
capital investment. By 1980, British Steel had closed several
outdated and loss-making plants and reduced its workforce
to 130,000-as compared with a total of 268,500 employees
at the time of nationalisation.
The other parent of Corus was the largest player of pig
iron in the world during the 1930s. Founded in 1918, Koninklijke
Hoogovens was one of the four largest producers of rolled
and extruded aluminium in Europe by 1987. By 1999, Hoogovens
had 17 business units, around 22,000 employees, a turnover
of m4.9 billion, production of 6.7 million tonnes of crude
steel. The merger between Hoogovens and British Steel was
initiated to help revive British Steel, which had incurred
a net loss of £81 million by 1999.
Then, nearly a year after the first meeting
between Leng and Tata at Bombay House, the deal was clinched when
both parties met in London early last month. On October 20, the
$8 billion deal was made public and, in one sweet move, Tata Steel
moved up from being the 56th largest steel company to the fifth.
A win-win for both?
From 56 to 5 is an impressive leap. Tata
Steel, with a capacity of 5 million tonnes, was a minnow in the
global steel business, where total capacities at the end of 2005
were 1.13 billion tonnes. The Corus deal catapaults it into the
rarefied big league. From being India's steel major, the Tata
Corus combine is now set to play the global game. In the steel
industry, like in other commodity businesses, capacities and scale
are the key factors determining global success and it is a fact
that the top 15 steel producers-yes, that includes the Tata-Corus
combine-account for a third of global capacities.
"The transformation of Tata Steel's
business over the last decade into one of the lowest cost and
most admired steel companies in the world is truly unique,"
says Jitesh Gadhia, Managing Director, ABN Amro Corporate Finance
in London, who was among the advisors for Tata Steel for the Corus
buyout. "Tata Steel was probably punching below its weight
in terms of steel sector consolidation-now it has a seat at the
But the Tata-Corus story isn't just about
the numbers and size-incidentally, post-acquisition, the combine
will have a turnover of $24 billion (Rs 1,10,400 crore) and ebitda
of $3.4 billion (Rs 15,640 crore), dwarfing many large Indian
companies-but also impacts manufacturing and access to clients.
Corus' manufacturing facilities are spread across the UK, Ireland,
Netherlands and the US. "The proposed union of these two
companies has been built on a global strategy. Together, we plan
to build a stronger and a bigger union in terms of the steel industry
globally," B. Muthuraman, Managing Director, Tata Steel,
isn't efficient to be just European. This is a global industry;
we have to respond-with passion, yes, but commercial passion"
"The proposed union
of these two companies
has been built on a global strategy. Together, we
plan to build a stronger
and a bigger union"
In the UK, where Corus has over a 50 per cent
share of the total steel market, it has four factories. It also
has three factories in the US and one in the Netherlands. Tata
Steel, besides its strong manufacturing base in India, has four
overseas factories (which it acquired earlier) that are spread
across Thailand and Singapore. Combined with Corus' presence in
the US and Europe, the deal makes the global footprint for Tata
Steel look compelling. Says Anshukant Taneja, Director (Corporate
Ratings), Standard & Poor's (S&P) Singapore, "Tata
Steel will move from being an Asian player to one that also operates
in developed markets."
There is synergy too between the two companies'
customer bases. Together, the two cover a spectrum that includes
consumers in automotive, construction and packaging industries.
The strategic fit, says Ratan Tata, is what made Tata Steel go
for the deal. "If Corus had been a 5-million-tonne company
and we felt that the strategic fit was right, I think we would
still have done this deal; it's not to gain mere tonnage."
Muthuraman adds that there is potential for adequate synergies
in the areas of manufacturing, shared services, logistics and
even cost reduction.
Following the buyout, Tata Steel will now
have an installed capacity of 23 million tonnes, which places
it above other established players like China's Baosteel. "The
fact that Tata Steel is buying someone about five times its own
size is not that important; what needs to be looked at is the
kind of synergy that can be derived," points out Jitender
Balakrishnan, Deputy Managing Director, IDBI Bank.
In sharp contrast to Tata Steel's low cost
operations, Corus' cost of steel production is among the world's
highest. But what may appear to be an apparent problem could actually
be an advantage to the combined entity. A recent report from Macquarie
Research says Corus' huge raw material costs is on account of
the fact that only 6.5 million tonnes out of its total capacity
is integrated. "Tata Steel can bring its large resource base
in India to good use. It is adding crude steel capacity of 2.4
million tonnes in fy09 and 7.7 million tonnes in FY 10 and with
India projected to have 20-25 million tonnes surplus capacity
by 2011-12, Tata Steel needs a market for its increased production,"
says the report. In Muthuraman's own words, Tata Steel will adopt
a six-point strategy-having a strong base in India, de-integration,
raw material security, getting more out of steel, control over
logistics and acquisition of finishing capacities in growth markets.
| THE GLOBAL STEEL INDUSTRY CONSOLIDATES
Fragmented capacities are driving M&As in the global steel
The international steel industry
is consolidating. according to PricewaterhouseCoopers, in
2005, total M&A activity for steel globally stood at
a massive $27.4 billion (Rs 1,26,040 crore), which comprised
165 deals. Importantly, a lot of this action is coming from
the BRIC (Brazil, India, Russia and China). The International
Iron and Steel Institute (IISI) predicts that the worldwide
steel demand will grow by 9 per cent to 1.121 billion metric
tonnes by the end of this year. "India and China are
among the fastest growing markets in the world. That's where
the growth will come from," says Ian Christmas, Secretary
General, IISI. Agrees Yezdi Nagporewalla, National Industry
Director, KPMG India, who says that large deals like that
of Tata Steel-Corus will continue to be witnessed. "I
think this trend will continue as corporates in India look
for synergies and globalisation as a part of their strategy."
In China, which prohibits foreign ownership in the steel
industry, domestic M&A activity is picking up, albeit
very slowly. Today, China has more than 800 domestic steel
producers and the government has ordered smaller plants
with legacy equipment to shut shop in an attempt to control
the number of steelmakers.
Steel companies across the world, including large players,
are also in the midst of adopting various methods to ward
off the threat of hostile takeovers. The most obvious instance
that comes to mind is Mittal Steel's hostile takeover of
Arcelor. Recently, Nippon Steel and Posco have stated that
they will spend around $1 billion (Rs 4,600 crore) to increase
their stakes in each other to reduce the possibility of
a hostile takeover.
Making the deal
The real challenge for Tata Steel could well
be the follow-through after the deal is concluded. Issues like
cultural integration and dealing with the apprehension of workers
at Corus' factories worldwide would have to be dealt with. In
the UK and elsewhere, some have expressed qualms about a relatively
small Indian company's ability to integrate a much larger global
firm. Yet, in sharp contrast to the furore raised by L.N. Mittal's
bid for Arcelor earlier this year, the Tatas have full backing
of Corus' management. Says Leng, "It isn't efficient to be
just European. This is a global industry; we have to respond-with
passion, yes, but commercial passion. Frankly, who owns the shares
is of secondary importance."
Hussain is the financial whiz at
the Tata group and will get a place on the Corus board along
with Tata, Muthuraman and Arun Gandhi
Executive Director/Tata Sons
It won't be a cakewalk to make the deal work.
Back in India, Tata Steel has its hands full. There's a big project
to expand capacity at its 95-year-old factory in Jamshedpur and
at least three greenfield projects coming up at other locations
in the country (see Tata Steel, 10 Years On). Add to that the
challenge of integrating Corus with Tata Steel and it could all
look quite daunting. Says S&P's Taneja, "Tata Steel's
earlier acquisitions were much smaller in size and integrating
them was much easier." Yet, its earlier deals-like Singapore's
NatSteel, which it took over in February 2005 and Thailand's Millennium
Steel, which it acquired in December 2005-may help like dress
rehearsals do before the final show. "With Tata Steel's plans
for its greenfield projects, the combined business would be around
40 million tonnes by 2011-12. This entity, I believe, which will
combine the strengths of Tata Steel and Corus, will become a powerful
force in the world of steel which today is increasingly consolidating,"
But things are not exactly hunky dory at
Corus. Ever since the merger of Dutch company Koninklijke Hoogovens
and British Steel to form Corus in 1999, the company's financial
health has suffered. The merger wasn't smooth and by early 2003,
Corus' stock market valuation had shrunk to $230 million (Rs 1,058
crore) from $6 billion (Rs 27,600 crore) in 1999. In response,
Corus launched a programme called 'Restoring Success' in June
2003 aimed to deliver EBITDA benefits of £680 million (Rs
5,848 crore) per annum by the end of 2006. "Ninety per cent
of the total targeted savings of £680 million have been
achieved," says Varin.
| TATA STEEL, 10 YEARS ON
Tata Steel plans to rapidly expand in India.
|The future looks bright: And why
not? Tata Steel will have 33 mi tin annual capacity
in India alone by 2015-16
Before 2015 is over, Tata
Steel will have 33 million tonnes in annual capacity in
India alone. Given that it is at just 5 million tonnes at
present, how does the company plan to ramp up capacity seven-fold
in less than 10 years? By moving on several fronts simultaneously.
For starters, the existing plant at Jamshedpur plans to
double its capacity to 10 million tonnes. The first phase
of expansion, where the capacity will increase to 7 million
tonnes, is underway. Then, there are plans for greenfield
projects. The biggest of them will be a 12-million TPA integrated
steel plant also in Jharkhand. Once the statutory clearances
are obtained, the first phase of 6 million TPA is expected
to be completed in about five years. Project cost: Rs 40,000
Tata Steel has also outlined another investment of Rs
15,400 crore, which will go towards setting up a 6 million
TPA integrated steel plant in Orissa. To be located in Kalinganagar,
this project too will have two phases. As things stand,
construction work on this project is expected to begin shortly.
Another greenfield project in Chattisgarh will have a capacity
of 5 million tonnes per annum. The Rs 10,000-crore project
will have the first phase completed in about five years.
This will also entail the development of captive iron ore
mines to feed this plant. These three projects alone will
require investments in excess of Rs 65,000 crore. It seems
Tata Steel is making up for lost time with a vengeance.
The other issue-and the one that has been
most talked about-is that of financing. The Tata-Corus deal marks
the single largest instance of leveraging. Tata will borrow $6
billion or Rs 27,600 crore (this includes the amount to refinance
Corus' existing debt) to fund the acquisition. Yet investment
bankers-and certainly those who advised the Tatas-don't seem to
be worrying. Says ABN Amro's Gadhia, "Funding for strategically
compelling transactions is always available and although Indian
companies might often be smaller than their overseas competitors,
their profitability is frequently superior." That probably
holds true for Tata Steel and its much larger prey, Corus: Tata
Steel's EBITDA margins have consistently been in the 30-35 per
cent range, while Corus' have been at best at 10 per cent.
Macquarie's report points out that Tata Steel
is "cash rich" thanks to $0.6 billion (Rs 2,760 crore)
raised through a preferential offering to its promoters and cash
in hand at $0.5 billion (Rs 2,300 crore) which is in addition
to expected cash earnings for the current year of $0.6 billion,
making for a total of $1.7 billion (Rs 7,820 crore). Besides,
if needed Tata, who manages his group like a confederation, can
also unlock Tata Steel's investments in other group companies.
For instance, the value of Tata Steel's holdings in other Tata
Group companies like Tata Motors and Tata Power is more than Rs
The Tata-Corus deal has been struck at a
time when the global steel industry is booming. What happens if
there's a downturn? "Steel prices are expected to be stable
in the near to medium term, since there is strong demand. Even
if prices do fall, we do not expect either of the companies to
make losses," says Shriram Iyer, Head (Research), Edelweiss
Securities. Then there are those who are sceptical about the Tata-Corus
combine getting benefits of Tata Steel's cost advantages. A Merrill
Lynch report says Tata Steel may have to wait till 2010 when its
first phase of a new factory at Orissa is commissioned before
it could hope to get any significant cost advantage.
Big global M&A deals can run into hitches
and, although everything looks good thus far, that could be true
for Tata-Corus as well. There is, for instance, the possibility
of counter bids from other global steel firms. Besides, Tata Steel,
in which the promoter group has a 30.26 per cent shareholding
at the end of September 30, 2006, could itself be a takeover target.
But, for the moment, as Ratan Tata applies the finishing touches
to what is unarguably an Indian company's largest overseas acquisition,
Tata Steel has found its place in the sun.