Ratan Tata & B. Muthuraman: Winning Duo

On January 30, in an auction conducted via e-mail, the two prospective buyers, CSN and the Tatas, battled it out for Corus. The bidding began at 4:30 pm GMT (10 pm IST) and lasted for eight hours. And then, after nine furious rounds of bidding, in a nail-biting finish, CSN withdrew from the auction leaving the arena open for the 99-year-old Tata Steel (established in 1907) to take over Corus. What Ratan Tata almost clinched last October was finally in the bag, albeit at a much higher price. Thanks to the Tatas' all-cash 608-pence winning bid, the group would now have to shell out $12.1 billion, 33.6 per cent more than what it would have needed to pay if it had got through in October. It is easily the biggest cross-border deal struck by any Indian company.

Curiously, back in May 2005, when Ratan Tata and Corus's Chairman Jim Leng began talking to each other, it was for a joint venture and not an acquisition. But soon Tata realised that buying the company made better sense than a mere JV. When he popped the question to Leng the latter's only contention was that it would have to be an all-cash deal. Corus had been in dialogues with prospective buyers in Russia, Europe and even with CSN around then but nothing had progressed as much as its talks with the Tatas.

But that, as they say, is now history. As soon as the deal was announced, the stock market reacted. Traders felt-and not unreasonably-that, at least in the near term, Tata Steel's performance could suffer, primarily because it would need to fund the acquisition. The hurdle in this deal was the valuation and a lot of people believed that Tata Steel was stretching its balance sheet. "The additional debt will definitely increase the pressure on rating," says Standard & Poor's (S&P), Director (Corporate Ratings) in Singapore, Anshukant Taneja. Following the announcement of the deal, the Tata Steel stock lost 10.65 per cent to close at Rs 463.95.

With a market value of $11.96 billion (Rs 52,708 crore), Corus is much bigger than Tata Steel at $6.12 billion (Rs 27,000 crore). While Tata Steel and, presumably, group companies will contribute $4.1 billion via cash flows and debt (Tata Steel's cash flows are currently around $1 billion annually), the balance will have to be raised externally. For the acquisition, the Tatas will be establishing a special purpose vehicle (SPV) that will be funded-partly by the Tata companies and partly by raising debt. Standard Chartered and ABN Amro will finance the $4.1 billion in their capacity as lenders. The decision to acquire Corus when the steel industry globally is on an upswing has not gone unnoticed either. "As an equity investor, it may take time for the synergies to come through. The stock performance would be driven by this and synergies would take at least 12-18 months," says Edelweiss Securities' Head of Research, Shriram Iyer.

In a quickly organised news conference to announce the deal, Tata said: "Many thought our bid was audacious," but he added that, "this was really the commencement of Tata Steel's global strategy." That's probably why the Indian company's top brass doesn't think it has gone overboard with its $12.1 billion bid-and, taking into account Corus's debt of $1.55 billion, the total valuation of the takeover adds up to $13.65 billion. "At Rs 608 pence per share, the deal works out to an enterprise value of $710 per tonne, while a new greenfield project can cost around $1,200-1,300 per tonne to build," pointed out Tata Steel's Managing Director, B. Muthuraman. The deal works out to an EBITDA multiple of 7, based on 2005 earnings and Muthuraman was candid enough to admit that it was high. "It is probably higher but it is equally important to have the right utilisation of assets," he said.

Exploiting synergies to do that is what Tata Steel will aim at. Besides giving the Tatas a leg-up in tapping big European markets, Corus brings with it superior technology and a more sophisticated product range like steel for packaging material and cars. If Tata Steel, which makes steel at rock-bottom costs, can supply semi-finished steel like billets and slabs to Corus, it could, according to estimates, save nearly $500 million over three years (according to Muthuraman, the result of all the synergies will take three years to bear fruit). But that cannot happen immediately because existing capacities at Tata's factories in India are limited and it will take the company 5 years to augment those. The first phase of expansion of 1.8 million tonnes at Jamshedpur is expected to be ready by August 2008. The second phase of expansion and the other greenfield projects are expected to be ready between 2009 and 2011.

The Tatas are no strangers at making global takeovers work. The bigger ones among the welter of 96 companies that make up the Rs 96,723-crore group are not newbies in the global marketplace. In 2000, Tata Tea took over Tetley, a UK beverages company that was twice its size. Tata Steel itself has acquired and successfully integrated steelmakers in 2004 and 2005. But the Corus deal is in an altogether different league and how the Tatas fare with it will be watched keenly. Unlike consumer products like beverages, steel is a volatile and cyclical business. Currently, steel is on an upswing and things are going great for most manufacturers. The crunch could come when the market turns and Tata Steel has to contend with servicing debt as well as pressures on margins.

Nevertheless, with Corus in the bag, Tata Steel can finally realise its ambitions of becoming a truly global steelmaker. "This deal places Tata Steel among the top five steel producers globally and positions it at the top table for further consolidation. It also gives India a significant stake in the global steel industry," says Jitesh Gadhia, Managing Director, Corporate Finance, ABN Amro. Already, the Indian steelmaker is thinking of even bigger goals. Says Muthuraman: "In 10 years, Tata Steel will be larger than what Tata Steel and Corus put together are today." Clearly, for the newly anointed fifth largest steelmaker of the world, the global pursuit has just begun.