The Hindu Business Line : Corus buy: ‘Innovations in funding saved millions of dollars’

I think that the manner in which the long-term finances are tied up somewhat determines the robustness of the transaction.— Mr Koushik Chatterjee, Tata Group CFO.

Kripa Raman
S. Shanker

Mumbai, Feb. 1

The $12-billion acquisition of the UK-based steelmaker Corus by Tata Steel has fetched the Indian group several awards and recognitions. It was ranked among the 10 best business deals of 2007 by Time magazine. It also fetched the Group CFO, Mr Koushik Chatterjee, several awards, including the deal of the year award at the recent CFO 2007 awards instituted by International Markets Association India. Mr Chatterjee relives the deal again for Business Line and talks about what lies ahead. Excerpts from the interview:In hindsight how would you sum up the Corus acquisition?

It is something which was very audacious by past trends. In such a large transaction, especially when it is out of cash funding, the financing becomes the foundation for its success. And, given the volatility in the markets, the transaction quite frankly did not finish with the auction, after which the long-term financing had to be tied up, and I think that the manner in which the long-term finances are tied up somewhat determines the robustness of the transaction.

The equity component was very large, with Tata Steel contributing $7.4 billion. We had one of the largest rights issues of almost $2.2 billion which just got completed. Then there was the element relating to the foreign convertible bond offering of $875 million which again happened when the markets were very volatile.

The challenge for the team is we did not have any benchmark of an Indian company having done this, so you need to set the benchmark. We actually transformed an LBO (leveraged buy-out) style of debt into a more corporate style debt. And, if you look at our spreads on the non-recourse debts, those spreads were the best around that time in spite of a very volatile market.

Did you opt for whatever was the best alternative or was there a creative element to the financing?

If you look at the set pattern of LBO transactions, there is a small portion of equity, typically around 10-30 per cent, the balance being debt. The debt would consist of high yield bonds, terms loans or bank debt. The typical LBO has features of very rigid terms — you cannot prepay, you do not have the flexibility of the shareholder till you pay out all the loans etc.

You do not have the flexibility of restructuring that you may want to do later on. It is very straight-jacketed. For an Indian company which went out for a global acquisition it could have been a safe way of doing it though not the most efficient way.

We tried to do this with the help of larger equity, because at that point of time when it was an LBO, the equity was not large. We went for a more corporate style debt. We did not want to go in for high-cost bonds and get stuck with the inflexibility. And we needed to ensure that the cost is significantly lower than on high yield bonds. These innovations resulted in savings of several hundred millions of dollars.

The other thing was optimising on tax. Taxation plays a very critical role in structuring cross-border transactions. Corus, UK, has a lot of unabsorbed tax losses. So we wanted to find out how best to utilise that. In the Netherlands, it is a tax paying entity so we wanted to restructure the acquisition in a manner where we can derive fiscal unity and save tax.

You have talked about various kinds of synergies arising from the Corus deal. Will the core synergies kick in only when Tata Steel’s new capacities come on stream for supply to Corus?

The synergies with respect to Corus are not built on supplies from Tata Steel. The synergies are built on better operating practices and efficiencies and which is premised out of cross learning between Corus and Tata Steel. Obviously, there is a time and process towards building up that. I think the transfer of semi-finished is not the basis of the synergy.

Not even in the long run?

In the long run it will be an option, but not necessarily. If India continues to grow and its steel demand continues to grow from a value perspective, how much value would be derived by sending semi-finished material from India to Europe? It may not be worthwhile. Instead we are focusing on making the assets in the UK more competitive. For the near term, we have already said that we will have $450 million in synergies coming by the end of the third year of acquisition.

What are the biggest concerns now at the Group?

It is difficult to say, but I think now the priority is more on raw material security. Raw materials, especially for Corus. As you would have seen, we have been investing in coal mining companies in Mozambique and iron ore mining companies in Nigeria and the Ivory Coast. We need to have security on our side, which is owning, which is the critical part.

How long will it be before your interest burden eases?

It is a two-stage process, at the first stage it would be reflected from 08-09 when all of the bridge loans will have been repaid. And it will come down to more normalised level, on standalone obviously. On the first stage almost as we speak it has come down after the rights issue has been completed and we prepaid some debt. As Corus pays off in the next couple of years, it will come down again. I would not say it will not be significant, it will still be significant, the Corus debt is almost $6.5 billion and Tata Steel debt $1.5 billion.

Why did you have a rights issue and not a private placement or other means of raising funds?

Private placement was never considered, there are restrictions on a listed company in terms of quantum. And we had done a preferential allotment to Tata Sons. The rights issue also raises funds while creating value for the shareholders.

So what would you say should be the qualities of a CFO going ahead?

Technical capability or competency was considered to be a given but the goal post of that competency level is constantly shifting. Today, Tata Steel is no longer an Indian company so to speak; it is as much global as any other global company. So you need to be technically competent to handle the diversity of it. Unfortunately, I don’t know whether any business school will teach you that. The second part is adaptability in circumstances that are changing. And finally taking your men and women along. There are a lot of hard times and you need to ensure that you have the right kind of empathy to take your people along. Decisiveness is also a feature that you need to have. You can have the best-of-the-world thinking. But when you execute you have to be decisive.

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