D. Murali

ChennaiFeb. 9The Tata-Corus deal happened at approximately 7.7 times EV (enterprise value) to EBITDA (earnings before interest, tax, depreciation and amortisation) and $770 per tonne capacity.

Critics point out that the number matrices suggest a higher valuation compared to the Arcelor-Mittal deal. Are they right?

When faced with this question from

Business Line

, this is what Mr Abizer Diwanji, Head-Transaction Services, KPMG India Private Ltd, Mumbai, had to say: "The point to remember is that the Arcelor-Mittal combined capacities are 109 million tonne (mt) while that of Tata Steel is 5 mt and Corus, 18 mt, giving a combined capacity of 23 mt.

"Accordingly, the latter's profitability is lower (given that they have lower scale); and so, EV/EBITDAs appear rich."

"The point to think about is whether Tata would have another opportunity to climb up to No 5 even by building capacities, and reaching end-product sophistication. Doing so would easily cost them around $2,500 per tonne (present value would be around $2,000 per tonne)," reasons Mr Diwanji.

What should one, therefore, look for in deals of this nature?

"Look at the opportunity to move up the chain quickly in a fast consolidating market which demands a global play and a good supply chain from `ore' to `core', i.e. from sourcing to the ultimate high end product," advises Mr Diwanji.

Cos' capacity

"Tatas are now placed among the bunch of global steel players who are between 20 mt and 35 mt capacity. This, I believe will be the next phase of consolidation to match up with Arcelor-Mittal (capacity 109.7 mt)."

Interestingly, Mr Diwanji makes the inevitable comparison of the Corus deal against `the very Indian but globally sized Hutch transaction'. Though the Hutch deal has a higher enterprise value, it is also in a lesser fragmented, but faster growing market of Indian telecom, he explains.

"If values are paid for market share (read volumes) in a market which has falling ARPUs (average revenues per user) and hence, profitability, maintaining market share is a real challenge," argues Mr Diwanji. "All the value paid could get lost if synergy and integration are not key drivers for any such acquisition."

Entry premium

Entry premium based pricing could prove quite dangerous as the possibilities of changing equations, and hence value erosion, is high, he cautions. "On the other hand, synergies and better use of infrastructure could result in lower costs and hence better profitability from operations and scale if integrated properly."

(This article was published in the Business Line print edition dated February 10, 2007)
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