Largest-ever acquisition by an Indian company; both boards clear deal

Our Bureau

Mumbai, Oct. 20

Tata Steel will celebrate a century of its existence as well as the largest acquisition by any Indian company ever when it closes the transaction deal for the UK-based Corus Group in January next year.

Ninety-nine-year-old Tata Steel's 4.3-billion ($8.09 billion or Rs 36,000 crore) takeover bid for steelmaker Corus was approved by the boards of both companies on Friday, paving the way for the largest international acquisition ever by an Indian company.

Tata Steel will acquire the entire equity capital of Corus at 4.55 per share, at a 26 per cent premium to the 12-month average price of Corus.

In one stroke, the acquisition will elevate Tata Steel to the position of the fifth largest steel maker in the world, adding 18.2 million tonnes to its existing capacity of 5 million tonnes.

The buy will be funded by equity contribution of $3.88 billion from Tata Steel, and by a fully underwritten non-recourse debt-financing package of $5.63 billion by Tata Steel UK Ltd, the special purpose vehicle through which the acquisition will be made.

The debt will fully leverage Corus' refinancing options and cash flows.

"This is a landmark transaction in the global steel industry and for us in India, a very important moment," said Mr Ratan Tata, soon-to-be Chairman of Corus, in a video conference from London.

This entity of Tata Steel and Corus will become powerful in the world of steel which is increasingly consolidating, said Mr B. Muthuraman, Managing Director, Tata Steel.

"The two companies have common values and business philosophy and are complementary in what they bring together," said Mr Tata. Corus will remain an Anglo-Dutch company and its management will substantially be the same, he said.

Negotiations had started as far back as late last year when Corus officials decided to visit India to meet Mr Ratan Tata, said Mr Jim Leng, Chairman, Corus. The UK-based company was looking beyond its shores towards a low- cost country with a growing economy where it could exploit its technology. It had considered Brazil, Russia and India, he said.

The respective teams explored various business opportunities, including joint venture and technology transfer, then realised that only a complete merger of the two businesses was the answer, said Mr Leng. "It was a unanimous decision from my board," he said.

The buy fitted Tata Steel's focus "towards new higher-end markets and a more sophisticated customer base".

"The powerful combination of low-cost upstream production in India with the high-end downstream processing facilities of Corus will improve the competitiveness of the European operations of Corus significantly," said a statement from the Tata group. Tata Steel will retain access to low-cost raw materials and slab for the enlarged group and exposure to high growth in emerging markets, whilst gaining price stability in developed markets, it said.

The consolidated EBITDA margin of the group will be 25 per cent and we hope our turnover will be $32 billion by 2011, said Mr Muthuraman. Tata Steel is one of the low-cost producers of steel in the world, producing steel at $160 per tonne. Corus' figure would be at least twice as high, he said. Tata Steel's strategy is to grow from 4-5 million tonnes to 30 million tonnes and eventually to 40 million tonnes by 2011, he said. Domestically, it will enhance capacity at Jamshedpur from 5 mt to 10 mt by 2010. Greenfield plants are planned at Orissa, Jharkand and Chhattisgarh. A port and shipping company are planned as well.

Job threats

Replying to the possibility of threat to jobs in Europe on account of the takeover, Mr Muthuraman said, "The job threat would be very high if this deal does not take place. One of ways of making sure there are jobs is for an entity to become competitive."

The acquisition amount includes payment of GBP 126 million by the Tatas (13 pence per share) towards the British Steel Pension scheme. The company's contribution to pension would also increase from 10 per cent to 12 per cent.

As soon as the transaction is completed, an integration committee will be set up, and perhaps other committees for various aspects of operation, said Mr Muthuraman.

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(This article was published in the Business Line print edition dated October 21, 2006)
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