India Inc arrives with Tata's Corus

Corus board accepts $8.04 billion Tata Steel bid; largest shareholder says price low. 

Eleven months after Corus Chairman Jim Leng travelled to India to meet Ratan Tata and his team, Tata Steel today announced an agreement to acquire Corus, about four times its size, in what is India's largest overseas acquisition.

Tata Steel will pay £4.3 billion ($8.04 billion) to emerge as the world's fifth-largest steel company, from 56th now. The deal is expected to be completed by January 2007 when Tata Steel turns 100.

The board of the Anglo-Dutch steel company approved the bid and recommended to the shareholders to support the Tata offer. The board of directors made it clear that they would subscribe to the offer. Their combined holding is 0.1 per cent.

Tata Steel will pay 455 pence per equity share and 910 pence per American depository share to Corus shareholders. It also agreed to a deal on Corus pensions, a potential stumbling block, and will pay £126 million ($236 million) into the firm's pension scheme. The Tatas also agreed to increase their contribution to the pension scheme from 10 per cent to 12 per cent till March 31, 2009.

Ratan Tata will become the chairman of Corus, which will remain a separate identity for now. The senior management team will continue.

In order to provide a common platform for strategy and integration, Leng will be the deputy chairman of Corus and Tata Steel; another three Corus representatives will join the Tata Steel board while three Tata Steel representatives, B Muthuraman, Ishaat Hussain and Arun Gandhi, will join the Corus board.

Ratan Tata, chairman of the Tata group, said: "The union of the two companies is built on a global strategy and is not opportunistic. Corus is seeking to address new markets. Tata Steel also has the same intention."

Tata said the deal valued Corus at a multiple of about 5.4 times underlying earnings before interest, tax, depreciation and amortisation (EBITDA) from continuing operations for the year ended December 31, 2005.

"This offer comes at the right time. It is the right offer from the right partner," said Corus Chairman Jim Leng .

Tata Steel has set up a wholly owned indirect subsidiary, Tata Steel UK, for completion of this acquisition. The deal puts the enterprise value at $10.26 billion. Tata Steel will inject $3.5 billion in Tata Steel UK for funding the acquisition while the balance will be mobilised through debt.

However, all shareholders of Corus are not happy with the pricing, which is a 26.2 per cent premium over the average closing mid-market price of 360.5 pence per Corus share for the year ended October 4, 2006.

Standard Life Insurance, the biggest shareholder with 7.9 per cent stake, said the offer price was lower than it would have expected the Corus board to agree to and recommend. However, it did not comment on whether its firm would tender its shares in the offer at the current price.

"The trading performance of Corus has been very strong and produced very attractive cash flows, which we believe could be worth more than the current price being offered by Tata," said the Standard Life Insurance spokesperson, in response to a Business Standard query.

The Tata Steel stock closed 1.23 per cent higher at Rs 507.85 on the Bombay Stock Exchange.

Leng said the Corus strategy to identify strategic partners having access to cheap raw material led it to accept the Tata offer. "In the past year, we had discussions with players in Brazil, Russia and India to find strategic partners," he added.

Tata Steel Managing Director B Muthuraman said the deal would feed the consolidation in the global steel industry. The deal follows Mittal Steel's $32 billion acquisition of rival Arcelor this year.

Japan's Nippon Steel Corp and South Korea's Posco today said they would each spend about $460 million to raise their stakes in each other's companies by 2 per cent, thereby becoming top shareholders in each other.

Under the deal, Nippon Steel will increase its holdings in the South Korean company by 2 per cent for $464.6 million and Posco will buy a 1.64 per cent stake, or 111.6 million shares, in the Japanese steelmaker for the same amount. Nippon Steel owns a 3.32 per cent stake in Posco while Posco holds 2.17 per cent in Nippon Steel.

Corus is Europe's second-largest steel producer with revenues of £9.2 billion ($17.2 billion) and crude steel production of 18.2 million tonnes, primarily in the UK and the Netherlands.

A strategic and integration committee will be formed to develop and execute the integration and growth plans.

Crisil has placed its ratings on Tata Steel's outstanding long-term and fixed deposit programme on rating watch with negative implications.

The short term rating of "P1+" has been reaffirmed. Crisil said the cost for the proposed acquisition of Corus was significantly larger than Tata Steel's current consolidated net worth.

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THE BLUEPRINT

SHARE PRICE

Tata Steel UK, which has been formed to make the acquisition, will offer £4.55 ($8.54) per share, valuing Corus at £4.3 billion

The price of £4.55 per Corus share represents a multiple of about 7.9 times the EBITDA for a year prior to July 1, 2006, and a premium of about 26.2% to the average closing mid-market price of £3.605 per share for the 12 months ended October 4, 2006

FINANCIAL DETAILS

Tata Steel UK has arranged a loan of £1.6 billion, a £350 million revolving credit facility and a £1.35 billion mezzanine bridge loan through Credit Suisse, ABN AMRO and Deutsche Bank

The rest of the bid will be funded by a cash contribution of £1.836 billion from Tata Steel to Tata Steel UK. Also, Standard Chartered Bank has provided £196 million of subordinated debt financing to Tata Steel UK

OPERATIONAL DETAILS

Tata Steel will safeguard all the existing contractual and statutory employment and pension rights of all directors and employees of Corus Group on completing the acquisition

Tata Steel has offered to pay upfront the deficit on the Corus Engineering Steels Pension Scheme with £126 million and to increase the contribution rate on the British Steel Pension Scheme from 10 to 12 per cent until March 31, 2009

Tata Steel's Chairman Ratan Tata will be chairman of the new board of Corus.