Tata Steel: The Bid for Corus

Author : Vishwanath S R
Language : English
Length : 36 pages
Discipline : Finance

Description: The case documents a high profile cross border acquisition by an Indian
company. Students are required to assess the strategic motives of these firms and perform
a valuation analysis.

Learning Objective: To introduce issues in a cross border, high leverage acquisition

Subjects Covered: Financial Management, Mergers and Acquisitions

On October 20 2006, the boards of Tata Steel and Corus announced their agreement on
the terms of the recommended acquisition of the entire issued-and-to-be-issued share
capital of Corus at a price of 455 pence in cash for each Corus share, valuing Corus at
£4.3 billion. Tata Steel said its 455-pence-a-share offer for Corus represents on an
enterprise value, a price earning ratio of 7.9 times Corus’ ’06 earnings and includes a
premium of approximately 26.2 percent to the average closing mid-market price of 360.5
pence. Details of the merger were likely to be decided by a strategic and integration
committee that would develop and execute the integration and growth plans for the
combined entity. Corus was much larger than Tata Steel, both in volumes and sales
figures. Globally, it was ranked ninth in terms of volume. Tata Steel, in comparison, was
ranked 58.

Ratan Tata, Chairman of Tata Steel, said 1:

“This proposed acquisition represents a defining moment for Tata Steel and is entirely
consistent with our strategy of growth through international expansion. Corus and Tata
Steel are companies with long, proud histories. We have compatible cultures of
commitment to stakeholders and complementary strengths in technology, efficiency,
product mix and geographical spread. Together we will be even better equipped to
remain at the leading edge of the fast changing steel industry.”
Jim Leng, Chairman of Corus, said:
“This offer from Tata Steel reflects the substantial value created for Corus shareholders
since the placing of open offer and launch of our “Restoring Success” programme in
2003. In the middle of last year, my board agreed a strategic way forward for Corus to
seek access to low cost production and high growth markets. Consistent with this, the
company held talks with a number of parties from Brazil, Russia and India. This
transaction represents the culmination of these talks. This combination with Tata, for
Corus shareholders and employees alike, represents the right partner at the right time at
the right price and on the right terms. This creates a well balanced company,
strategically well placed to compete in an increasingly competitive global environment.”
Tata Steel offered to fund upfront the IAS 19 deficit on the Corus Engineering Steels
Pension Scheme by paying £126 million into the scheme; and to increase the contribution
rate on the British Steel Pension Scheme from 10 percent to 12 percent until 31 March
2009. The acquisition would be made by Tata Steel UK, a wholly-owned indirect
subsidiary of Tata Steel.
The Corus directors unanimously recommended that Corus Shareholders vote in favor of
the scheme after taking advice from Credit Suisse, J P Morgan Cazenove and HSBC. If
the deal sailed through, they would be the fifth largest global steel producer with pro-
forma crude steel production of 23.5 million tonnes in 2005. Tata Steel announced that it
was keen to retain Corus’s management, including Chief Executive Philippe Varin. The
combination was strategically compelling, creating a vertically integrated global steel
group.

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The acquisition would position the combined group as the fifth largest steel company in
the world by production, with a meaningful presence in both Europe and Asia. The
powerful combination of low cost upstream production in India with the high end
downstream processing facilities of Corus would improve the competitiveness of the
European operations of Corus significantly. The combination would also allow the cross-
fertilization of research and development capabilities in the automotive, packaging and
construction sectors and there would be a transfer, from Europe to India, of technology,
best practices and expertise of senior Corus management. In addition, Tata Steel would
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.
As per the agreement, 75 percent of Corus shareholders would have to tender their shares
for the acquisition to be complete. When complete, this would be the largest overseas
takeover by an Indian company. The deal would also catapult the combined entity to
among the world's largest steel companies with a total capacity of about 24 million
tonnes per year. The new, combined entity of Tata Steel-Corus would have a capacity of
40 million tonne by 2011-12 and a turnover of $32 billion by 2011-12 with an EBIDTA
margin of 25 percent. Tata Steel had developed a six-pronged strategy in 2003 where the
target was to increase capacity from 4 million tonne to 30 million tonne by 2015. The $8
billion Tata Steel-Corus deal would be at No 5 among the top deals witnessed by the steel
industry over the past few years.

Steel Industry Background2

Steel was an alloy of iron and carbon containing less than 2 percent carbon and 1 percent
manganese and small amounts of silicon, phosphorus, sulphur and oxygen. Steel was the
most important engineering and construction material in the world. It is used in every
aspect of our lives, from automotive manufacturing to construction products, from steel
toecaps for protective footwear to refrigerators and washing machines and from cargo
ships to the finest scalpel for hospital surgery.

Most steel was made via one of two basic routes:

 Integrated (blast furnace and basic oxygen furnace).

 Electric arc furnace (EAF).

The integrated route used raw materials (that is, iron ore, limestone and coke) and scrap
to create steel. The EAF method used scrap as its principal input.

The EAF method was much easier and faster since it only required scrap steel. Recycled
steel was introduced into a furnace and re-melted along with some other additions to
produce the end product.

2
This section draws from the information on the International Iron and Steel Institute website
http://www.worldsteel.org
Steel could be produced by other methods such as open hearth. However, the amount of
steel produced by these methods decreased every year.

Of the steel produced in 2005, 65.4 percent was produced via the integrated route, 31.7
percent via EAF and 2.9 percent via the open hearth and other methods.

At a steel mill, the crude steel production process turned molten steel into ingots, blooms,
billets or slabs. These were called semi-finished products. Semi-finished products were
solid blocks of steel, usually with a square or rectangular cross section.

A flat steel product was typically made by rolling steel through sets of rollers to produce
the final thickness. There were two types of flat steel products:

 Plate products: Varied in thickness from 10 mm to 200 mm. Plate products were
used for ship building, construction, large diameter welded pipes and boiler
applications.
 Strip products: Could be hot or cold rolled and vary in thickness from 1 mm to 10
mm. Thin flat products were used in automotive body panels, domestic white
goods (for example, refrigerators and washing machines), steel (or tin) cans, and a
number of other products from office furniture to heart pacemakers.

A long product was a rod, a bar or a section. Typical rod products were the reinforcing
rods used in concrete, engineering products, gears, tools etc. Sections were the large
rolled steel joists (RSJ) that were used in building projects. Wire-drawn products and
seamless pipes were also part of the long products group.

Supply of raw materials was a key issue for the world steel industry. IISI managed
projects which looked at the availability of raw materials such as iron ore, coking coal,
freight and scrap.

Scrap iron was mainly used in electric arc furnace steelmaking. Apart from scrap arising
in the making and using of steel, obsolete scrap from demolished structures and end-of
life vehicles and machinery was recycled to make new steel. About 500 million tons of
scrap was melted each year.

Iron ore and coking coal were used mainly in the blast furnace process of iron making.
For this process, coking coal was turned into coke, an almost pure form of carbon which
was used as the main fuel and reductant in a blast furnace.

Typically, it took 1.5 tons of iron ore and about 450 kg of coke to produce a ton of pig
iron, the raw iron that came out of a blast furnace. Some of the coke could be replaced by
injecting pulverized coal into the blast furnace.

Iron was a common mineral on the earth’s surface. Most iron ore was extracted in
opencast mines in Australia and Brazil, carried to dedicated ports by rail, and then
shipped to steel plants in Asia and Europe.
Iron ore and coking coal were primarily shipped in capesize vessels, huge bulk carriers
that could hold a cargo of 140,000 ton or more. Sea freight was an area of major concern
for steelmakers, as the high demand for raw materials was causing backlogs at ports, with
vessels delayed in queues.

Since the World War II, the steel industry had experienced three distinct phases- growth
(1950-73), stagnation (1974-2001) and boom (2002-2006) 3. The demand for steel grew at
an annual rate of 5.8 percent during 1950-73 as the industrializing nations were building
their civil infrastructure. The oil shocks of 1973 through 1979 slowed consumption in the
second phase. The production of crude steel grew at 0.6 percent p.a. over the entire
period. Steel prices declined by 2-3 percent p.a. During 1999-2001 the industry’s
overcapacity hovered near 25 percent globally. Only a few companies were able to
sustain.

Since 2002 the annual steel production had grown at 7-8 percent driven almost entirely
by the double digit growth in China. The huge demand from China had caused a
commensurate leap in steel prices.

The industry had experienced a drop in the over capacity from 23 percent in 2001 to
about 17 percent from 2003-2005. But the demand from China had also witnessed a
structural change. From 2002-2004 China’s capacity for producing crude steel increased
on average by 55 percent. By 2005 China became a net exporter of steel. In the first half
of 2006 China overtook Japan, Russia and the EU 25 to become the world’s largest steel
exporting country.

Exhibit 1 presents the list of top steel-producing countries as of 2005 and Exhibit 2
presents the historical steel prices.

Competition: US, Europe and Emerging Markets

In the past, industry consolidation contributed to reduced cyclicality. The top 10 steel
makers represented about 28 percent of global production. Besides Arcelor Mittal, four of
the top 10 were in Asia, three in Europe and two in the U.S. In addition to China’s plan
for consolidation, many of the leading steel producers had ambitious growth plans that
would entail further consolidation. Lakshmi Mittal, the CEO of Arcelor Mittal stated in
June 2006 that winning companies in the steel industry would have somewhere between
150 m-200 m tons of annual capacity by 2015 and that scale was crucial in the pursuit of
value.

Shanghai Baosteel, although founded in 1998, had already become the world’s fifth
largest steel maker producing 22.7 m tons in 2005. The potential acquisition of Corus by
Tata Steel would create a new entity with a production volume close to that of Baosteel.

3
This section is based on Deforche, Filiep, “Beyond the Boom: The outlook for Global Steel”, Boston
Consulting Group, February 2007
Exhibit 3 provides a list of Global Steel Manufacturers. Exhibit 4 provides a comparison
of financial indicators of major steel firms.

Tata Steel Background

Tata Steel was the largest, flagship company of the Tata Group of companies,
headquartered in Mumbai, India4. The Tata Group was the oldest, largest, most respected
industrial house in India. At last count, it had 96 operating companies categorized into 7
businesses, and included India’s largest companies in the fields of steel, automobiles,
chemicals, hotels, and software,

Established in 1907, Tata Steel was Asia's first and India's largest private sector steel
company. Tata Steel was among the lowest cost producers of steel in the world and one
of the few select steel companies in the world that was EVA-positive (Economic Value
Added). Concerns over the availability of iron ore and coal, and the resultant volatility in
prices, meant that most Indian steel producers had to integrate backwards in order to have
greater access and pricing power over these commodities. Tata Steel had its own iron ore,
coal and chrome mines and reserves (on long term leases from the Government of India),
and hence was largely self-sufficient in most critical raw materials. However, it did not
have the right to export the ores and coal outside India.

Its captive raw material resources and the state-of-the-art 5 MTPA (million tonne per
annum) plant at Jamshedpur, in Jharkhand State, India, gave it a competitive edge.
Determined to be a major global steel player, Tata Steel had recently included in its fold
NatSteel, Asia (2 MTPA) and Millennium Steel (1.7 MTPA) creating a manufacturing
network in eight markets in South East Asia and Pacific Rim countries. The Jamshedpur
plant was expected to expand its capacity from 5 MTPA to 7 MTPA by 2008. The
company planned to enhance its capacity, manifold through organic growth and
investments. The Company's wire manufacturing unit in Sri Lanka was known as Lanka
Special Steel, while the joint venture in Thailand for limestone mining was known as Sila
Eastern. Tata Steel's products were targeted at the quality conscious auto sector and the
burgeoning construction industry. With wire manufacturing facilities in India, Sri Lanka
and Thailand, the Company planned to emerge as a major global player in the wire
business. Tata Steel's products included hot and cold rolled coils and sheets, galvanised
sheets, tubes, wire rods, construction rebars, rings and bearings. In an attempt to
'decommoditise' steel, the company had introduced brands like Tata Steelium (the world's
first branded Cold Rolled Steel), Tata Shaktee (Galvanised Corrugated Sheets), Tata
Tiscon (re-bars), Tata Bearings, Tata Agrico (hand tools and implements), Tata Wiron
(galvanised wire products), Tata Pipes (pipes for construction) and Tata Structura
(contemporary construction material). The company had launched the Customer Value
Management initiative with the objective of creating complete understanding of customer
problems and jointly finding solutions. The company's Retail Value Management
addressed the needs of distributors, retailers and end consumers. The company had also

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launched India's first steel retail store – steel junction - for making steel shopping a happy
and memorable experience.

Tata Steel’s profitability ranked among the best in the industry. It posted comparatively
good results for the year ended March ’06. Consolidated sales grew at 26 percent to Rs
20,244 crore5. Operating margins were a robust 31 percent in fiscal 2006. Consolidated
profits for the year stood at Rs 3,721 crore, an increase of 4 percent. It bought NatSteel in
2004 for Rs 1,313 crore and Millennium Steel for Rs 675 crore in 2005.

In 2006 Tata Steel was ranked once again the best steel making company in the world by
World Steel Dynamics Inc. USA (WSD) based on a study of 22 world class steel makers
-consecutively for the second time. The WSD report of February 2006 covered the study
of all the leading steel manufacturing companies across the globe including POSCO,
Arcelor, Nippon Steel, BaoSteel, Thyssen Krupp on 20 different parameters. Tata Steel
was ranked first with a weighted average score of 8.51 as against a score of 8.11 in 2005.
POSCO of South Korea followed in the second place with 8.41. Tata Steel had been
continuously marching towards becoming a global steel enterprise and aspired to become
a steel producer with a capacity of 15 mt by 2010. It was also developing a deep-sea port
in Orissa along with Larsen & Toubro to facilitate the flow of inbound and outbound
commodities.

Apart from the main steel division, Tata Steel's operations were grouped under strategic
profit centers like tubes, growth shop (for its steel plant and material handling
equipment), bearings, ferroalloys and minerals, rings, and wires.

Exhibits 5 and 6 present the consolidated balance sheets and income statements for Tata
Steel.

Corus Group Background6

Corus was formed on 6th October 1999 through the merger of British Steel and
Koninklijke Hoogovens. Koninklijke Hoogovens was founded at Hague to enable the
Dutch industry to become less dependent on imports. In 1990, the Hoogovens group had
five divisions; Steel, Aluminum, Technical Services, Subcontracting, and the newly
formed Steel Processing and trading division. In 1999, the trend towards greater
rationalization in the European steel industry led to the merger discussions with British
Steel. At that time Hoogovens had 17 business units with a turnover of €4.9 b.

The British Steel Corporation was formed from the UK’s 14 main steel producing
companies. In 1987, the UK government formally announced its intention to privatize the
British Steel Corporation. The British Steel Act 1988 transferred the assets of the
corporation to British Steel, a company registered under the Companies Act. The early
1990s saw reduced demand and it was not until 1993 that growth in the UK economy
gradually gathered pace and was reflected in a partial recovery in steel demand and

5
I crore is 10 m. It is customary in India to quote currency in crores rather than millions
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prices. The trend continued into 1994 and helped by continuing efficiency and
productivity gains, British Steel returned to profit. On October 6, 1999, the merger of
Hoogovens with British steel to form Corus came into effect.

Corus had manufacturing operations in many countries with major plants located in the
UK, The Netherlands, Germany, France, Norway and Belgium. The company produced
around 18 million tonnes of crude steel in 2005, which represented approximately 10
percent of total EU production and positioned the company as the 9th largest steel
producer in the world and the 2nd largest producer in Europe. Corus produced carbon
steel by the basic oxygen steelmaking method in the UK at Port Talbot, Teesside and
Scunthorpe and in The Netherlands at IJ muiden. In addition, carbon steel was produced
by the electric arc furnace method in the UK at Rotherham. Corus had approximately 50
percent of the UK carbon steels market and around 11 percent of the European (including
UK) carbon steels market.

In 2005 Corus generated turnover of £9.1 billion and produced 19 million tonnes of steel
and delivered over 0.6 mt of aluminum. At the end of December 2005 Corus had 47,300
employees. From October 2003 Corus has been structured into four main divisions: Strip
Products, Long Products, Aluminum and Distribution and Building Systems.

Corus had a strategy focused around carbon steel, with the intention of:

 Ensuring that upstream steelmaking facilities were optimized and that the leading
position of its I J muiden site was maintained.
 Pursuing selective growth of downstream businesses
 Seeking opportunities to participate in the ongoing consolidation of the world's
steel industry.

Following his appointment as Chief Executive of Corus with effect from 1 May 2003,
Philippe Varin carried out an intensive and detailed review of the group's activities. As a
result, a number of key initiatives were launched, known as the 'Restoring Success'
initiatives. These focused on introducing new leadership and instilling a new corporate
culture across the group, aligning the financial resources available to the Group with its
future strategic needs, and returning all parts of the Group to acceptable levels of
profitability. The latter would be done by building on our 'Restoring Success' initiatives -
existing cost reduction programmes, implementing restructuring proposals for the UK
asset base and initiating Group-wide efficiency measures.

Restoring Success

The Restoring Success programme, launched in June 2003, was designed to deliver a
£680m improvement in earnings before interest, tax and amortization by the end of
20067. During 2005 the company continued to make good progress and achieved
approximately 80 percent of the overall target.

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Tata Steel Finance webcast, October 20, 2006
Apart from savings through cost reduction and improved operational efficiency, action
plans were also focused on improving safety record and achieving best in class customer
service.

 Safety During 2005, Corus saw a further 24 percent reduction in the frequency of
lost time injuries, a good lead indicator of performance.
 Service As part of its Restoring Success programme, Corus set out to improve the
percentage of deliveries made on time, from 74 percent in 2003, to 90 percent by
the end of 2006. Significant and sustainable progress was made in this area, with
85 percent of deliveries having met this target during 2005.
 Savings By the end of December 2005 Corus had achieved nearly 80 percent
(£555m) of the £680m per annum savings that it had committed to deliver by the
end of 2006.

The group's aim was to close the competitive gap that currently existed between Corus
and its European peer group. Corus estimated that this gap in 2003 was some 6 percent at
the EBITDA margin level (i.e. EBITDA to turnover) when measured against the average
of its European competitors. Full implementation of the 'Restoring Success' initiatives
above was designed to close the current competitive gap by the end of 2006.

Exhibits 7, 8 and 9 present the consolidated financial statements of Corus group.

The Corus Acquisition Opportunity

Corus’ half yearly operating profits in 2006 dropped by 37 percent to £305m in

comparison to 2005 because of increasing raw material costs. Prices of raw materials
such as iron ore, coke, coking coal and scrap had risen dramatically since 2002 (see
Exhibit 10 and 11 for input costs). In case of iron ore, three companies- BHP Billiton of
Australia, Companhia Vale do Rio Doce of Brazil and Rio Tinto of Britain controlled
more than 70 percent of the export market.

The company expected the raw material cost to be 400m more in 2006 if the prices
increased at the same rate. Philippe Varin announced at a press conference:

“We identified the need to have a strategic partner and a presence in a lower-cost
country with a growing economy and raw material availability and where we could use
and fully exploit our technology. As to where, we had an initial focus on Brazil, on
Russia and, of course, on India. Our subsequent travels and discussions in the past year
were diligent and comprehensive. India, with its strong and growing economy,
indigenous raw materials, rising consumer demand and infrastructure needs, plus the
country’s long relationship with the UK, was always a favored location. Philippe and I
traveled to India to meet Ratan Tata and his team in November of 2005. Over the next
several months, we had several meetings, and our respective teams examined various
business options, from JV (joint venture) to new plants and technology transfer. It
became increasingly clear that the best long-term solution could only be realized through
a complete merger of our two businesses, the result of which is today’s announcement,
which carries the unanimous recommendation of my Board. This will be a unique global
partnership”.8

Tata Steel had high quality captive sources for its raw materials and has nearly 5m tonnes
(mt) of capacity and less than 0.5 mt of value-added steel capacity. Corus’ steel-making
capacity, by contrast, stood at 18 mt. It had no captive sources for raw materials, but had
significant capacities in value-added steel. While for Tata Steel flat products formed 69
percent of its production with long products forming the rest 31 percent, Corus had flat
products accounting for 42 percent of its total production and a significant 31 percent
coming from its distribution and building systems division that was a value-added
segment.

The Corus management team led by Jim Leng and Varin approached the Tata Steel Board
and top management for a possible acquisition. On October 17, 2006 Tata Steel
announced that it was in discussions with the board and management of Corus Group Plc
and it had made an indicative non binding offer to acquire 100 percent equity in Corus
Group Plc through a recommendatory offer route at 455p per share in cash amounting to
an enterprise value of approximately USD 10 billion.

A key objective for Tata Steel in this acquisition was gaining finishing expertise in
European markets, where it could export semi-finished steel from its plants in India. It
could also shift part of the steel-making capacities to India, where it was already planning
a massive expansion. Muthuraman, the managing director of Tata Steel explained:

The cash cost of Tata Steel is around $160 per tonne. I believe that the cost at Port
Talbot (where Corus has a plant) is perhaps roughly twice of that. Between the two
teams, we see potential for significant synergies in the area of manufacturing, in shared
services, in logistics, in the marketplace, sharing best practices. We do see significant
synergies and a possibility of cost reduction.

Exhibit 12 presents a comparison of steel making costs around the world.

Structuring and Pricing a deal

Financing Structure Financing India's largest leveraged buyout comprised of a $3.88

billion equity contribution from Tata Steel, a fully underwritten non-recourse debt
package of $5.63 billion, and a revolving credit facility of $669 million.

As per the acquisition plan, a special purpose vehicle, a wholly owned subsidiary, called
Tata Steel UK would be set up by Tata Steel. The acquisition was proposed to be effected
under section 425 of the English Companies Act 1985 and upon approval from the Corus
shareholders. Tata Steel UK would offer a price of 455 pence per Corus share valuing
Corus at £4.3b ($8.04b). This price represented a multiple of 7.9 times the EBITDA of
Corus from continuing operations for the twelve months to July 1, 2006. The acquisition
was to be structured as a 100 percent leveraged buy out funded through cash resources

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Tata Steel Finance webcast, October 20, 2006
and loans raised by Tata Steel and the SPV. Under the plan Tata Steeli i UK would
arrange a loan of £1.6 b ($3056m), a revolving credit facility and a bridge loan and the
rest would come from Tata Steel (to the SPV).

Tata Steel appointed Credit Suisse, ABN AMRO and Deutsche Bank to arrange
financing. Of the £3.3 billion of financing being raised at the SPV level, Credit Suisse
would provide 45 percent and ABN AMRO and Deutsche 27.5 percent each. The $1.8
billion bridge debt being raised at the Tata Steel level in India would be shared between
Standard Chartered and ABN AMRO.

The financing structure and the break up of sources are shown in Exhibits 13 and 14.

Operational Structure One of the biggest concerns Tata executives had was whether the
inevitable cultural conflicts between the organizations would pose significant operating
problems. Integrating a large company that operated on a different continent with diverse
cultures and operating environments was going to be no small task. Exacerbating this
problem was the fact that Corus itself was formed by the merger of English and a Dutch
company that had different cultures and profitability.

In line with the Tata Group’s approach to acquisitions, Tata Steel announced its intention
to continue with the senior management of Corus. Appointments to the Tata Steel and
Corus were to provide common platform for strategy and integration. According to the
plan, Ratan Tata would be the chairman of both Tata Steel and Corus and Jim Leng
would serve as deputy chairman of Tata Steel and Corus. Three board members
(including the CEOs) of each company would serve on the other company’s board. A
strategic and integration committee comprising of Ratan Tata, the CEOs and senior
management professionals of both companies was formed to develop and execute the
integration plan and further growth plans. Appropriate cross functional teams were to be
formed to execute the integration plan.

Strategy Muthuraman, the Managing Director of Tata Steel, had a number of things to
consider in negotiating a deal for Corus. First of all, Tata Steel could not make an all cash
offer and assume the assets and liabilities of Corus on its balance sheet because of the
sheer size. Second, both companies had to convince their shareholders about the strategic
and financial benefits to the companies. Shareholders would be concerned about the size
of the premium and the potential dilution in earnings per share. Muthuraman explained in
a conference9:

While we have been talking about strategy in this world of consolidation and growing in
size, both in geography and in size, Tata Steel has been planning its long-term strategy.
Tata Steel’s strategy, in terms of what it wanted to do over a period of time of 10 years,
between 2002-03 and 2015, was to grow from four million tonnes per annum, which we
were at that time, to about 30 million tonnes plus, beyond the shores of India,
multinational, and continuing to be in a low-cost position and continuing to be EVA
positive. That strategy had six elements. One of them was that we would build a strong

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Tata Steel Finance webcast, October 20, 2006
base in India, which is why we’re expanding Jamshedpur from five to 10 million, and
we’re building three green field projects.

The second part of the strategy was that we’d adopt a de-integrated strategy where we
believed that the world steel industry, over the last 150 years or so, had adopted a certain
model of making from iron to finished steel in one location, irrespective of where the raw
materials were. We always believed that this model will change, because steel has to
compete with other materials and, for the sustainable competitiveness of steel, it is
necessary that this business model will undergo a change. We wanted to be at the
forefront of that change in business model, so we said we would look for private
steelmaking in countries which are rich in iron ore and coal or gas. So we thought of
plants in India, we thought of plants in Bangladesh, we thought of plants in Iran.

The third part of the strategy was raw material security. It’s important that we have raw
material security to be competitive and sustainable in this world. We have raw material
security on a 100 percent basis for our existing operations in Jamshedpur. We have a
large extent of self-sufficiency for coal. Each of our three green field projects in India
will carry with it raw material iron ore security. We have some strategic types and some
strategic positions in terms of coal and limestone beyond the shores of India. We said we
should continue to look for raw material security, both in India and overseas.

The next part of our strategy was getting more out of steel, which is by branding, by
going downstream, by positioning the products, getting into construction solutions and so
on. It is with that aim we formed the joint venture with BlueScope. It is with that
strategy that we started having a joint venture with Ryerson of the U.S, for going
downstream into processed materials.

The next part of the strategy was control over logistics. No large company – no large
steel company – can be sustainably competitive over a period of time without some
control on the efficiency and costs of logistics, so we decided to build a port in Orissa to
connect Indian operations with our overseas operations. We decided to start a shipping
company with NYK of Japan, and these are all in progress.

Our acquisition of Corus and our partner in Corus to form a joint entity is part of this
strategy, and it is part of this strategy that we have been talking about for the last few
years. Just like Mr Leng mentioned, Corus had a strategy, and the partnership with Tata
Steel was part of that strategy. We have looked at it exactly in the same manner, and we
believe that this entity, which will become, in terms of scale, number five in the world,
has the potential to consolidate the steel industry even further.

Indeed, there was very little shared territory in the markets the companies served. Tata
Steel had a strong position in India, Singapore, Thailand and other parts of Asia whereas
Corus had a strong presence in Europe.

Exhibit 15 presents a summary of production and distribution facilities of the combined

entity.
Synergy The merger of Tata Steel with Corus was expected to lead to a saving of $130
million savings in 2007 till March 2008 and $400 million to the company every year after
three years. The Corus group had developed a breakthrough technology to reduce cost of
steel production and Tata Steel was planning to adopt the technology in the near future.

Demand Analysis

Domestic Market To establish a base case analysis, investment bankers made use of
base case forecasts of production and demand for steel in India and the rest of the world
as well as the outlook for steel prices10. According to government estimates, domestic
consumption of steel in India was expected to go up to 60 mt by 2010 from the prevailing
35 mt, and to 100 mt by 2020. The planned capacity expansions would lead to a capacity
of 70 mt by 2020. Assuming a CAGR of 6 per cent in steel demand, the domestic demand
would be around 90 million tonnes by 2020. Also most steel companies in India had
strong balance-sheets, which would help them carry on with their expansion plans.

India had a per capita consumption of steel of around 30 kg against 180 kg in China and
an average of over 400 kg in the developed countries. Analysts pointed out that India's
steel consumption had stagnated at around 30 kg, despite increasing steel production,
mainly because of an increasing population. According to a report by the Organization
for Economic Cooperation and Development, world steel supply was likely to expand
dramatically over the next two to four years. According to the report, much of this
unprecedented investment was occurring as a result of decisions by governments to
support the expansion of domestic steel-making capability. The report warned that these
state-supported expansions would lead to growing steel trade disputes and a return of
over-capacity conditions within the next few years. It also noted that the planned capacity
expansions would represent a structural problem for the global steel industry to the extent
that production exceeded the projected increase in demand for steel between 2005 and
2008. The OECD report projected Indian steel consumption to grow by only 3.5 per cent
in 2005 from the levels a year ago. It said the gap between demand and supply would
mean that the vast majority of India's new production capacity would be for export.

According to some analysts, demand from the US, Japan and China were expected to
slow down, which, coupled with the tightening availability of raw materials, would lead
to softer prices in the short to medium term. Further, new capacities were expected to
come into play only around 2008. So analysts expected a drop in prices around that time.
But in the short-term they expected HRC (hot rolled coil) prices to hover around $480-
500 range in the short term. But there were worries about the long term.

Global Market Global apparent consumption of steel increased at an average pace of

more than 7 percent per annum since 2002 to reach a record level of 1.113 billion tonnes
in 2006. To meet this rise in demand, steel production growth had accelerated sharply,
reaching 1.24 billion tonnes in 2006, up by as much as 393 million tonnes (or 46per cent)

10
ABN AMRO Research, June 14, 2007
compared to its level of 850 million tonnes in 2001. This growth in demand for steel was
creating a favorable situation for many steelmakers. Steel prices and the prices of some
raw materials in some markets were two times higher or more compared to levels
prevailing in 2001.

China’s apparent crude steel consumption had doubled between 2000 and 2005 to reach
398 million tonnes in 2006. The economy now accounted for around 32 percent of the
world’s apparent steel consumption. The rapid expansion of China’s industrial production
and its strong urbanization trend would ensure that steel consumption rose, though
growth would moderate slightly in coming years from the double-digit rates observed in
recent years.

In India, there was enormous potential for growth in steel consumption. Heavy
investment in developing the country’s infrastructure, such as railways, ports, and roads
would fuel growth in the steel-intensive construction sector. In Russia, steel consumption
prospects were favorable, supported by the consumer boom, which was now spreading to
automobiles and housing, as well as the replacement of ageing infrastructure. Brazilian
demand for steel would continue to be supported in the future by the country’s
automotive and construction sectors.

Steel consumption in the Middle East was expanding rapidly from a relatively low level
of 37 million tonnes. Massive infrastructure and other building activity were driving this
development.

In NAFTA, housing market problems and a slowdown in manufacturing activity in the

U.S. could contribute to a reduction in steel consumption in 2007 from around 155
million tonnes in 2006, while a recovery in demand could take place in 2008 as economic
growth reaccelerated. Steel consumption in the EU-27 was expected to stay on a gradual
growth path in 2007 and 2008, thanks to the relatively healthy outlook for domestic as
well as external demand for products manufactured in steel-using industries.

Global Steel Production

World production of steel had posted a dramatic acceleration in growth between 2001
and 2006. China accounted for more than two-thirds of the increase in world steel
production seen over the last five years, i.e., Chinese production surged from 151 million
tonnes in 2001 to as much as 423 million tonnes by 2006. As a result, China’s share of
world production nearly doubled over the past five years, rising from 17.7 percent in
2001 to 34 percent by 2006.

In India, the world’s seventh largest producer of steel, production reached 44 million
tonnes in 2006. In the future, Indian steel production capacities and volumes were
expected to increase strongly in order to meet demand for steel from a growing industrial
sector and expanding infrastructure building. Russian steel production, which grew from
59 million tonnes in 2001 to 71 million tonnes in 2006, was expected to increase steadily
over the next few years, supported by growing electric-arc furnace capacity that would
gradually replace the outdated open-hearth process.

The rest of Asia (excl. China), NAFTA and the EU-25 had seen their shares of world
steel production decline over recent years. Supported by strong Chinese demand for high
quality steel products, Japanese crude steel production reached 116 million tonnes in
2006, its highest level recorded since the early 1970s. U.S. crude steel production had
increased from 90 million tonnes in 2001 to around 99 million tonnes last year driven by
electric-arc furnace production. Crude steel production in the EU-25 rose to 198.5 million
tonnes last year. Growth had been slightly faster in the new Member States, though from
a much lower base.

Exhibits 16 through 20 present forecasts for Tata Steel and Corus, details of comparable
transactions, trading multiples of steel firms, and capital market data.

Problems While the merger would instantly transform the combined companies into the
fifth largest steel firm in the world, successfully completing the transaction was not
without problems. At the antitrust level, the combination would be subject to an EEC
review.

At the level of the structure of the deal, would the company’s balance sheet take the
strain if the Corus deal cost it way over USD 10 billion? And would it be worth it? Tata
Steel had free reserves of Rs 8,900 crore and its debt equity ratio was a very healthy 0.3.
By global standards, there would be a lot of scope for leverage, but the Tatas always
prided themselves on maintaining the lowest debt-equity ratios.

Finally, the takeover panel of UK could auction Corus if a competitive situation

continued beyond January 30. The panel might also decide on a sealed process where
bidders' offers are final or a standard auction held over a period.

The CSN Bid

As expected by observers, CSN announced on November 11, 2006 that it had made an
informal bid for Corus, setting the stage for a bidding war and throwing Tata Steel's
agreed takeover into jeopardy. CSN's offer of 475 pence per share for Corus, which
would value the firm at $5.3 billion pounds, including debt, topped Tata's bid of 455
pence. Both companies had a significant presence in the manufacture of tinplate in
Europe. Interestingly, in 2002, Corus had made an offer for CSN, but it was shelved over
debt concerns.

Companhia Siderúrgica Nacional was founded on April 9, 1941, becoming operational on

October 1, 1946. As the first integrated flat steel producer in Brazil, CSN played a
historical role in the country's industrialization process. Steel from its mills permitted the
implantation of the nation's first domestic industries, the nucleus of the modern day
Brazilian industrial park. Privatized in 1993, with over six decades in the market, the
company continued to make history. A listed public company, with shares traded on the
São Paulo and New York (NYSE) stock exchanges, CSN was one of the largest and most
competitive integrated steel companies in Latin America. With an annual production
capacity of 5.8 million tons and around eight thousand employees, CSN was focused on
steel production, mining and infrastructure. The company had one of the most
comprehensive lines of high added value flat steel on offer throughout the continent.
The acquisition of the assets of Heartland Steel and the subsequent incorporation of CSN
LLC in the United States in 2001 was the first step towards the internationalization of the
company. The company’s assets consisted of an integrated steel mill, five industrial units,
two of them abroad (the United States and Portugal), iron ore, limestone and dolomite
mines, a major flat steel distributor, port terminals, as well as shares in railroads and two
hydroelectric plants.

Even as Tata Steel was mulling over its next move in the race for Corus Group, CSN,
along with bankers and brokers allied to it, scaled up its holding in the Corus group to a
little less than 23 percent. The combined holding of CSN and its allies stood at 19.5 per
cent on November 25. The increased holding came from UBS AG, which emerged as the
largest shareholder in Corus with 10.23 percent stake. UBS was acting as a joint broker to
CSN for this deal. CSN's other financial advisors Barclays Capital and Goldman Sachs,
held 4.7 per cent and 4.01 per cent in Corus respectively. Further, the Brazilian
steelmaker held a 3.8 per cent stake in Corus. The combined holding was inching towards
the crucial 25 per cent that could block Tata Steel's offer at the extraordinary general
meeting if such a situation were to arise.

According to the rules, a resolution pertaining to the bid would have to garner support
from 50 percent of shareholders and 75 percent of shares at the EGM, which was
adjourned to December 20. Corus had around 158,000 registered shareholders.

Institutional investors accounted for around 90 percent of the total shareholders. The
remaining 10 percent were individual investors.

As of November, the major shareholders in the Corus group apart from the ones
connected to Corus were Standard Life Investments at 7.81 percent, Legal & General
Investment Management at 3.82 per cent, Lehman Brothers at 3.45 percent and Capital
Group at 3.05 percent.

The UK takeover regulator had set a deadline of January 30 for the two bidders to make
their final offers. The commission had set a provisional deadline of February 5 for ruling
on the proposed transaction of CSN. As on December 7, Deutsche Bank, the financial
advisor to Tata Steel, had 4,786,061 Corus shares. The chronology of bidding events is
presented in Exhibit 21 and a summary of the UK takeover code is presented in Exhibit
22. Exhibit 23 presents a comparison of the two bidders.

Market Reaction Tata Steel share prices fell upon announcement of the acquisition and
continued to slide during the next two months. After a battering of two-and-a-half months
(in December), shares of Tata Steel staged a partial recovery with a gain of over 5 percent
with some market players speculating that the company might withdraw its bid to acquire
Corus. Tata Steel shares had lost about 20 percent ever since the reports first poured early
in October that it was planning to acquire Corus, as it was felt that the costly takeover
would have an adverse impact in the company's balance sheet. The brokers said the deal
might have significant long-term synergies, but market players were worried about the
adverse impact in the short term. Tata Steel's share price closed 5.4 percent higher at Rs
459.25, after hitting an intra-day high of Rs 461.45 at the Bombay Stock Exchange.
However, the stock was still 14 per cent below the level it was trading at in the beginning
of October. Exhibits 24 and 25 present the stock price history of Tata Steel, and Corus.
Interestingly, the CSN stock price went up when it announced its bid.
Exhibit 1: Top Steel Producing Countries (in million tons)
Country Capacity

China 349.4
Japan 12.5
U.S.A 94.9
Russia 66.1
South Korea 47.8
Germany 44.5
Ukraine 38.6
India 38.1
Brazil 31.6
France 19.5
Spain 17.8
U.K. 13.2
Source: International Iron and Steel Institute

Exhibit 2: World Carbon Steel Transaction Prices

World Steel Hot Steel
Prices Rolled Hot Cold Wire Medium Steel
US $/tonne Steel Coil Rolled Rolled Rod Sections
Steel
Plate Steel Coil
Jan-06 510 649 613 446 602
Feb-06 503 646 607 447 602
Mar-06 516 651 620 462 612
Apr-06 538 670 636 480 631
May-06 569 717 668 495 666
Jun-06 599 741 703 513 685
Jul-06 597 736 702 517 703
Aug-06 599 737 704 519 705
Sep-06 591 755 691 521 716
Oct-06 569 740 664 507 701
Nov-06 560 743 658 501 718
Dec-06 558 757 665 499 734
Jan-07 549 747 647 495 735
Feb-07 562 748 654 507 751
Mar-07 577 758 670 533 768
Apr-07 617 788 698 577 798
May-07 623 800 696 606 815
Jun-07 611 800 686 602 812
Jul-07 599 808 681 590 819
Aug-07 603 814 686 594 825
Source: www.meps.co.uk
Exhibit 3: Global Steel Manufacturers

(Output in million metric tons crude steel; the country/region of producer's basing
specified in brackets)

Rank Capacity Company Market Share per cent

1. 63.0 Mittal Steel Company NV (Global) 5.56

2. 46.7 Arcelor (Europe) 4.15
3. 32.0 Nippon Steel (Japan) 2.82
4. 30.5 POSCO (South Korea) 2.74
5. 29.9 JFE (Japan) 2.65
6. 23.8 Shanghai Baosteel Group Corporation (China) 2.12
7. 19.3 United States Steel Corporation (United States) 1.77
8. 18.4 Nucor Corporation (United States) 1.59
9. 18.2 Corus Group (Europe) 1.59
10. 17.5 Riva Group (Europe) 1.59
11. 16.5 ThyssenKrupp (Germany) 1.50
12. 16.1 Tangshan (China) N.A
13. 13.9 Evraz Holding (Russia) N.A
14. 13.7 Gerdau (Brazil) N.A
15. 13.6 Severstal (Russia) N.A

Source: International Iron and Steel Institute

Exhibit 4: Comparative Performance of World Steel Manufacturers

Company Net Sales Op Profit Net Income ROS percent Mkt Cap
($m) /ton ($)

Arcelor Mittal 88576 105 7973 8.9 107,182

POSCO 25842 170 3314 12.8 58,825
Baoshan Iron 71129 145 4389 6.1 47,705
U S Steel 15715 73 1374 8.7 12,413
Nucor 16592.98 95 1471.95 8.87 16,895

Thyssen Krupp 47125 89 1117 2.3 29,994

2007E

Company ROA % ROE% EV/MT ($) P/E P/B EV/EBITDA

Arcelor Mittal 6.8 11.1 1192 11x 2.1x 7.3x

POSCO 11.3 15.7 1807 13.9x 2.2x 7.9
Baoshan Iron 5.98 5.9 2512 23.7x 3.9x 11.2x
U S Steel 16.8 31.4 662 10.1 2.0x 7.2
Nucor 17 29.38 762 11.5x 3.0x 5.8x
Thyssen Krupp 7.4 21.4 NA 8.4x 2.1x 4.8x

Company Market Share %

Arcelor Mittal 9.71

POSCO 2.74
Baoshan 2.12
US Steel 1.77
Nucor 1.58
Thyssen 1.50

Source: Goldman Sachs, Companies and Case writer estimates

Notes: Currency Units- Arcelor Mittal, U S Steel, Nucor in $m, POSCO in KRW billion,
Baosteel in Rmb m; Thyssen Krupp in €m

Results are for 2006 for all companies except Baosteel, which is for the first half of 2006
Exhibit 5: Tata Steel Consolidated Balance Sheet (INR crore 11)
Liabilities
Mar 2006 Mar 2005 Mar 2004 Mar 2003
Net worth 9755.30 7059.92 4515.86 3186.02
Authorized capital 600.00 600.00 440.00 440.00
Issued equity capital 554.07 554.07 369.58 368.37
Paid-up equity capital 553.67 553.67 369.18 369.18
Preference capital 0.00 0.00 0.00 0.00
Bonus equity capital 257.93 265.83 81.35 81.35
Buy back amount 0.00 0.00 0.00 0.00
Buy back shares (nos.) 0.00 0.00 0.00 0.00
Reserves & surplus 9201.63 6506.25 4146.68 2816.84
Borrowings 2516.15 2739.68 3382.12 4225.40
Deferred tax liabilities 1716.40 1607.41 1690.56 1676.74
Current liabilities & provisions 5269.51 5288.60 4345.38 4173.38
Current liabilities 2835.99 2640.04 2163.79 1881.02
Provisions 2433.52 2648.56 2181.59 2292.36
Total liabilities 19257.36 16695.61 13933.92 13261.54
Assets
Net fixed assets 9849.81 9094.84 7857.85 7543.80
Revalued assets 0.00 0.00 0.00 0.54
Investments 4069.96 2463.25 2201.42 1201.56
Deferred tax assets 759.40 777.99 850.60 836.52
Inventories 2174.75 1872.40 1249.08 1152.95
Raw materials and stores 1150.20 952.76 618.99 581.52
Raw materials 707.54 603.70 292.82 262.30
Stores and spares 442.66 349.06 326.17 319.22
Finished and semi-finished goods 1024.55 919.64 630.09 571.43
Finished goods 1000.62 887.22 620.81 556.78
Semi-finished goods 23.93 32.42 9.28 14.65
Incomplete construction contracts 0.00 0.00 0.00 0.00
Stock real estate 0.00 0.00 0.00 0.00
Stock of shares / securities 0.00 0.00 0.00 0.00
Other stock 0.00 0.00 0.00 0.00
Receivables 1846.54 2008.19 1368.26 2153.59
Sundry debtors 539.40 581.82 651.30 958.47
Debtors exceeding six months 49.55 33.65 39.57 124.55
Accrued income 0.20 0.20 0.20 2.89
Advances / loans to corporate bodies 323.72 692.06 136.51 163.93
Group / associate cos. 321.72 690.06 134.51 107.72
Other cos. 2.00 2.00 2.00 56.21
Deposits with govt. / agencies 337.83 299.71 187.42 164.54
Advance payment of tax 75.02 44.02 39.83 425.66
Other receivables 570.37 390.38 353.00 438.10
Cash & bank balance 288.39 246.72 250.74 373.12
Intangible / DRE not written off 268.51 232.22 155.97 0.00
Total assets 19257.36 16695.61 13933.92 13261.54

11
I crore is 10 m. It is customary in India to quote currency in crores rather than millions.
Exhibit 6: Tata Steel Consolidated Income Statement (INR crore)

Mar Mar Mar Mar

2006 2005 2004 2003
Income
Sales 17136.08 15870.77 12656.73 10516.72
Other income 261.95 159.52 134.60 64.09
Change in stocks 104.91 289.55 80.31 15.03
Non-recurring income 163.96 277.98 182.46 99.24
TOTAL INCOME 17666.90 16597.82 13054.10 10695.08
Expenditure
Raw materials, stores, etc. 3762.03 3641.75 3458.85 2984.90
Wages & salaries 1351.51 1291.00 1349.59 1217.72
Energy (power & fuel) 897.57 778.30 724.62 787.75
Indirect taxes (excise, etc.) 2060.48 1467.30 1261.38 1107.12
Advertising & marketing expenses 80.75 86.18 81.90 87.19
Distribution expenses 1004.32 936.68 748.44 695.77
Others 2365.79 2311.34 1990.73 1623.74
Less: expenses capitalised 112.62 204.82 151.84 60.79
Non-recurring expenses 41.14 30.05 41.44 43.43
TOTAL EXPENSES 11676.21 10747.42 9808.79 8608.41
Profits / losses
PBDIT 6215.93 6260.04 3548.99 2208.25
Financial charges (incl. lease rent) 175.70 211.28 256.96 362.52
PBDT 6040.23 6048.76 3292.03 1845.73
Depreciation 733.96 618.78 625.11 570.94
PBT 5306.27 5429.98 2666.92 1274.79
Tax provision 1799.89 1955.82 920.70 262.48
PAT 3506.38 3474.16 1746.22 1012.31
Appropriation of profits
Dividends 820.43 821.37 416.25 333.01
Retained earnings 2685.95 2652.79 1329.97 679.30

Source: Prowess
Exhibit 7: Corus Consolidated Balance Sheet (£m)

2006 2005 2004

Non Current Assets 3668 3496 3577
Current Assets 4412 4446 3714
TOTAL ASSETS 8080 7942 7291
Current Liabilities -2348 -2467 -2397
Non Current Liabilities -1798 -2097 -1836
TOTAL LIABILITIES -4146 -4564 -4233
NET ASSETS/TOTAL EQUITY 3934 3378 3058

Source: Annual report

Exhibit 8: Corus Consolidated Income Statement (£m)

2006 2005 2004

Group Turnover 9733 9155 8373
Total operating costs -9,276 -8512 -7756
Group operating profit 457 643 617
Finance costs -202 -127 -123
Finance income 34 31 12
Share of post-tax profits of joint ventures 24 1 21
and associated undertakings
Profit before taxation 313 548 527
Taxation -119 -116 -119
Profit after taxation from continuing operations 194 432 408
Profit after tax from discontinued operations 35 19 33
Profit after taxation 229 451 441

Attributable to:
Equity holders of the parent 223 452 447
Minority interests 6 -1 -6
229 451 441
Basic earnings per ordinary share from continuing op
(pence) 21.01 48.14 46.4
Diluted earnings per ordinary share from cont. op.
(pence) 20.38 46.21 43.48

Source: Annual report

Exhibit 9: Corus Cash Flow Statements (£m)
2006 2005 2004

Cash Generated from Operations 373 939 578

Net Cash Flow from Operating act 125 657 363
Net Cash Flow from Investing Act 99 -354 -200
Net cash flow financing activities -244 -33 55
(Decrease)/Increase in cash and eq. -20 270 218
Cash and equivalents at the beginning 825 557 340

Cash and eq. at the end 798 825 557

Source: Annual report

Exhibit 10: Input prices12
Thermal Coking Natural Steel
coal Coal Iron Ore Gas Scrap Electricity
US
Year/ US US US $/000 US US
Month $/tonne $/tonne cents/tonne m3 $/tonne Cents/KwH

2003 M4 25.10 32.00 128.80 124-131 4.99

2003 M5 25.00 32.00 128.80 115-120 5.06

2003 M6 25.80 50.37 32.00 128.90 120-125 5.28

2003 M7 26.10 50.14 32.00 130.00 132-135 5.54

2004 M1 40.40 37.90 122.00 225-230 5.01

2004 M2 44.70 37.90 122.00 255-260 5.04

2004 M3 52.40 53.81 37.90 122.00 220-225 5.04

2004 M4 57.10 37.90 125.30 200-205 5.09

2004 M5 60.50 37.90 125.30 150-160 5.18

2004 M6 63.80 59.46 37.90 125.30 170-175 5.46

2004 M10 60.70 68.87 37.90 156.20 235-240 5.25

2005 M1 56.80 65.00 182.20 200-210 5.23

2005 M2 53.50 65.00 182.20 200-205 5.26

2005 M3 54.60 65.00 182.20 200-205 5.30

2005 M12 41.00 82.70 65.00 250.60 180-190 5.94

2006 M1 46.30 90.20 77.35 275.80 185-190 5.79

12
Notes
1) Coal is Australian thermal coal, 1200- btu/pound, less than 1percent sulfur, 14 percent ash, f.o.b.
Newcastle/Port Kembla, US$ per metric tonne.
2) Iron ore is 67.55 percent iron content, fine, contract price to Europe, FOB Ponta da Madeira, US cents
per dry metric tonne unit.
3) Natural gas is Russian natural gas, border price in Germany, US$ per thousands of cubic meters of gas.
Exhibit 11: International Labor Cost Comparisons

US $/hour 2000 2001 2002 2003 2004 2005

Australia 14.4 13.3 15.4 19.8 23.1 24.6
Brazil 3.5 3 2.6 2.7 3 3.2
Canada 16.5 16.2 16.7 19.4 21.4 23.7
China 0.6 0.7 0.8 0.9 1 1.1
Czech
Republic 2.8 3.1 3.8 4.7 5.4 6.1
France 15.5 15.7 17.1 21.1 23.9 25.3
Germany 22.7 22.5 24.2 29.6 32.5 34.1
India 0.6 0.6 0.7 0.7 0.8 0.9
Italy 13.8 13.6 14.8 18.1 20.5 21.7
Japan 22 19.4 18.7 20.3 21.9 21.4
Kazakhstan 0.5 0.7 0.7 0.9 0.9 1
Korea 8.2 7.7 8.8 10 11.5 14.1
Mexico 2.2 2.5 2.6 2.5 2.5 2.5
Spain 10.7 10.8 11.9 15 17.1 17.6
Sweden 20.2 18.4 20.2 25.2 28.4 29.7
Taiwan 6.2 6.1 5.6 5.7 6 6.4
Ukraine 0.3 0.4 0.5 0.7 0.7 0.8
United
Kingdom 16.7 16.8 18.3 21.2 24.7 26
United
States 19.7 20.6 21.4 22.3 23.2 23.8

Source: U.S. Department of Labor, Bureau of Labor Statistics. 2005 and all other estimates by Metals
Consulting International Limited (MCI),
Exhibit 12: Comparison of steel making costs
Country Pre tax
Total cost
$ per ton

US 483
Japan 475
UK 421
Canada 472
Korea 335
Taiwan 458
CIS 331
China 421

Production Cost
Slab Cost ($ per ton)
North America- base 100

North America 100

Europe 100
Japan/Korea 96
RoW 91
China 87
India 81

Source: Tata Steel, World Steel Dynamics

Exhibit 13: Financing Structure

Tata Steel Equity- $2056m

100 percent

Tata Steel Asia Holdings Bridge/Mezzanine Debt - $1824m

Pte Ltd

100 percent

Tata Steel UK Ltd Acquisition Debt- $5635m

Senior Debt- $3056m
100 percent High Yield Debt - $2579m
Revolving Credit Facility- $669m
Corus Group Plc

Source: Tata Steel

Exhibit 14: Funding Break Up

In In In
Rupees Million Million
Crores Pounds Dollars

Source Equity Debt Total Equity Debt Total Equity Debt Total

Internal Generation 3,000 700

External Commercial
Borrowings 2,170 500
Pref Share Issue to Tata
Sons 2,770 640
Rights Issue of equity
shares 3,655 862
Rights Issue of Convertible
Preference Shares 4,350 1,000
Foreign issue of an equity-
related instrument in such
form as may be considered
appropriate 1,805 398

Total Equity 17,750 17,750 1,687 1,687 4,100 4,100

Long-term non-recourse
debt from consortium of
banks 26,582 26,582 3,620 3,620 6,140 6,140

After re-financing 23,277 2,137 3,170 5,307 5,194 5,377 10,571

Quasi - Equity funding at
Tata Steel Asia Singapore 5,412 5,412 - 1,250 1,250
Long term Capital funding
at Tata Steel Asia
Singapore 6,104 6,104 - 1,410 1,410

17,750 38,098 55,848 1,687 3,620 5,307 4,100 8,800 12,900

Source: Case writer

Notes
Figures at 4, 5 and 6 above are approximate estimates sourced from Company Press Releases. Actual
amounts may vary slightly.
For above, Tata Steel is raising debt equivalent to amount at 2 above, which is 12 percent of total amount.
Tata Steel would be raising additional equity share capital of the face value in the range of about Rs.250 -
280 crores depending on the final pricing of the various issues. This increase in the equity capital will come
into effect only in stages during the three financial years 2007-08 to 2009-10 which will therefore ease the
burden of servicing. The post-tax cost of this total financing package for equity contribution is expected to
be 4.3 percent p.a.
Item at 8 above reduced to GBP3170 Million after refinancing vide Press Release dated 3 May 2007.
Simultaneously, Equity has gone up by GBP 450 Million due to additional equity provided by Tata Steel/
Tata Steel Asia.
Exhibit 15: Distribution of Production and Distribution Facilities of the combined
entity

Country Facilities

UK and Ireland 4 Production

Crude Steel Capacity: 14 mtpa
16 manufacturing plants
33 distribution centres

EU (excl. UK and Netherlands) 19 manufacturing plants

13 distribution centres

Netherlands 1 production
6.8 mtpa capacity
6 manufacturing locations
3 distribution centres
USA 3 manufacturing
2 distribution

India 1 production facility

5 mtpa capacity
22 distribution centres

Thailand 3 production
1.2 mtpa capacity
3 distribution centres
South East Asia 1 production facility
0.6 m tpa
4 distribution centres

Source: Tata Steel

Exhibit 16: The Corus Acquisition Economics

Tata Steel Corus Combined

Sales ($m) 5007 19367 24374

EBITDA ($m) 1480 1962 3442
Net Profit ($m) 840 861 1701
Crude Steel Production (m ton) 5.3 18.2 23.5
Market capitalization ($m) 6510 8227 14737
Exhibit 17: Recent Steel Acquisitions and Corus Financial Data

Date Acquirer Target Region EV/EBITDA

Jan 07 Nucor Harris Canada 9.0

Dec 06 Evraz Oregon Steel US 5.8
Dec 06 Arcelor Mittal Sicartsa Mexico 5.7
June 06 One Steel SMorgon Australia 9.9
June 06 Mittal Arcelor Europe 5.5
May 06 Arcelor Severstal Russia 5.6
Nov 05 Arcelor Dofasco N America 6.1
Oct 05 Mittal Krivorizhstal Ukraine 4.7
Sep 05 Oyak Erdemir Turkey 7.3
Oct 04 Mittal ISG N America 5.5
Oct 04 Arcelor CST L America 3.8

Average 6.4

2006 2005 2004 2003 2002

Shares in Issue 967.69 m

Historic P/E 11.95
Employees 45000 48000 49000
Net Profit £m 451 440 -305 -458 -419
Capex £m 449 423 375
Depreciation £m 259 263 267

Sales per Geographic area

UK 27 percent
Europe 79 percent
Asia/Pacific 9 percent
North America 9 percent
Rest of the world 3 percent

Analyst estimate for 2006

EBITDA £m 840
EBIT £m 559.36
Exhibit 18: Trading multiples of major steel firms

2007E P/E Multiples (X)

Company Multiple

Nucor 11.7
ThyssenKrupp 10.3
US Steel 9.1
Corus 8.9
Nippon Steel 8.9
JFE 8.8
POSCO 5.7
Arcelor Mittal 5.0

Average 8.55

Source: Arcelor Mittal

Exhibit 19: Forecasts for Tata Steel

Assumptions
2006A 2007E 2008E 2009E

Saleable steel sales volume 4.42 4.86 5.17 5.62

per cent change YoY 12.2 10.3 6.4 8.7
Average Realization (Rs/ton) 24069 25070 24491 22994
Other revenues 38384 42671 44935 45302
Imported Coking Coal
Cost (Rs/ton) 6892 6540 5007 4048
Coke rate 536 545 545 535

Free Cash Flow Components (Rs m)

Net Sales 151394 171528 177903 180516

EBITDA 58787 69565 81903 85917
Depreciation 7751 7791 7755 8735
Net Fixed Assets 87074 81539 79595 120383
Net Current Assets 4289 20499 29353 30269

Terminal Growth Rate 2 percent

Net Debt 26,400

Source: Morgan Stanley, Feb 1, 2007

ABN AMRO Forecast

(Rs m)
2006 A 2007 A 2008 F 2009 F 2010 F
Revenue 204,910 256,514 1,173,388 1,188,933 1,232,227
Cost of sales -139,061 -177,632 -994,468 -990,609 -1,004,239
EBITDA 65,849.5 68,772.4 140,069 157,772 184,194
Depreciation -8603.7 -10,110 -38,850 -40,551 -43,795
EBIT 57,245.8 68,772.4 140,069 157,772 184,194
Capex -19,328 -35,000 -82,320 -61,575 -61,400
Change in
WC -7143.7 -5579.3 -21692 -649.7 -1795.7

Source: ABN AMRO Research, June 14, 2007

Exhibit 20: Select Financial Market Data

India and Tata Steel UK and Corus Group

10 Year T Bond Rate 7% 4.4 %

Market Risk Premium 9 % 4.5 %13
Beta (Tata Steel) 1.12 1.54 (Corus) 14
Cost of Debt 7.5 %
% of Equity 45
% of Debt 55
Tax rate 33.1%

FX rates using average appreciation/depreciation (Rs/£)

2003-04 2004-05 2005-06 Spot Rate15

77.74 82.94 79.22 85.73

Exhibit 21: Tata Steel- Corus Chronology of Events

 October 5: Tata says "considering" bid for Corus.

 October 20: Corus agrees 455 p a share offer from India's Tata Steel, valuing the
group at £4.3bn. But Standard Life, the largest investor in Corus, with a 7.9per
cent stake, says it thinks the terms are too low.
 October 26: Sir Anthony Bamford, one of Britain's leading industrialists, says he
agrees that Tata's first bid is too low and that it would damage Britain's
manufacturing industry.
 November 3: Russia's Severstal rules itself out as a rival bidder
 November 17: CSN announces indicative bid of 475p a share.
 November 27: Corus postpones Extraordinary General Meeting which was to
vote on the first Tata deal to allow CSN more time to formalize its offer.
 November 29: Corus reports a 60% surge in third-quarter profits on the back of
booming European demand for steel.
 December 10: In a late night announcement, Tata Steel ups its offer to 500p a
share, valuing Corus at £4.7bn.
 December 11: CSN raises its terms to 515p, valuing Corus at £4.9bn. Corus
directors switch their recommendation to the Brazilians.
 December 19: The Takeover Panel imposes a January 30 deadline on Brazilian
group CSN and its Indian rival Tata to launch a revised deal for control of Corus.
Corus shares are still ahead of the CSN terms, at 529p.
 Jan 2, 2007 Tatas decide to raise its bid for Corus by 10per cent to 550p after
several meetings with its bankers in a determined attempt to defeat a rival offer
from Brazil.

13
This is the result of a study by Elroy Dimson, Paul Marsh and Mike Staunton of the London Business
School
14
Based on the stock prices in the last half of 2006 to March 30, 2007
15
Spot Rate is on October 1, 2006
Exhibit 22: City Code on takeovers and mergers (U.K)

The City's code applies to all listed and unlisted public companies, and also some private
ones which have had shares listed on the London Stock Exchange within the previous ten
years. It also protects shareholders involved in the bid. The City Code on Takeovers and
Mergers was last fully revised and reissued in July 2000.

The code sets out General Principles and is enforced by the Panel on Takeovers and
Mergers. The panel is a self-regulating body. However, decisions are subject to judicial
review. There may also be some legitimate doubt as to whether the Panel's structure is
compatible with art 6(1) of the European Convention on Human Rights.

The code's objectives are as follows:

 Equality of treatment of shareholders;

 Equality and sufficiency of disclosure for shareholders;
 Careful and responsible consideration of the terms of the offer by the offeror
company;
 Prevention of the creation of false markets;
 Acceptance or rejection of the offer by shareholders of the target without
interference of selfish advice by their board of directors; and
 Proper organization of persons acting together to ensure they can all fulfill their
obligations under the offer.

The code lays down that:

 The acquirer of 30 % of the shares of a company within the code must make an
offer to all the holders of voting shares.
 The price at which the offer is to be made is the highest at which the target
company's shares have been dealt in by the offeror within the 12 months
preceding the acquisition of the 30 % stake.

The Substantial Acquisitions Rules are concerned with the speed of acquisition and
disclosure requirements where shares (and rights over shares) are required which confer
15 % to 30 % of the voting power in a public company whose shares are dealt with on
either the London Stock Exchange or the Alternative Investment Market. These rules are
enforced by the Panel.

The salient features of the code are discussed below:

1. All shareholders of the same class of an offeree company must be treated similarly by
an offeror;

2. During the course of an offer, or when an offer is in contemplation, neither an offeror,

nor the offeree company, nor any of their respective advisers may furnish information to
some shareholders which is not made available to all shareholders. This principle does
not apply to the furnishing of information in confidence by the offeror company to a bona
fide potential offeror or vice versa;

3. An offeror should only announce an offer after the most careful and responsible
consideration. Such an announcement should be made only when the offeror has every
reason to believe that it can and will continue to be able to implement the offer:
responsibility in this connection also rests on the financial adviser to the offeror;

4. Shareholders must be given sufficient information and advice to enable them to reach a
properly informed decision and must have sufficient time to do so. No relevant
information should be withheld from them;

5. Any document or advertisement addressed to shareholders containing information or

advice from an offeror or the board of the offeree company or their respective advisers
must, as is the case with a prospectus, be prepared with the highest standards of care and
accuracy;

6. All parties to an offer must use every endeavor to prevent the creation of a false market
in the securities of an offeror or the offeree company. Parties involved in offers must take
care that statements are not made which may mislead shareholders or the market;

7. At no time after a bona fide offer has been communicated to the board of the offeree
company, or after the board of the offeree company has reason to believe that a bona fide
offer might be imminent, may action be taken by the board of the offeree company in
relation to the affairs of the company, without the approval of the shareholders in general
meeting, which could effectively result in any bona fide offer being frustrated or in the
shareholders being denied an opportunity to decide on its merits;

8. Rights of control must be exercise in good faith and the oppression of a minority is
wholly unacceptable;

9. Directors of an offeror and the offeree company must always, in advising their
shareholders, act only in their capacity as directors and not have regard to their personal
or family shareholdings or to their personal relationships with the companies. It is the
shareholders' interests taken as a whole, together with those of employees and creditors,
which should be considered when the directors are giving advice to shareholders.
Directors of the offeree company should give careful consideration before they enter into
any commitment with an offeror (or anyone else) which would restrict their freedom to
advise their shareholders in the future. Such commitments may give rise to conflicts of
interest or result in a breach of the directors' fiduciary duties;
10. Where control of a company is acquired by a person, or persons acting in concert, a
general offer to all other shareholders is normally required; a similar obligation may arise
if control is consolidated. Where an acquisition is contemplated as a result of which a
person may incur such an obligation, he must, before making the acquisition, ensure that
he can and will continue to be able to implement such an offer.
Exhibit 23: Comparison of the bidders
Tata Steel CSN

Steel Production (mtpa) 8.7 5.8

Revenues $b 4.6 3.8
Operating Margins per cent 40 32
Manufacturing Locations 11 3
Cost of slab production (per
Ton in $) 180 190
Gross Debt $m 753.5 4369.9
Net Debt $m 0 2869.6
Equity $m 2293.9 1051.4
Debt/Equity (gross) 0.3 4.2
Debt/Equity (Net) 0.0 2.7
2005 Total Assets $m 7157
Cash flow from operating
Activities $m 1757
Net Profit Margin per cent 18.24 17.90

Exhibit 24: Stock Price History of Tata Steel (in Rupees)

Exhibit 25: Stock Price History of Corus (in pence) 16

Source: London Stock Exchange

Question-

5) Examine the impact of the acquisition on Tech Mahindra’s financial performance. Use the following
assumptions for your analysis

Revenues of Satyam = $1.3 b

EBITDA Margin = 3%
Debt Assumed for the merger = Rs 20b; balance is financed through internal accruals
Interest on debt = 10%
Rs/$ Exchange Rate = Rs 48.50; Rs/C$ Exchange Rate = Rs 39.74

16
During 2003-2006 the FTSE 100 increased from less than 4000 to about 6000