Mergers and Acquisitions

Case study analysis submission

Financing strategy at TATA Steel

Submitted by:

Naresh O. Heda (16S528)

TATA STEEL LIMITED: FINANCIAL STRATEGIES

Case Synopsis:

The case discusses about the financial requirements of Tata Steel Limited (TSL). The case gives
the insight about the growth adopted by TSL in the past and its current financial strategy. Purpose of
this case is to show various financial strategy, capital structure and different instruments used by TSL.
Growth Strategy of TSL:

From initial period of 2000, TSL has been expanding globally. They grew inorgincally by
acquiring companies worldwide. This was done to increase efficiency and reduce cost. One of the
major acquisition was the one with Corus Steel. Some of the key acquisitions and mergers of TSL in
the recent past are as follow:

1. Acquisition of Corus Steel for $7.6 billion in an all cash deal. Initially the acquisition was
financed through Leverage Buy Out. Later, the bridge loans were repaid through various
instruments such as
a. Foreign Direct Investment through its Singapore owned subsidiary
b. Divesting its stake in other TATA Companies such as TATA Consultancy Services
c. Equity contributions from TATA Steel and TATA Sons, the holding company
2. In November 2007, TSL purchased a 35% stake in coal venture owned by Riverdale Mining
Limited as part of their backward integration strategy
3. The company was constructing a multipurpose industrial park at Gopalpur, Orissa, India
4. 50%-50% JV with Steel Authority of India
5. 50% – 50% JV with L&T to develop deep sea port at Dhamra, Orissa

Because of the series of acquisition, the company turned from a cash rich company to cash hungry
company. They were raising funds through different routes to meet their financial obligations.

TSL Finance steps:

1. In July 2011, TSL issued GDR worth $500 million.

2. In July 2010, it issues warrants worth $158.23 million and ordinary shares worth $198 million
to TATA Sons, the holding company.
3. In December 2010 and January 2011, it raised $30 billion through issuance of NCDs
4. In November 2009, converted Cumulative Alternative Reference Securities into FCCBs
5. The Company tied up with Export Credit Agency and got long term buyer’s credit of 264 million
euros
6. It also issues many long to short term NCDs to finance its growth

Financial Strategy for TSL:

 Tata Steel will leapfrog from the fifty-sixth largest steel producer in the world to the fifth
position.
 The company will have better geographical mix. Tata steel will have access to 40 countries
across the globe, transforming it into a major global player from a domestic player.
 It will also achieve access to high-developed markets and premium customer base.
 There will be a transfer, from Europe to India, of technology, and expertise, research and
development capabilities in the automotive, packaging and construction sectors, increased
procurement knowledge and in effect, a better bargaining power.
Corus' well known strength is the production of high-end steel-used in construction automobile and
aircraft as well as its impressive research and development will complement Tata Steel. The merger
will also give it access to the important markets of Europe. All that will benefit Corus is the
management expertise of the Tatas and their cost advantage in producing steel. With their acumen
they will bring down the production cost of Corus. Tata Steel expects to earn $300 million per year
through cost savings.

Market has not responded well to this deal as the price of the stocks fell. Investors are worried about
cash outflow and the resultant strain on company's balance sheet. Of the total cash to be paid in the
deal $4.1 billion will be forked by Tata steel, rest of the money will be as debts and will be returned
from Corus cash flows.