Professional Documents
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Group 3
Sec - L
LBO-Definition
Leveraged Buy-Outs
Unique Features of LBOs
Large portion of buy-out financed by debt
Junk bonds are non-rated debt. Bond quality varies widely Interest rates usually 3-5 percentage points above the prime rate Bridge or interim financing was obtained in LBO transactions to close the transaction quickly because of the extended period of time required to issue junk bonds. These high yielding bonds represented permanent financing for the LBO Junk bond financing for LBOs dried up due to the following: A series of defaults of over-leveraged firms in the late 1980s Insider trading and fraud at such companies a Drexel Burnham (Michael Milken), the primary market maker for junk bonds Junk bond financing is highly cyclical, tapering off as the economy goes into recession and fears of increasing default rates escalate
On 20 October 2006 the board of directors of Anglo-Dutch steelmaker Corus accepted a $7.6 billion takeover bid from Tata Steel, the Indian steel company. On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at USD 12.04 Billion. The deal was the largest Indian takeover of a foreign company at the time and made Tata Steel the world's fifth-largest steel group.
VISION Tata Steel We aspire to be the global steel industry benchmark for Value Creation and Corporate Citizenship
SWOT
- To become a World leader in low cost and high quality steel products.
SWOT Analysis
Worlds ninth largest and Europes second largest steel producer. - Wide range of products of high technology.
SWOT
- To merge with a company to eliminate duplication and remove overlaps in marketing, accounting etc. - To get access to raw material and growth markets through merger. - Increasing losses could result in winding up of company
TATA was a low cost steel producer in fast developing region of the world. CORUS was a high value product manufacturer in the region of the world demanding value products TATA had self sufficiency in raw material. CORUS was fighting to keep its productions costs under control and was on the look out for sources of iron ore TATA had a strong retail and distribution network in India and SE Asia. CORUS was a major player in Europe
TATA was a major supplier to the Indian auto industry and the demand for value added steel products was growing in this market. Hence with CORUS there would be a powerful combination of high quality developed and low cost high growth markets
There would be technology transfer and crossfertilization of R&D capabilities between the two companies that specialized in different areas of the value chain
Strong culture fit both emphasizing on continuous improvement and ethics (ASPIRE and The Corus Way)
To tap European Mature Market Cost of acquisition is lower than setting up of Green field plant & marketing and distribution channel TATA manufactures low value, long and flat steel products ,while Corus produce high value Stripped products TATA to feature in Top 10 players in world
Economies of scale
TATA accesses CORUS patents and R&D facilities
extend its Global reach through TATA get access to Indian Ore reserves, as well as virgin market for steel get access to low cost materials market of Europe integration for Corus
Saturated
Decline
Backward
DEAL DYNAMICS
October 20, 2006 - Tata Steel picks up 100% stake in CORUS at 455 pence per share in all cash deal, valued at GBP 4.3 billion (USD 8.04 billion) November 19, 2006 - CSN launches counter offer at 475 pence per share, valuing it at $8.4 billion December 11, 2006 Tata raises offer to 500 pence: CSN counters with 515, valuing the deal at $ 9.6 Billion. December 19, 2006 - UK Watchdog on Takeovers and Mergers announced that the last date for each of Tata and CSN to announce revised offers for the Company is 30 January 2007 January 31, 2007 -Tata Steel wins bid for Corus. Offer at 608 pence per share, valuing Corus at $11.3bn
Tata steel's Continuous Improvement Program Aspire with the core values :Trusteeship, Integrity, respect for individual, credibility and excellence Corus's Continuous Improvement Program The Corus Way with the core values : code of ethics, integrity, creating value in steel, customer focus, selective growth and respect for our people As the core values of the two companies were same so Tata used Light Handed Integration Approach Top management of the company remained same
High value paid. Approximately 7.7 times its Enterprise Value. Corus EBITDA was at 8% which was much lower as compared to Tata Steels 30%. Debt of US $ 6.14 was raised against the cash flows of Corus (LBO). It was a risky proposition. Tatas debt equity ratio was adversely affected to 2.74:1 from 1.1 which it was maintaining earlier. Fast consumption of Tata Steels captive iron ore reserves as production capacity increased from 5.3 million ( estimated for 50 years at this capacity) to 27 million tons of steel per annum.
Strengths : Easy Access to quality raw material. New technology for producing high value products. Reach in 4 continents and 45 countries. Economies of Scale and production. Weakness : Cost of production per unit bound to increase. High Debt equity ratio. High dependability on the growth of market. A lot of stress on the cash flows of combined entity.
Opportunities : To become global player in steel industry. Takeover more companies successfully. Increase in production capacity beyond 56 mn tons by 2015 Threats : Cultural Diversifications are not easy to integrate. Markets should continue to grow. Rising cost of raw material. Rising terrorism and political unrest among nations.
If TATA steel were to create, from scratch, 19 million tonnes of steel making capacity comparable in quality to what Corus possesses, It would end up investing 70% to 85% more than it is paying now Besides, setting up a new factory, a 3 to 5 years project if everything goes well, has great execution risk With Corus in its fold, Tata steel can confidently target becoming one of the top 3 steel makers globally by 2015 . the company would have an aggregate capacity beyond 50 million tones per annum, if all the planned Greenfield capacities go on stream by then We can conclude that if acquisitions are well planned , executed and the necessary precautions taken for the deal a company can achieve its strategic objectives and thus ensure its growth through
acquisition
The first ever leveraged buy-out (LBO), largest cross-border acquisition by any Indian company
Tata Tea's strategy of pushing for aggressive growth and worldwide expansion.
The acquisition of Tetley made Tata Tea the second biggest tea company in the world with the expected combined turnover worth Rs. 2,800 2,900 crore. (The first being Unilever, owner of Brooke Bond and Lipton).
Tetley Acquisition
271mn
25mn
9mn
Before Merger
TATA TEA Turnover operating profit Employees Tea Estates $207million $36 million 59740 54 TETLEY $417 million $42.6 million 110 0
Key Market
India
Merger Implications
Company has moved up the value chain 84% of turnover came from packed tea bags
Increased outsourcing
produced 95% of its tea requirements in house Margins highly correlated with tea cycle
outsourced entire requirement from 35 different countries with an estimated procurement of 3 million kgs of tea every week
today 70% of TATA Tea requirement is outsources from 20 different countries thus reducing the risk associated with fluctuations in production arising out of various factors.
Predictable margins
Margins hedged
Global footprint
Domestic operations
Global presence