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Introduction to LBOs
Leverage buyout (LBO) purchase of a company by a small group of investors using a high percentage of debt financing Investors are outside financial group or managers or executives of company Management buyout (MBO) leveraged buyout performed mainly by managers or executives of the company Results in significant increase of equity share ownership by managers Turnaround in performance is usually associated with formation of LBO
Characteristics of Lbos
LBOs are a way to take a public company private, or put a company in the hands of the current management, MBO. LBOs are financed with large amounts of borrowing (leverage), hence its name. Debt Equity ratio can go more than 90:10 LBOs use the assets or cash flows of the company to secure debt financing, bonds or bank loans, to purchase the outstanding equity of the company. After the buyout, control of the company is concentrated in the hands of the LBO firm and management, and there is no public stock outstanding.
Suitable for Small and Medium sized transactions. Allows selection or rejection of assets and liabilities. Leads directly to price allocation and stepped up asset value, that are part of Tax and Accounting aspects of transactions.
Stock Purchase
In Stock purchase , the target shareholders simply sell their stock and all their interest in target corporation to the buying group and then the two firms may be merged. This method cannot be used if one or more minority share holders refused to sell.
Types of LBO
Public to Private
Spin Offs
Private Deals
LBO Companies
Acquirer KKR KKR KKR Thompson Co. KKR Wings Holdings TF Investments Macy Acquisitions Corp. Carlyle Group & Welsh, Carson, Anderson and Stowe Quest Dex TRW Automotive Blackstone Group Holdings KKR PanAmSat Texas Pacific group, Bain Capital. & Goldman Sachs. Burger King Target RJR Nabisco Beatrice Safeway Southland (7-11) Owens-Illinios NWA, Inc. Industry Food, tobacco Food Supermarkets Convenience stores Glass Airlines Hospitals Department stores Yellow pages Auto parts Satellites Fast food Year 1989 1986 1986 1987 1987 1989 1989 1986 2002 2002 2004 2002 Value ($mil) 24,720 6,250 4,240 4,000 4,680 3,690 3,600 3,500 7,050 4,700 4,380 2,260
A colloquial term for a high-yield or noninvestment grade bond. Junk bonds are fixed-income instruments that carry a rating of 'BB' or lower by S & P , or BA or below by Moody's. Junk bonds are so called because of their higher default risk in relation to investmentgrade bonds.
Fallen Angels - The opposite of a fallen angel, this is a bond with a rating that has been increased because of the issuing company's improving credit quality. A rising star may still be a junk bond, but it's on its way to being investment quality. Junk Bonds - These are the bonds that pay high yields to
bondholders because the borrowers don't have any other option. Their credit ratings are less than pristine, making it difficult for them to acquire capital at an inexpensive cost. Junk bonds are typically rated at 'BB'/'Ba' or less.
Cont
risk
lenders. A bond rating on investment grade debt usually ranges from AAA to 'BBB. Investment grade bonds might not offer huge returns, but the risk of the borrower defaulting on interest payments is much smaller.
Rising Stars -The opposite of a fallen angel, this is a bond with a rating that has been increased because of the issuing company's
Bond Ratings
Moodys Aaa Aa A Baa Risk Ba, B Caa, Ca, C Risk C S&P AAA AA A BBB BB, B CCC/CC/C D Grades Risk
Investment Lowest Risk Investment Low Risk Investment Low Risk Investment Medium Junk Junk Junk High Risk Highest In Default
Tata Tea one of the largest company in the world was sheltered from competition by a protectionist Indian government for most of its history. In 1999, Tata Tea company faced several new challenges:
Upcoming deregulation. Changing consumer tastes.
Majority of the companys tea is sold in India, with 12% total international sales only. Possibility of future stiff competition from Nestle, Sara Lee Corporation, and Associated British Foods.
Possible Strategies/Solutions
The sheer size of the transaction could prove unwieldy Wouldnt investing in building its own global brand be more efficient than buying a foreign brand?
Finally
Introduction Of Corus
London based Corus group is the worlds one of the largest producer of steel & aluminum. Corus was formed in 1999 following the merger of Dutch group koninclijike Hoogovens N.V. with UKs British Steel Plc. On October 6,1999 . It employees 47300 people worldwide & 24000 people in UK. It had revenue of 9.2 billion in the year 2005,i.e.Rs. 64,400 CR. Corus provide Innovative solutions in construction ,automotive packaging, mechanical engineering worldwide.
Timelines Of Deal
On October 20, 2006, Tata Steel announced that it had agreed to pick up a 100% stake in the Anglo-Dutch steel maker Corus at 455 pence per share in an all cash deal, cumulatively valued at GBP 4.3 billion (USD 8.04 billion). On November 19, 2006, the Brazilian steel company CSN launched a counter offer for Corus at 475 pence per share, valuing it at $8.4 billion. On December 11, 2006, Tata preemptively upped the offer to 500 pence, which was within hours trumped by CSN's offer of 515 pence per share, valuing the deal at $ 9.6 Billion. The Corus board promptly recommended both the revised offers to its shareholders.
On
December 11, 2006, CSN announced a formal offer for the Company at an offer price of 515 pence per Corus Share, valuing the deal at $ 9.6 Billion on December 19, 2006, UK Watchdog the Panel on Takeovers and Mergers announced that the last date for each of Tata and CSN to announce revised offers for the Company, should they wish to do so, is 30 January 2007. They also warned that it would begin an auction procedure if the two remained in competition. On January 31, 2007 Tata Steel won their bid for Corus after offering 608 pence per share, valuing Corus at $11.3bn
Total TATA-CORUS deal of US $ 13.7 billion Equity Component-US$ 7.56 billion using Rights issue,Preferencial issue along with other financial methods. Debt Component-US $ 6.14 billion through mezzanine & long term loan arrengement with Citi Group,Standard Chartered,ABN AMRO bank. For immmediate financing Tata Steek UK raised 2.66 billion bridge loans. Acquisition was completed through Tata Steels UK Special Purpose Vehicle named Tata Steel UK.
Deal
TATA STEEL LTD(INDIA) TATA STEEL ASIA HOLDINGS(SINGAPORE) TULIP UK HOLDINGS TATA STEEL UK LIMITED(U K) CORUS GROUP Plc
There is recognition that for indian economy to continue its growth, its companies must look to compete on a global scale. Globally Tata steel was only 56 th largest steel producer. Buying Corus will leapfrogs it to fifth largest steel producer in world. Acquisition of Corus provide Tata steel of its production line & technology. Economies of scale To tap europeon market. Corus hold No. of patents & R & D facilities. Cost of acquisition is lower than setting up green field
The main reason is backward integration. Saturated market of europe. Decline in market share & profit. Lower net profit to sales ratio i.e.Revenue US$18.06 billion & N.P.only $626 million. Employee cost of Corus was 15% & Tata only 9%. Loan of Corus was 1.6 billion.
A really confident acquirer will tend to pay for the acquisition by cash and the markets historically have been rewarding this confidence by responding through rise in share value, a stock buy out could (almost certainly) take the opposite direction if they sense that the stock is overvalued. In about 75% of the cases, the stock value of acquirer has taken a dip soon after the deal is announced. The cash buyout also makes sure that its shareholders do not give up any merger gains to the acquired companies shareholders. Immediate takeover was required Share swap deal would have been less attarctive to Corus Shareholder.
Share swap deal may diluted the TataSteels share base which was not in favor of Tata Steels share holder. Cost of acquisition Debt i.e.8% was less than cost of equity i.e.15%. Share swap deal means FDI & lot of regularity which might have not been accepted by Corus Shareholders.
There were a lot of apparent synergies between Tata Steel which was a low cost steel producer in fast developing region of the world and Corus which was a high value product manufacturer in the region of the world demanding value products. Some of the prominent synergies that could arise from the deal were as follows : Tata was one of the lowest cost steel producers in the world and 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. This would give the European
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 There was a strong culture fit between the two organizations both of which highly emphasized on continuous improvement and ethics. Tata steel's Continuous Improvement Program Aspirewith 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,
CONCLUSION
On July 23, 2007, Tata Steel stock reached a 52-week high close of 721.00 on the Bombay Stock Exchanges (BSE) 30-stock Sensex after hitting a low of 399.00 on March 8, 2007. Tata Steel was one of the market leaders for the BSE Sensex up 27% in 2007. Standard & Poors Ratings Services cut its credit rating to BB from BBB and removed them from the negative watch list on which they were placed after the financing structure for the acquisition of Corus was announced. The rating was changed to a positive outlook. If after acquisition,if this deal will able to acquire all the synergies,then TATA STEEL-CORUS can be within top 3 companies by the year 2015.