Tata-Corus Deal : Expert Opinion
I am delighted to post the view points of Mr Joy Kumar Jain -Executive Director , PricewaterhouseCoopers -India on the Tata-Corus deal . In the interview Joy talks about the naunces of the deal and its implications
Profile:
Joy Jain is a brilliant Chartered Accountant who rose to partnership of PwC at a very early age. Joy specalises in valuations of business , share valuation, valuation of property, plant and equipment, valuation of intangible assets, purchase price allocations Financial due diligence reviews, corporate restructuring
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Interview
Q1 –Joy , what do you think are the drivers for the Tata –Corus deal , from a strategy perspective?
Steel Industry globally is still fragmented. The top five steel makers control only about 20% of the global production as against Aluminium where the top five producers have 40% of the market share. Transactions like this would strengthen the ongoing consolidation in the Industry. It is clear that further consolidation will soon take place. The cyclical nature of the industry means that low-volume, high-cost producers have to generate sufficient cash or create a strong enough borrowing position during market peaks to survive the market troughs. The sector is still very fragmented and cannot therefore control its raw materials costs or the price of its finished goods. Arguably, the only way to counteract the situation is to acquire other steelmakers and become a larger player on the global scene, thereby obtaining greater bargaining power with suppliers and customers, and increased operating flexibility. It will ultimately ensure they are better able to survive, should iron ore prices keep soaring. Further, there are parts of the World which have surplus steel production and other parts of the World which do not have adequate production capacities. Such mergers will enable companies to freely move steel from surplus production areas to shortage areas. The need to consolidate, reduce over capacity and to secure greater market clout will only accelerate the process of mergers and acquisitions in the steel industry.
Additionally, as Corus has offices in various parts of the World, the Corus acquisition will boost Tata Steel’s reach in the global market and providing access to customers in Europe and elsewhere, thereby boosting its exports out of India. Higher Exports would mean higher utilisation levels resulting in higher operating margins for Tata Steel. Corus is also likely to gain with the deal as they would have access to untapped iron ore reserves of India. Both, Tata Steel and Corus will be able to draw on each other global facilities which will improve their attractiveness to institutional and other investors leading to better valuations. Additionally, Tata Steel will benefit from the rich R&D facilities and a number of patents owned by Corus. The deal makes Tata-Corus combined entity the fifth largest steel maker in the World. This will improve Tata Steel’s bargaining position both with the suppliers as well as with its customers. Further, additional synergies can be secured by integrating the operations of both the entities to the extent possible.
Q 2 – Well all of us have read about the deal in the newspapers but am not too sure if we understand the nuances of the deal from a financial perspective. What according to you are the three top features of the deal which differentiates this one
Per Tata Steel, it has paid a premium of 49% over closing mid market share price of Corus on October 4, 2006 and a premium of over 68% over the average closing mid market price over the twelve months ended on that date. Further the price paid also represents a significant premium on the PE multiples prevailing in the metals industry. The price paid is a factor of synergies that Tata Steel perceives it will be able to obtain pursuant to this deal. Further, the total deal value is much lower than what it would have cost Tata Steel to set up equivalent production capacity today.
Another element of the deal is the confidence that International banks/investors now have on the Indian Corporates. This deal requires Tata’s to raise a huge amount of debt to buy out the shares. The fact that they have been able to put the financing in place for such a large amount differentiates it from other deals.
Q 3 –What are the implications of this deal of the Tata Steel balance sheet and its profitability
While there would not be a significant implication on Tata Steel’s stand alone balance sheet, the deal would make its consolidated balance sheet very large. On a consolidated basis, the leverage/debt gearing would also go up substantially. However, they may not be a significant increase in consolidated earnings as it would depend upon the accounting and amortization of intangible assets acquired by Tata as a part of the deal.
Q4 – The media believes that it is indeed a landmark deal, what are your views on the same, what are the key things that the Tata’s need to be wary of to derive maximum value from the deal?
This is indeed a landmark deal from the point of view of Indian corporate history though relatively small in the global M&A space. Tata’s will have to ensure that they obtain maximum synergies from integrating Corus’ operations with theirs as well as make the best use of R&D facilities of Corus to derive maximum value from the deal. Also they will have to ensure that they have the confidence of workers to obtain maximum value. It may not be easy for an Indian company to obtain confidence of European Workers. However, Tata’s have the experience of Tetley acquisition with them which will help them in this regard.
Q-5 – What are the implications of the deal for the country (India) , what does these large deals do to the brand of the nation, (Brand India ).
Deals like this definitely catapult the nation into top of the mind recall for various corporate honchos internationally. It make them sit up and take notice of the country. Further it sends out positive signals since the country is no longer dependant on inward remittances but is actually investing overseas.
Q-6 –Of late , India has been known more for its IT Services and BPO, does this deal change the face of Indian manufacturing ?
The deal does not really change the face of Indian manufacturing. Of late, a lot of Indian companies, particularly in auto components and pharmaceutical sectors have been making overseas acquisitions. The net FDI outgo from India in 2006 was higher than the net FDI inflow into the country in that year and these numbers are excluding Tata – Corus and Vodafone-Hutch deals.
India would need to improve manufacturing’s share in its GDP to continue with or exceed the 8% growth rate as it is only manufacturing sector which has the capability of providing both direct and indirect employment to a large mass of people along with various spin-off benefits.
q- 7-What people capabilities are required to derive maximum value from deals such as these
Companies require adequate management bandwidth to be able to manage such large acquisitions. Management needs to be capable of completing the integration quickly and as mentioned above get the confidence of the local management and workers to ensure maximum value from such deals.
Joy Jain is a brilliant Chartered Accountant who rose to partnership of PwC at a very early age. Joy specalises in valuations of business , share valuation, valuation of property, plant and equipment, valuation of intangible assets, purchase price allocations Financial due diligence reviews, corporate restructuring
-------------------------------------------------------------------------------
Interview
Q1 –Joy , what do you think are the drivers for the Tata –Corus deal , from a strategy perspective?
Steel Industry globally is still fragmented. The top five steel makers control only about 20% of the global production as against Aluminium where the top five producers have 40% of the market share. Transactions like this would strengthen the ongoing consolidation in the Industry. It is clear that further consolidation will soon take place. The cyclical nature of the industry means that low-volume, high-cost producers have to generate sufficient cash or create a strong enough borrowing position during market peaks to survive the market troughs. The sector is still very fragmented and cannot therefore control its raw materials costs or the price of its finished goods. Arguably, the only way to counteract the situation is to acquire other steelmakers and become a larger player on the global scene, thereby obtaining greater bargaining power with suppliers and customers, and increased operating flexibility. It will ultimately ensure they are better able to survive, should iron ore prices keep soaring. Further, there are parts of the World which have surplus steel production and other parts of the World which do not have adequate production capacities. Such mergers will enable companies to freely move steel from surplus production areas to shortage areas. The need to consolidate, reduce over capacity and to secure greater market clout will only accelerate the process of mergers and acquisitions in the steel industry.
Additionally, as Corus has offices in various parts of the World, the Corus acquisition will boost Tata Steel’s reach in the global market and providing access to customers in Europe and elsewhere, thereby boosting its exports out of India. Higher Exports would mean higher utilisation levels resulting in higher operating margins for Tata Steel. Corus is also likely to gain with the deal as they would have access to untapped iron ore reserves of India. Both, Tata Steel and Corus will be able to draw on each other global facilities which will improve their attractiveness to institutional and other investors leading to better valuations. Additionally, Tata Steel will benefit from the rich R&D facilities and a number of patents owned by Corus. The deal makes Tata-Corus combined entity the fifth largest steel maker in the World. This will improve Tata Steel’s bargaining position both with the suppliers as well as with its customers. Further, additional synergies can be secured by integrating the operations of both the entities to the extent possible.
Q 2 – Well all of us have read about the deal in the newspapers but am not too sure if we understand the nuances of the deal from a financial perspective. What according to you are the three top features of the deal which differentiates this one
Per Tata Steel, it has paid a premium of 49% over closing mid market share price of Corus on October 4, 2006 and a premium of over 68% over the average closing mid market price over the twelve months ended on that date. Further the price paid also represents a significant premium on the PE multiples prevailing in the metals industry. The price paid is a factor of synergies that Tata Steel perceives it will be able to obtain pursuant to this deal. Further, the total deal value is much lower than what it would have cost Tata Steel to set up equivalent production capacity today.
Another element of the deal is the confidence that International banks/investors now have on the Indian Corporates. This deal requires Tata’s to raise a huge amount of debt to buy out the shares. The fact that they have been able to put the financing in place for such a large amount differentiates it from other deals.
Q 3 –What are the implications of this deal of the Tata Steel balance sheet and its profitability
While there would not be a significant implication on Tata Steel’s stand alone balance sheet, the deal would make its consolidated balance sheet very large. On a consolidated basis, the leverage/debt gearing would also go up substantially. However, they may not be a significant increase in consolidated earnings as it would depend upon the accounting and amortization of intangible assets acquired by Tata as a part of the deal.
Q4 – The media believes that it is indeed a landmark deal, what are your views on the same, what are the key things that the Tata’s need to be wary of to derive maximum value from the deal?
This is indeed a landmark deal from the point of view of Indian corporate history though relatively small in the global M&A space. Tata’s will have to ensure that they obtain maximum synergies from integrating Corus’ operations with theirs as well as make the best use of R&D facilities of Corus to derive maximum value from the deal. Also they will have to ensure that they have the confidence of workers to obtain maximum value. It may not be easy for an Indian company to obtain confidence of European Workers. However, Tata’s have the experience of Tetley acquisition with them which will help them in this regard.
Q-5 – What are the implications of the deal for the country (India) , what does these large deals do to the brand of the nation, (Brand India ).
Deals like this definitely catapult the nation into top of the mind recall for various corporate honchos internationally. It make them sit up and take notice of the country. Further it sends out positive signals since the country is no longer dependant on inward remittances but is actually investing overseas.
Q-6 –Of late , India has been known more for its IT Services and BPO, does this deal change the face of Indian manufacturing ?
The deal does not really change the face of Indian manufacturing. Of late, a lot of Indian companies, particularly in auto components and pharmaceutical sectors have been making overseas acquisitions. The net FDI outgo from India in 2006 was higher than the net FDI inflow into the country in that year and these numbers are excluding Tata – Corus and Vodafone-Hutch deals.
India would need to improve manufacturing’s share in its GDP to continue with or exceed the 8% growth rate as it is only manufacturing sector which has the capability of providing both direct and indirect employment to a large mass of people along with various spin-off benefits.
q- 7-What people capabilities are required to derive maximum value from deals such as these
Companies require adequate management bandwidth to be able to manage such large acquisitions. Management needs to be capable of completing the integration quickly and as mentioned above get the confidence of the local management and workers to ensure maximum value from such deals.
6 comments:
Simply wow!
This is really enlightening.Thanks to Mr Jain and to you
hey thx for a really nice intellectual blog...
Simple, lucid and informative
Here is my opinion of corus deal
http://corusdeal.blogspot.com/
Hey that was really informational and got a very good insight of the deal.
Thank you very much
precisely said..thanks joy
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