the euphoria of winning a high-stakes bidding war to acquire
Corus Group, Tata Steel top brass had to face some tough
questions from the media and analysts today morning. Tata
Group chairman Ratan Tata led the Tata Steel top management
in defending the buy-out and espousing the long-term strategic
vision for the Tata Steel-Corus combine.
Steel believes that, though the Corus valuations appear
to be very steep based on current performance, it can
achieve significant gains in future through operational
synergies and access to mature markets. Ratan Tata was
categorical in dismissing the criticism that the deal
was detrimental to shareholder interests.
went on to add that the negative reaction of the stock
market was without appreciating the long-term gains and
strategic importance of the deal. "With this acquisition
we can prove that Indian industry can step outside the
national shores and prove itself as a global player",
expected, most of the questions were centred on the valuation
of Corus, which most analysts have termed as very high.
Tata Steel managing director B Muthuraman admitted that
the price offered by his company is expensive on the basis
of 2005 EBITDA levels of Corus. However, he argued that
the deal is not very expensive on the basis of enterprise
value per tonne of capacity - especially when compared
to similar deals in recent years. Muthuraman asserted
that the cost of setting up a greenfield plant is considerably
higher and would take anywhere between three to five years
to become operational.
Steel management also sought to allay fears of very high
financial burden on Tata Steel because of the acquisition.
The equity infusion by Tata Steel into its subsidiary
Tata Steel UK, which is the acquiring company, would be
around $4.1 billion. The Tata Steel management elaborated
that this amount would be tied up in such a way that the
investment by Tata Steel would be attractive in terms
of the capacity being acquired. A part of this amount
would come from Tata Sons, which has already subscribed
to a preferential issue of equity shares by Tata Steel.
remaining amount of close to $9.5 billion, including existing
debt of Corus which would be re-financed, would come from
borrowings which have already been tied up. Tata Steel
said these debt facilities have been structured in such
a way that they would be serviced from future cash flows
of Corus. Though these liabilities would appear on the
consolidated financial statements of Tata Steel, their
servicing would not affect the standalone cash flows of
the stock market refused to buy these arguments and the
Tata Steel stock ended the day with substantial losses
of nearly 10.5 per cent. Most of the leading stock brokerages
have downgraded the stock while some have come out with
recommendations to sell.
a majority of analysts are willing to concede that the
acquisition makes strategic sense and may pay off in the
long term, the consensus view is that stock price of Tata
Steel would remain depressed in the short to medium term
because of the higher financial risks.