Q.1.What are the benefits of the TATA-CORUS merger deal to the stakeholders of TATA Steel and the stakeholders of CORUS? Evaluate the post-merger security with the help of CAPM Model.
A.1.On January 31st, 2007 India’s Tata Steel acquired Corus, the erstwhile British Steel Major at a price of 608 pence per Corus share totaling $12.1 billion/ Rs 54,000 crore/ £6.1 bn, which was five pence per share higher than the offer of Brazil’s CSN (Companhia Siderugica Nacional). The deal is the largest Indian takeover of a foreign company, and creates the world's fifth-biggest steel company from the present 56th rank.
Benefits of TATA-CORUS merger deal to the stakeholders of TATA Steel
Investors with a one-to-two year perspective may find the Tata Steel stock unattractive at current price levels. While the potential downside to the stock may be limited, it may consolidate in a narrow range, as there appears to be no short-term triggers to drive up the stock. The formalities for completing the acquisition may take three to four months, before the integration committees get down to work on the deal. In our view, three elements are stacked against this deal in the short run:
1)Equity dilution: The financing of the acquisition is unlikely to pose a challenge for the Tata group, but the financial risks associated with high-cost debt may be quite high. Though the financing pattern is yet to be spelt out fully, initial indications are that the $4.1 billion of the total consideration will flow from Tata Steel/Tata Sons by way of debt and equity contribution by these two and the balance $8 billion, will be raised by a special investment vehicle created in the UK for this purpose. Preliminary indications from the senior management of Tata Steel suggest that the debt-equity ratio will be maintained in the same proportion of 78:22, in which the first offer was made last October. Based on this, a 20-25 per...