Structuring and Pricing a deal
Financing Structure Financing India's largest leveraged buyout comprised of a $3.88 billion equity contribution from Tata Steel, a fully underwritten non-recourse debt package of $5.63 billion, and a revolving credit facility of $669 million. As per the acquisition plan a special purpose vehicle, a wholly owned subsidiary, called Tata Steel UK would be set up by Tata Steel. The acquisition was proposed to be effected under section 425 of the English Companies Act 1985 and upon approval from the Corus shareholders. Tata Steel UK would offer a price of 455 pence per Corus share valuing Corus at £4.3b ($8.04b). This price represented a multiple of 7.9 times the EBITDA of Corus from continuing operations for the twelve months to July 1, 2006. The acquisition was to be structured as a 100 percent leveraged buy out funded through cash resources and loans raised by Tata Steel and the SPV. Under the plan Tata Steel UK would arrange a loan of £1.6 b ($3056m), a revolving credit facility and a bridge loan and the rest would come from Tata Steel (to the SPV). Tata Steel appointed Credit Suisse, ABN Amro and Deutsche Bank to arrange financing. Of the £3.3 billion of financing being raised at the SPV level, Credit Suisse would provide 45% and ABN AMRO and Deutsche 27.5% each. The $1.8 billion bridge debt being raised at the Tata Steel level in India would be shared between Standard Chartered and ABN AMRO. The financing structure and the break up of sources are shown in Exhibits 13 and 14. Operational Structure One of the biggest concerns Tata executives had was whether the inevitable cultural conflicts between the organizations would pose significant operating problems. Integrating a large company that operated on a different continent with diverse cultures and operating environments was going to be no small task. Exacerbating this problem was the fact that Corus itself was formed by the merger of an English and a Dutch company that had different cultures and profitability. In line with the Tata Group’s approach to acquisitions, Tata Steel announced its intention to continue with the senior management of Corus. Appointments to the Tata Steel and Corus were to provide common platform for strategy and integration. According to the plan Ratan Tata would be the chairman of both Tata Steel and Corus and Jim Leng would serve as deputy chairman of Tata Steel and Corus. Three board members (including the CEOs) of each company would serve on the other company’s board. A strategic and integration committee comprising of Ratan Tata, the CEOs and senior management professionals of both companies was formed to develop and execute the integration plan and further growth plans. Appropriate cross functional teams were to be formed to execute the integration plan.
Strategy Muthuraman, the Managing Director of Tata Steel had a number of things to consider in negotiating a deal for Corus. First of all, Tata Steel could not make an all cash offer and assume the assets and liabilities of Corus on its balance sheet because of the sheer size. Second, both companies had to convince their shareholders about the strategic and financial benefits to the companies. Shareholders would be concerned about the size of the premium and the potential dilution in earnings per share. Muthuraman explained in a conference:
While we have been talking about strategy in this world of consolidation and growing in size, both in geography and in size, Tata Steel has been planning its long-term strategy. Tata Steel’s strategy, in terms of what it wanted to do over a period of time of 10 years, between 2002-03 and 2015, was to grow from four million tonnes per annum, which we were at that time, to about 30 million tonnes plus, beyond the shores of India, multinational, and continuing to be in a low-cost position and continuing to be EVA positive. That strategy had six elements. One of them was that we would build a strong base in...
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