TATAS SING IN C(H)ORUS
Every Indian has been celeberating the aquisition of corus by Tatas and is probably justified in doing so.
But as finance professionals one needs to look in the financial viabiity or other wise of the whole thing.
The TATAs have aquired Corus at 9 times EBIDTA which is almost double than what Mittal paid for Arcelor.
Moreover, Standard & Poor’s, the international rating agency has put Tata Steel on the watch list with negative implication. However, the agency has maintained its ‘BBB’ long term corporate rating after the Corus acquisition.
Further if one considers the fact that the steel cycle is almost nearing its peak any fall in the demand for steel is likely to impact the top line.
The borrowings required for funding this aquisition will be huge and irrespective of the debt equity mix adopted for funding this - there is likely to be considerable strain on the TISCO bottomline.
It would be interesting to observe the funding pattern to be adopted by the TATAs as this is the largest aquisition by an Indian corporate. The mode of funding adopted might be a guide post for other corporates planning on aquisition in the future.
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4 comments:
I am also of the opinion that the corus acquisition has been done at a high price. Tata steel has to seriously manage its cash flows to service the 8 Billion $ debt. It is possible that Tata sons may dilute their stake in TCS to service this debt.Corus has a PE ratio of 27,which is too high considering that it is in a cyclical business. But the explanation that the Tata group has been giving is that the cost of installing new capacity is higher than the cost incurred to acquire Corus and that the acquisiton has longterm benefits. Tata steel is one of lowest cost producers of steel in the world with EBITDA margin of 40% and on the other hand Corus the most inefficient and high cost producer of steel with an EBITDA margin of 8%. If Tata steel is able to increase the efficiency of Corus along with providing it with low cost inputs it can improve its margins.
i dont think arrangement of finance for the tatas will be a big issue.afterall the acqisition has been done after taking into confidance the various sources of finance options available.but only the way it is financed will have to be looked into. a fresh issue may be considered as a good option but upto what extent? will tatas be able to fulfill their committments to the new shareholders?
Everyone's keeping an eye as to what Tata's will do now or how is the funding goin to be...
Well as read in the ET...i observed these facts....
Corus is a private company owned by Tata Steel U.K. which is a holding company of Tata Steel.There are n no of ways it can financed.
1.Initially it was decided that 3.45$Bn will be contributed by Tata Steel U.K. 6.5$Bn debt fiancing from consortium of banks like ABN Ambro,Deutsche Bank.Rest wil be funded from Tata steel.
2. Equity- Tata steel cannot raise all the money through equity. Also a foreign listed company can raise money better globally.So option is either Corus will raise money through equity by relisting itself in stock exchange or other option is SPV Tata Steel U.K. will raise money after merging Corus with itself.So they need not raise cash if it gets a foreign listed company to issues stock for takeover.
3. Debt- Corus balance sheet cannot support equity more than 3.5$ billion so rest has to be funded from India.But serving the debt is going to be a big thing..(around 573crores aprrox a yr wil be shelled out only as interest).
4. Issue of ADR's & GDR's is also an option.
5.Tata's have already diluted their shares.Around 1% shares have already been sold in the market costing around 1000 crores, but the reason for dilution is not known.
4. The recent news is that they are considering preferential allotment also.
It is said that Corus is not that efficient producer of steel as against Tatas, so probably Tatas can acquire more steel plants which can help Corus be more efficient thus decreasing its high cost.
Rohan:
I very much doubt whether Tatas will dilute their holding in TCS to fund a venture in steel. They might opt for a combo of overseas debt / adr or gdr and the preferential route.
Amrita:
Is tata steel UK a holding company of Tata Steel ? I doubt - but then I might be wrong need to check up!!!!
Point no 2 makes a lot of sense but it might call for a reverse merger - where TATA Steel UK merges with Corus and Corus loses its identity.
Any clue about the branding ? will corus be called as TATA steel or will it continue to be called Corus?
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