Why did the Tatas take over Corus, which is nearly four times bigger the size of Tata Steel? Though Tata Steel had to spend over $12 billion to acquire Corus, the move would instantly make it the fifth largest player in the world with a combined capacity of over 24 MTPA.
It has given Tata Steel instant access to the matured markets of Europe. And it can make use of Corus’ top of the line R&D capabilities. Corus has good distribution network in Europe and has strong brand loyalty.
The combine would be present across a large part of the globe considering that Tata Steel already has a presence in Indian and other South East Asian markets. The Tatas, with its low-cost manufacturing capabilities, can supply its low-cost steel to Corus for making better yield value added products.
Corus, with annual revenues of 9 billion pounds, has multi-location facilities and has a worldwide workforce of 41,100 employees. Building a greenfield plant could have taken Tatas up to 5 years and the investment could have been higher.
Though a section of analysts have termed the deal as highly overpriced, Managing Director B Muthuraman countered it by saying, "The payout of 608 pence per share puts the enterprise value of Corus at $710 per tonne compared to industry average of $1200 to $1300 per tonne.
"But it is 9 times the EBITDA, higher than the industry average of 5 to 7. As a long term strategy, we had decided to pay higher price."
Ratan Tata agreed by saying, "We strongly feel the consolidation will bring synergy and benefit Tata Steel in the long run."
The steel industry has a promising future as prices are growing by 5 per cent year after year and this growth will be sustained. Since the debt portion will be serviced by the profit margins of Corus, it will have little impact on Tata Steel’s bottomlines.
Churiwala Security Managing Director Alok Churiwala said, "This is the right price for the right moment. Though the deal looks expensive, it would have been more expensive for Tatas for not having the deal as they would have remained a fringe player. The move will benefit long term shareholders of the company."