Within two weeks of initial reports, the recommended acquisition of Corus by Tata Steel was formally announced today. Rex Mathew reports on the details of the agreement and the post-acquisition scenario.

In a clearly landmark development for India Inc, Tata Steel - the largest private sector steel company in the country – has formally announced the bid to acquire European steel maker Corus Group Plc. If successful, this would be the largest ever acquisition – either domestic or overseas – by an Indian company. (See: Tata Steel in $10.5-billion bid for Corus)

Boards of both the companies have approved the bid and the Corus board has recommended the offer to its shareholders. (See: Corus board approves Tatas' offer). An agreement has also been signed, detailing the terms and procedure of the acquisition. Though it is an acquisition by Tata Steel, operationally it would be a friendly merger with the Corus management retaining their positions even after conclusion of the deal.

The Offer
Tata Steel has not changed its initial indicative price, announced earlier this week, of 455 pence per share of Corus.(See: Tata Steel bids $7.57 billion for Corus) The offer, at 5.4 times EBITDA for the last financial year ended December 2005 and at a premium of 26 per cent to the average stock price of Corus for the last one year, values Corus at $8.09 billion.

The acquisition would be made by Tata Steel UK, an indirect wholly-owned subsidiary of Tata Steel specially set up in the UK for the deal. The transaction is subject to the approval of a majority of shareholders and the High Court of Justice in England and Wales

As per the agreement between Tata Steel and Corus, the acquisition is expected to be completed by 16 January 2007. The agreement would lapse in any case if not concluded by 20 July 2007, unless the deadline is extended by mutual consent.

The offer by Tata Steel is subject to a minimum acceptance of 75 per cent of shareholders. Corus has agreed to pay an inducement or termination fee to Tata Steel if the acquisition fails because of a withdrawal of recommendation by the Corus board or endorsement of a counter-bid by any other company.

Corus has also agreed not to solicit or encourage a counter-bid from another company. However, it can respond to unsolicited offers and provide sufficient information to the companies making such offers. All such offers or approach have to be promptly notified to Tata Steel UK.

The agreement can be cancelled by mutual consent at any time or if the deal fails to get regulatory approvals. Corus can also terminate the agreement by paying the termination fee to Tata Steel.

Financing
Tata Steel has said that the acquisition would be financed through "own funds and debt". Tata Steel UK would receive $3.45 billion from Tata Steel to finance the acquisition. The company has also arranged debt financing for a total of around $6.5 billion from a consortium of banks including Credit Suisse, ABN Amro and Deutsche Bank.

It is not clear how Tata Steel is raising the $3.5 billion for funding Tata Steel UK. It is likely, though not confirmed, that a major portion of the funds would come from Tata Sons. In July this year, Tata Steel board had cleared a preferential issue of equity shares and convertible warrants to Tata Sons.

The debt facilities arranged by Tata Steel UK would also be used to retire the existing debt of Corus, besides providing working capital funds to Corus after the acquisition.

Combined entity
Tata Steel currently has a capacity of 5-million tonnes per annum India and another 3.7-million tonnes in South East Asia. Corus has an annual capacity of 18.2-million tonnes, taking the combined present capacity to 26.9-million tonnes. The combined entity would emerge the fifth-largest steel maker in the world.

Tata Steel is currently expanding capacity at:

• Jamshedpur by 2- million tonnes, which would be operational by 2008
  
• The company also has plans to set up three new plants in the states of Jharkhand, Chattisgarh an Orissa with a combined capacity of 23-million tonnes per annum
  
• In Bangladesh, Tata Steel is planning a 2.4-million tonne plant
  
• In Iran it has proposed a 5-million tonne plant

Once, and if, all these new plants come up, total capacity of the merged Tata Steel-Corus entity would go up to nearly 60-million tonnes. By then, Tata – Steel-Corus would be vying with Posco and some of the Russain companies – who also have massive expansion plans – for the second spot behind Arcelor – Mittal.

Current revenues of the Tata Steel-Corus combine would be in excess of $22 billion and would earn it a spot in the Fortune Global 500 list of largest companies.

Management
Top management teams of both companies would be combined after the acquisition – with select Corus directors appointed to the Tata Steel board and Tata Steel directors taking positions on the Corus board. The senior management of Corus Group would remain with the company even after acquisition. CEO Philippe Varin and David Lloyd, executive director, finance, would remain with the company for at least two years.

On successful completion of the acquisition, Tata Group chairman Ratan Tata would take over as the chairman of Corus and Jim Leng, the current Corus chairman, will then become deputy chairman. CEO Philippe Varin would retain his position and would report directly to Ratan Tata. Four other executive directors and two non-executive directors of the present Corus board, apart from the chairman and CEO, would also be appointed to the new board. From Tata Steel, managing director B Muthuraman, Isshat Hussain and A Gandhi would become members of the new Corus board.

Moreover, Jim Leng would appointed deputy chairman of Tata Steel, as well. Philippe Varin would be appointed as deputy managing director of Tata Steel after a period of one year. Three other current executive directors of Corus would also join the Tata Steel board.

Tata Steel has agreed to safeguard the employment terms of all Corus employees. There are no plans to change the location of any of the Corus units. Tata Steel has also agreed to make an up front payment of $237 million to meet the pension liabilities of Corus and would raise the pension fund contribution from 10 to 12 per cent in future.