24 - Tata’s acquisition of Corus—a valuation analysis

Abstract

The steel industry witnessed a wave of consolidation of capacity since the year 2004. The prices of iron ore were rising, and on the other hand, requirement of steel from the emerging nations started to rise. To maintain market concentration, most players started indulging in price wars stressing the margins further. Consolidation for economies of scale became inevitable. The steel industry had long fragmented capacity. Consolidation would increase the pricing power with both suppliers and buyers. At the time of Tata Corus deal, the top 10 auto companies, which were the major buyers of steel controlled about 95% of the market. Tatas had great interest in Corus. Tatas initially started with 455 pence all cash bid per share on October 20, 2006. Thus, Corus was valued at d4.3 billion. CSN made its first bid on November 17, 2006, offering 475 pence per share. Tata upped the offer on 11th December, valuing the enterprise at d4.7 billion followed by the CSN offer of 515 pence and thereafter on 31st January. Tatas sealed the deal at 608 pence. The first counter bid by the CSN was the turning point in the whole episode in which a friendly negotiated deal turned into a fierce battle. The Corus acquisition facilitated Tata Steel to adopt the philosophy of deintegrated production.