As of yesterday Tata Steel has agreed to buy Corus for $11.94/share. The plan is to “… add finishing mills in Europe that supply Ford Motor Co. and Volvo AB to plants in India, a country with the world’s fifth-biggest iron-ore reserves. The combined company will have annual sales of $24.4 billion, with two-thirds of the revenue coming from Europe” (Bloomberg).
While there are chances it could turn out to be a good aquisition, this is a terrible managerial decision in my opinion. So Tata thinks they are getting a good deal because they are buying an extremely cyclical company for 9x EBITDA. To me that’s pretty pricey. Delving into the financials, you’ll see that Tata will be taking on a massive amount of debt depleting shareholders equity. Why I think this is a bad move on Tata’s part is that Corus doesn’t make a profit in down years for the steel industry. Every steel company is profitable right now, it doesn’t take much to be. For a company like Corus with high costs relative to the industry, there’s nothing special about this aquisition and worst case scenario can be brutal if the steel industry makes a 180 as it easily could.
Eric Schleien
zachary
teenmoney
josh4580
Carlton
Eric,
I agree that Tata probably paid too much, but personally I am glad because up until this morning I was a shareholder in Corus (originally bought 6/2/05 at $8.34, sold today at $23.40). The two things that Corus brings to Tata are 1) a good revenue stream and 2) technology.
At the sell price, Corus was purchased at an enterprise value to revenue ratio of 0.74. This is far cheaper that Mittal (1.22), POSCO (1.02), and Nucor (1.22), but higher than USX (~.67) and AK Steel (0.48). If Tata can reduce the costs for Corus it will turn out to be a good buy.
The second advantage for Tata is technology. To be honest, Indian technology is not up to the level of European technology. With so many grades of steel, technology does play an important role in steel manufacturing. The transfer of technology from Corus back to Tata should help the Tata side of the business.
While I list these two potential advantages, I do still agree that they probably paid too much.
By the way, the proceeds from the sale of Corus stock were reinvested in Head Corp (HED).