Tata Corus

TATA STEEL-CORUS DEAL AND TAX IMPLICATIONS

Group Members: Shweta Baidya Tarun Daga Noshin Mamsa Uma Balakrishnan Vineet Sekhani

AGENDA • Synopsis Of The Deal

• • Acquisition or Merger?

• • The Route Adopted

• • Allocation of Funds

• • Tax Implications § Singapore-India Agreements § Impact on Tata Steel Shareholders

SYNOPSIS OF THE DEAL • Tata Steel UK Ltd purchased 20.66% shares in Corus on Jan 30, ’07 and 2.18% in Feb ’07

• • Bidding by CSN (Brazil) and Tata Steel ended with Tata offering 608 pence per share

• • Corus was hence valued at £6.2 b (or US$12.04 b)

• • Tata Steel is now the 5th largest global steelmaker

• • Combined capacity of Tata-Corus is in excess of

ACQUISITION OR MERGER? • Name of entity is retained as Corus plc after the amalgamation

• • Rs. 11,522.97 cr is reflected in 2006-07 balance sheet as investment in Corus plc

• • Corus makes four times more steel than Tata Steel. Tata Steel went in for a leveraged buyout.  

Hence, the move by Tata Steel is called a reverse takeover

THE ROUTE ADOPTED Pa re n t C o m p a n y

H o ld in g C o . fo r a ll fo re ig n a cq u isitio n s

W h o lly o w n e d S u b sid ia ry to e a se a cq u isitio n fu n d in g ( SPV ) Ta rg e t C o m p a n y a cq u ire d

ALLOCATION OF FUNDS • Equity contribution by Tata Steel to Tata Steel UK via Singapore of $4.1 b § § § §

Internal generation- $1.267 b External commercial borrowings- $0.5 b Proceeds from rights issue- $1.888 b Foreign equity offering- $0.445 b

• • Non-recourse debt financing by bank consortium (at Tata Steel UK) of $6.143 b § Five-year amortizing loan of $3.236 b § Seven-year minimally amortizing term loan of $2.907 b

• • Bridge financing in Tata Steel Asia Holdings

TAX IMPLICATIONS • Interest cost of $640 m on debt of $8 b at a rate of 8% § Existing debt of Corus- $400 m § UK allows 30% tax break on interest paid (as allowable expense) § Interest outflow becomes $725 m § Interest outgo to be paid by Corus (EBITDA of 41.45 b)

• • UK allows 125% deduction on R&D expenses prior to April 1, ‘08 and

SINGAPORE-INDIA AGREEMENTS Extensive double tax treaty network Mutual investment protection agreements India taxes foreign dividends at 34% Companies in Singapore can avail exemption on foreign dividends, if corporate tax rate of country from which income is sourced, is at least 15% and has been subjected to tax in that country Withholding Tax Comparison: Particulars India Singapore Withholding Tax Comparison: Interest 20% 15% • • • •

Royalty

10%

Technical Service

10%

Other services

40% of net income

10% If non-resident company provides in Singapore-18%. If provided remotely- no withholding tax If non-resident company provides in Singapore-18%. If provided remotely- no withholding tax

IMPACT ON TATA STEEL SHAREHOLDERS • Tata Steel raised funds via rights issue and not private placement § Increase in value to existing shareholders •

• Earnings per share and market capitalization of Tata Steel shareholders will get diluted immediately after the takeover due to high debt-equity ratio •

• Fall in share prices will allow Tata to pick up its own shares from the market at lower prices, fending off a takeover

IMPACT ON TATA STEEL SHAREHOLDERS • Section 35 DD- The taxpayer being an Indian company has incurred expenses for amalgamation § § This can be amortized over five successive years in equal installments

COMPARISON OF FINANCIALS PRE- AND POST-MERGER

O p e ra tin g Pro fit a s a p e rce n ta g e o f R e ve n u e ( pre -Corus )= 25 . 10 %  O p e ra tin g Pro fit a s a p e rce n ta g e o f R e ve n u e ( post -Corus )= 10 . 48 %

PA T a s a p e rce n ta g e o f R e ve n u e ( p re -C o ru s)= 1 6 .2 8 %  PA T a s a p e rce n ta g e o f R e ve n u e ( p o stC o ru s)= 9 . 3 4 %

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