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Tatas unveil Corus cash plan

Mumbai, April 17: Tata Steel plans to raise Rs 10,105 crore ($2.36 billion) through twin rights issues and an overseas flotation to finance the $12.9-billion acquisition of Corus Group Plc.

The Rs 17,144-crore steel behemoth will be raising the money to put together $4.1 billion, roughly a third of the buyout corpus. The company has already raised $1.84 billion from internal resources, external commercial borrowings and an earlier rights issue of preference shares to Tata Sons, the holding company of the Tata group.

The board today cleared proposals for two more rights issues: the first is for the issue of rights equity on a 1:5 basis at a price of Rs 300 per share. This will rustle up Rs 3,655 crore ($862 million) and will involve the issue of equity shares with an overall face value of Rs 122 crore.

The second will be a simultaneous, but un-linked, issue of convertible preference shares in the ratio of 1:7 with a coupon rate of 2 per cent. The preference shares will be converted into equity after two years at a price ranging between Rs 500 and 600 per share. This issue is expected to yield Rs 4,350 crore.

Tata Steel will invest $4.1 billion in its wholly owned subsidiary Tata Steel Asia Holdings (Singapore) which, in turn, will shovel the cash into Tata Steel UK, which acquired Corus in late January. After the two rights issues, the company will come out with a “foreign issue of an equity-related instrument up to $500 million or Rs 2,100 crore”.

The details of this overseas flotation has yet to be worked out. By choosing to come out with equity issues, Tata Steel wants to clearly protect its balancesheet from the perils of a large exposure to debt. After the acquisition of Corus, analysts had expressed deep misgivings about the anticipated strain on the company’s balancesheet.

Tata Steel now says that for the acquisition, it will be utilising additional debt of only $500 million which represents 12 per cent of the total amount required. This is crucial when viewed in the context of Tata Steel’s ambitious greenfield and brownfield expansions. The company has maintained that these plans won’t be affected by the Corus deal.

However, the rights issues will lead to a dilution of its equity. The equity base will widen in stages during the three financial years beginning 2007-08 and this is expected to ease the burden of servicing.

“The EPS growth from the acquisition will more than offset the equity dilution,” B. Muthuraman, managing director of Tata Steel, told reporters after the board meeting at Bombay House, headquarters of the Tata group.

N.A. Soonawalla, vice chairman of Tata Sons, and Kaushik Chatterjee, vice president (finance), said the equity dilution was not a cause for worry when viewed against the benefits that would flow from the acquisition.

Muthuraman said he had initially expected synergy benefits of $350 million from the acquisition. However, the indications are that the sum will be a lot higher. Close to 18 teams from both the companies have been formed to identify synergies and work on long-term strategic issues.

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