The Merger of

Tata Tea - Tetley

 The Merger of
Tata Tea - Tetley
The first ever leveraged buy-out
(LBO), largest cross-border
acquisition by any Indian company
The Merger of Tata Tea - Tetley
 Largest cross-border acquisition that marked the
culmination of Indian company’s - Tata Tea's strategy
of pushing for aggressive growth and worldwide
expansion.

 The acquisition of Tetley made Tata Tea the second

biggest tea company in the world with the expected
combined turnover worth Rs. 2,800 – 2,900 crore.
(The first being Unilever, owner of Brooke Bond and
Lipton).
The Merger of Tata Tea - Tetley
 The size of the deal was big, and was the first ever
leveraged buy-out (LBO) by any Indian company –
Tata Tea allowing to minimize it’s cash outlay in
making the deal.

 Acquisition price paid to Tetley was 271 mn pounds

(US $450 m) representing more than four times the
net worth of Tata tea at US $ 114 mn.
The Merger of Tata Tea - Tetley
 Tata Tea Limited (TTL), is the second largest tea
company in India.

 It has a significant presence in over 35 countries.

 Branded teas contribute 88% of the consolidated

turnover of the group,

 12% comes from bulk tea, spices and investment

activities
The Merger of Tata Tea - Tetley
 18,000 hectares under tea cultivation.

 Produces around 40 million kg of Black Tea

annually.

 Five major brands in the Indian market –

 Tata Tea,
 Tetley,
 Kanan Devan,
 Chakra Gold and
 Gemini
The Merger of Tata Tea - Tetley
 Tata Tea's distribution network in the country with 38
C&F agents and 2500 stockists caters to over 1.7
million retail outlets.

 "Super Brand" recognition in the country with market

share in terms of value and volume in India.
The Merger of Tata Tea - Tetley

 Tetley world’s second largest branded tea company.

 Tetley blends, packs and distributes tea products

(mainly tea bags) in the UK, Canada, Australia, USA
and a number of European countries.
The Merger of Tata Tea - Tetley

 Tetley recorded turnover worth more than 2,000

crore in 1999 with growth rate of 15% over 1998

 Tetley is the second largest tea bag brand in the

world, and Tetley products are on sale in over 40
countries
Tata Tea – Tetley Synergies
 The deal offer significant synergies – Tetley gets
access to Tata Tea’s gardens and production
base and the latter gets Tetley’s premium brands
and global distribution network.

Vertical Integration
Tata Tea – Tetley Synergies
 The Tetley acquisition catapulted Tata Tea from
the second largest branded tea marketer in India
to the second largest tea multinational in the world
with combined sales of over US$600m.
Tata Tea – Tetley Synergies

 Tea prices are on a structural downturn with

supply exceeding demand. In such a scenario,
Tetley’s technical expertise should enable Tata
Tea to upgrade its product portfolio and thus
improve its competitive position.
Tata Tea – Tetley Synergies
 Integration of branding, marketing, and
distribution, as well as manpower .

 Working together to
- Capture cost synergies.
– Capture revenue synergies
 revenue synergy is accomplished by utilizing
the complimentary strengths of both
organizations in marketing .
–Tata Tea has been successful in the marketing of packet
teas,
–Tetley is strong in tea bags.
Tata Tea – Tetley Synergies
 Jointly developing the markets where one or the
other company has so far worked singly thereby,
leveraging the Tetley international brand name.

 Bringing Tetley brand at the premium end of the

Indian market, flavored teas,
 Herbal teas,
 Organic teas and
 decaffeinated teas.
Merger - the process
 Tetley was acquired for £271m (equity: £70m, debt:
£201m) by a special purpose vehicle, Tata Tea GB.

 The purchase of Tetley was funded by a combination

of equity, subscribed by Tata tea, junior loan stock
subscribed by institutional investors (including the
vendor institutions Mezzanine Finance, arranged by
Intermediate Capital Group Plc.) and senior debt
facilities arranged and underwritten by Rabobank
International.
Merger - the process
 TATA Tea (Great Britain), the special purpose
vehicle was created for the Tetley acquisition, will
be merged into Tata Tea as soon as it has repaid
it’s debt obligations.

 The acquisition was financed with $70 million in

equity, of which $60 million was brought in by Tata
Tea and $10 million by Tata Tea, USA -- a 100 per
cent subsidiary of Tata Tea.
Merger - the process
 Take over deal comprises of
– 271mn pounds as Takeover cost
– 9mn pounds as legal & banking charges
– 25mn pounds as WC & additional funding

 The SPV leveraged the 70 mn pounds equity

3.36 times to raise a debt of 235 mn pounds
Merger - the process
 The entire debt amount of 235mn pounds
comprises of four Tranches bearing interest @
11%, divided into four tranches – A, B, C and D.

 Amount raised via tranches A and B were used for

funding the acquisition whereas C and D tranches
were used capital expenditure & WC
requirements. The tenure varied from 7 years to
9.5 years, with a coupon rate of around 11% which
was 424 basis points above LIBOR.
 Structure of the Tata Tea’s LBO Deal

Tata Tea Inc Tata Tea

Rabobank Intermediate
£ 185mn Capital Group
£ 60mn
£ 10mn Tata Tea (Gr Britain) Prudential Schroder £ 30mn
SPV Mezzanine Ventures
Capital
£ 10mn
£ 10mn
Equity £ 70mn Debt £ 235mn

A fine blend of debt

and equity
Tetley Legal Services & Tetley’s Working
Acquisition Bank Charges Capital requirements
 Debt Repayment Structure
A B C D
Amount 110mn 25mn 10mn 20mn
pounds pounds pounds pounds

Loan Type Long-term Long-term Long-term Revolving

Purpose Funding Funding CAPEX WC exp
Acquisition Acquisition

Year of 2007 2007 2008 2007

maturity

Pay-back Semi-annual 2 2 Cessation

method installments installments installments of credit
in 07-08 in 07-08
Concept of SPV - explained
 In an LBO, the acquiring company could float a
Special Purpose vehicle (SPV) which was a 100%
subsidiary of the acquirer with a minimum equity
capital.

 The SPV(TATA TEA GB) leveraged this equity to gear

up significantly higher debt to buyout the target
company.
 Concept of SPV - explained
 This debt was paid off by the SPV(TATA TEA GB) through the
target company's own cash flows. The target company's assets
were pledged with the lending institution and once the debt was
redeemed, the acquiring company had the option to merge with
the SPV.
 Rationale
 This mechanism allowed the acquirer (Tata Tea) to minimise its cash outlay
in making the purchase.

 The LBO seemed to have inherent advantages over cash transactions.

 The debt was paid off by the SPV through the target company's own cash
flows.

 The target company's assets were pledged with the lending institution and
once the debt was redeemed, the acquiring company had the option to
merge with the SPV.

 Thus the liability of the acquiring company was limited to its equity holding
in the SPV.

 Thus, in an LBO, the takeover was financed by the target company’s future
internal accruals.
 In the case of Tata Tea, its reserves at the time of the deal were just around
Rs 4 billion, precluding the possibility of making such a gigantic acquisition
on its own, neither could it afford the debt burden associated with large
borrowings.

 Hence it opted for a SPV.

 The deal was so structured, that although Tata tea retained full control over
the venture, the debt portion of the deal did not affect its balance sheet.

 The liability of acquisition was limited to Tata Tea's equity contribution to the
SPV.
Thanx !