TATA-TETLEY DEAL IN 2000

By Group 7
1. Debargha Dawn (20PGPM089)
2. Dhaanya (20PGPM090)
3. Riyanka Sadhu (20PGPM113)
4. Tridip Dutta (20PGPM129)
5. Vedika Dokania (20PGPM131)
 BUYER’S INTENTION
The acquisition did not require Tata to persuade Tetley for acquisition. The global scenario was
such that both sides recognized the need for the consolidation of resources. It was recognized
that African countries were becoming potential formidable competitors by virtue of their
increasing production speeds, with the quality of the final product being alarmingly similar to
that of the Indian tea. The demand and supply of the product were being affected. Regular
consumers of tea produced in India like Russia and tea produced in the UK like Ireland had
reduced their consumption which led to a steady decline. Supply was more than demand which
led to a decrease in prices. Though India ranked at the top in terms of tea consumption, the
diverse variants of tea being offered internationally impacted the prices of tea globally, a factor
that was beyond the control of anyone tea production company.

As for Tata specifically, it recognized changing trends in the tea business well in advance and
made strategic moves throughout the 1990s with its most impactful move taking place in 2000.

Seller’s Intention
SELLER’S INTENTION

The acquisition would result in an increase in revenues as the joint revenue of both the
companies would be considerably high. Tata had a great amount of raw material by virtue of
its tea gardens and Tetley had sales expertise on an international level. There would be an
expansion of market share as the entity born out of this acquisition would have excellent
vertical integration. There were a lot of benefits for both parties involved.

PRICE PAID

The acquisition of Tetley Tea by Tata Tea was the David and Goliath story of the financial
world and created quite the buzz in the 2000s. The transaction was initiated in February 2000
and the sale of Tetley Tea took place on March, 10th 2000. This acquisition deal would go
down in history as one which saw the acquisition of a “global shark by an Indian
minnow”. This was no exaggeration as indeed that was the case. The deal cost Tata $ 450
million (271 million pounds) to acquire Tetley when its net worth stood at a puny $114
million. Adding to the sensationalism of this deal was the fact that this was the first
acquisition made by an Indian company using the technique of a leveraged buyout.

MODEL FOR REACHING THE PRICE

Model for Reaching at that Price

The deal was quite different as instead of a cash transaction which was the norm during that
period of time, Tata utilized the option of a leveraged buyout. A leveraged buyout is a means
of acquisition where the target company is acquired using capital the break-up of which reveals
that the debt in that amount is significantly higher than the equity.

A special purpose vehicle (SPV) was set up which was a complete subsidiary of Tata with very
little equity capital. The SPV paid off the debt which was undertaken through cash flows of
Tetley (the target company). Tetley’s assets were used as security for the debt. Once the debt
was paid off, the SPV merged with Tata Tea.

The capital of the SPV included 2 parts, the equity which was 70 million pounds, and the
debt which stood at 235 million pounds, and equity. The equity was completely financed by
Tata Tea out of which, Tata Tea Inc, Tata’s company incorporated in the US supplied 10
million pounds, and 60 million pounds was supplied by Tata Tea. Out of the 60 million, 45
million pounds were raised through GDRs. The debt was spread over four tranches with a
repayment period which ranged from 7 to 9.5 years. The lenders of the debt were Schroders
(10 million pounds), Rado Bank (185 million pounds), Mezzanine (10 million pounds), and
Intermediate Capital Group (30 million pounds). The total amount raised was spent on three
major expenses. 271 million pounds was spent on the transaction, 9 million pounds was spent
on legal and bank charges and 25 million pounds was assigned to be the working capital of
Tetley.

SYNERGIES
• Revenue Synergy – The consolidated revenues of Tata Tea and Tetley Tea were slated to be
higher, which was one of the motives to go for this acquisition as far as Tata Tea was concerned.

• Operations Synergy – Tata Tea had a large number of tea gardens, whereas Tetley Tea had
expertise in buying tea from global auction market and sell it under their own brand after
processing it. These two models could come together well resulting in better downstream
operations, creating a greater net positive effect.

• Synergies in the Management – This deal being cross-border, there was possibility of
challenges in this regard. However, on the bright side, there was also a scope for synergy in the
Management Practices.

• Line and Width Synergy – The combined entity resulting from this deal would have a very
good width of operations, and vertical integration that would enable it to compete anywhere in
the market.