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TATA TEAS LEVERAGED BUYOUT OF TETLEY

Group 5:Karan Gupta Sahil Singla Tejas Gharge

Features

In 2000, Tata Tea acquired the UK brand Tetley for 271 million (US $450 million) Largest cross-border acquisition by an Indian company This deal was special as it was the first ever successful leveraged buyout by any Indian company. The financing mechanism of LBO made this transaction possible This deal made Tata tea, the 2nd biggest tea company in the world

The Tale of Tata Tea

Incorporated in 1962 as Tata Finlay Limited, initially setup a tea factory in Munnar (Kerela) and packaging in Bangalore Over the years, expanded its operations and acquired tea plantations In 1976, acquired Sterling Tea from James Finlay and Co. Acquired the entire stake of James Finlay and Co. in the joint venture and renamed it to Tata Tea in 1983 Entered the branded tea market in the mid 80s.

Contd..

Bought 52% stake in Karnataka based coffee consolidated ltd, largest coffee plantation in Asia Joint venture with Tetley International in 1991 to market its branded tea abroad. In 1992, acquired 9.5% stake in Asian Coffee which subsequently was increased to 64.5% in 2 years Initiated a massive physical upgradation program in 1995 at cost of Rs 1.6 Bn and bid for 20 tea estates in Sri Lanka Thereafter, it focused to develop itself into a truly national brand Tapped American and Japanese Tea and Coffee market

SYNERGIES

Tetley got access to Tata Teas gardens and production base and the latter gets Tetleys premium brands and global distribution network. Tata tea became the second largest tea multinational in the world with combined sales of over US$600m. Tea prices were on a structural downturn with supply exceeding demand. In such a scenario, Tetleys technical expertise should enable Tata Tea to upgrade its product portfolio and thus improve its competitive position. Wider Geographical reach.

Winning Blend

MINDSHARE

Tata tea got marketing expertise. Whereas Tetley is the most easily recalled tea brand in the world, known for its innovation, whether in packaging or marketing the brand.

NEW PRODUCTS

Tetley would give Tata Tea access to speciality products such as: flavoured teas, herbal teas, organic teas, and decaffeinated teas.

NEW MARKETS

Tata Tea could help Tetley to launch the brand in India, to enter the premium segment, as well as in the Middle East and Russia, traditional bastions of Tata Tea. Tetley could give to Tata Tea a global presence as Tetley had the second largest branded tea portfolio in the world and a foothold in 35 countries. A way for Tata Tea to have access to new markets and to focus more on branded tea business which is the future of the tea business.

Leveraged buyout
Acquiring Company

SPV

Target Company

In an LBO: The acquiring company floats a SPV. SPV is a 100% subsidiary of the acquirer with minimum equity capital. The SPV leverages this equity to gather a large amount of debt. This debt and equity is used to buy the target company. The debt is paid off using the target companys cashflow.

The Advantages

This mechanism allowed Tata Tea to minimise its cash outlay in making the purchase. 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 Tata tea was limited to its equity holding in the SPV. This deal was not possible without LBO. Tata tea retained full control over the venture The debt portion of the deal did not affect its balance sheet.

Process:Tata Tea contributed 60 mn out of which 45 mn was raised through GDR issue. The US subsidiary contributed 10mn.

Tata Tea (Great Britain) had 70 mn of equity base and this SPV leveraged 3.36 times to raise 235 mn debt.

Tetley was acquired with 271 mn and remaining money used in legal service, bank charges and working cap requirements.

Debt :- Raising and Usage

Debt of 235 mn

A Senior Term Funding the acquisition

B Senior Term Funding the acquisition

C Senior Term CAPex and WC

D Revolving Loan CAPex and WC

Market reaction to deal


Tata Tea Prce(Rs)
70

60

50

40

30

Tata Tea Prce(Rs)

20

10

EPS Pre/Post Acquisition


EPS(Rs)
25

20

15

EPS(Rs)

10

0 1997 1998 1999 2000 2001

Wise Decision?

Criticism:
Though

Tata tea had immediate dilution of Equity, Company would not earn the revenue to sustain the investment and its ROE will fall. It was the reason for low rating of bonds issued by company. Indian Banks lent to Tata Tea at very high equity to debt ratio of 1:3.77 while global standards were between 1:1 to 1:2.

Post acquisition Performance

Revenue grew at CAGR of 6.41%.


Revenue(Cr)
1800

1600
1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Revenue(Cr)

Post acquisition Performance


ROE
25

20

15

ROE

10

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Refinance in 2005

In 2005, Tata tea refinanced its entire debt outstanding of pound 184 million @ 2.95%+LIBOR to pound 160 million @ 1.4%+LIBOR. Debt to equity ratio brought down to 1.6:1 in 2005 from 3:1 in 2000. In 2006, Tetley recorded strong performance in the UK, Canada, Western Europe and developing markets. With Acquisition of JEMCA and Joekels Tea Packers in 2006, Company record sales volume in 2007.

Conclusion

Tough company could not provide ROE comparable to that of pre-acquisition ROE, It took 5 years for company to attain the same level of ROE. Company gave more ROE after year 2006 than that of year 2000.

Conclusion

Disinvestments in non-core activities


Tata

Tea has sold Tetley's private label tea business in the US to Harris Tea for $15 million.

Currently Tata Tea and Tetley operate in countries accounting for 53 percent of global packaged tea volume. HLL share reduced to 19.5% from 50% in packet tea segment. Finally Tata tea and Tata Tetley were merged in 2005.

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