Tata tea-tetley case analysis

By,
Divyahsree p.v
E.Saravanan
Kruthika S.Iyer
monawar zeeshan aamir
TATA TEA-TETLEY
A story of David & Goliath

In the summer of 2000, the Indian corporate

fraternity was witness to a path breaking
achievement, never heard of or seen before
in the history of corporate India.
 TATA TEA-History
• 1962 - Tata Tea was incorporated as Tata Finlay Limited

• The company, in collaboration with Tata Finlay &

Company, Glasgow, UK, initially set up an instant tea
factory at Munnar (Kerala) and a blending/packaging unit
in Bangalore.

• 1976 - Company acquired Sterling Tea companies from

James Finlay & Company for Rs 115 million.

• 1983 - Renamed ‘Tata Tea Limited’.

• Mid 1980s - Tata Tea entered the branded tea market.

 TETLEY-History
• Tetley - owned by a group of banks and institutional investors,
including venture capital major Schroder Ventures.

• Tetley - leading brand in the UK, US and Canada.

• Tetley is known for its tea bags & black tea made from fully
oxidized leaves, dripless Tetley tea bags with exotic flavors of
lemon Chamomile, Orange Peach, Peppermint Summer & black
drawstring tea like English Breakfast & British Blend.

• 2003 - Tetley was the market leader with 29.4% and 43.4% share,
respectively in the UK & Canada.

• Fastest-growing tea brand in Australia, & in the US it had 11.5% of

the black tea bag market.
 Start of an era
• 1991 - TTL formed a joint venture with Tetley
International, UK, to market its branded tea abroad.

• 2000- TTL acquired shareholding of Tetley group in

UK, through a new subsidiary.

• Tata Tea - Tetley became the 2nd largest branded tea

company in the world & the market leader in tea
products in Canada & UK.

• The Tata-Tetley deal, an unusual deal.

 TATA & TETLEY-The case

• Case of Tata & Tetley-provides insights to the

concept of Leveraged Buyout & its use as a
financial tool in acquisitions, with specific
reference to Tata Tea's takeover of global tea
major Tetley.

• This deal - the biggest ever cross-border

acquisition
- also the first-ever successful leveraged buy-
out by any Indian company.
• The acquisition of Tetley made Tata Tea
the 2nd biggest tea company in the
world. (The 1st being Unilever, owner of
BrookeBond & Lipton).

• TTL also went through a

metamorphosis from a plantation
company to an international consumer
products company.
SPECIALITY OF THIS DEAL

• Size of the deal

• 1st ever leveraged buy-out by any Indian

company.

• Financing - never been successfully

attempted before by any Indian company.

• Tetley's price tag (US $450 m) > 4 times the

net worth of Tata tea (US $ 114 m).
Leveraged buy out
• LBO made TATA to acquire TETLEY.

• LBO mechanism of financing the acquisition set

the deal apart.

• The LBO has inherent advantages over cash

transactions.

• 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.
 Special Purpose vehicle (SPV)

• The SPV leveraged this equity obtain higher

debt to buyout the target company.

• This 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.
• Tata Tea created a (SPV)-christened
Tata Tea (Great Britain) to acquire all
properties of Tetley.
• The SPV was capitalised at 70 mn
pounds:
– Tata tea contributed 60 mn pounds: this
included 45 mn pounds raised through a
GDR issue.
– The US subsidiary of the company, Tata Tea
Inc. 15mn pounds.
 Criticism
• Some analysts felt Tata Tea's decision to acquire Tetley
through a LBO not beneficial for shareholders.

• They told though there would be an immediate dilution of

equity (after the GDR issue), Tata Tea would not earn revenues
on account of this investment in the near future (as an
immediate merger is not planned).

• Lead to a dilution in earnings & also a reduction in return on

equity.

• Thus shareholders have to bear the burden of investment

without immediate benefits in enhanced revenues & profits.
From the lenders point of view too there seemed to be some
drawbacks...
THE SYNERGY
• TTL believed: acquisition would not only open up
several new opportunities but also fortify the
company in an increasingly competitive
environment.

• 3 Rivals like Hindustan Uni Lever Ltd (HUL),

Kenyan crush, Tear & Curl tea would be able to
buy & import good quality lower-priced tea.

• With its strong distribution network, TTL had been

planning to become a fast moving consumer
goods (FMCG) company, along the lines of HUL.
Cultural problems

• At the time of the takeover, cultural

differences were a big hurdle.

• Eg: Tata executives complaining about

being kept waiting when visiting Tetley's
UK head office, despite being the senior
partners.
– Meanwhile, Tetley managers complain about
being run by the Tatas, who they felt knew
only about India and nothing about Western
markets.
The Road Ahead

• Tetley was expected to bring TTL

volumes in the short term and greater
opportunities in the long term.
• All the profits that TTL is making from
now on will be funded to the interest
occurred and paying back the debt.
• So running of TTL in short term will be
a hard show, though it will pay back in
long term.