The Merger of Tata Tetley

The Merger of  Tat ataa Te Teaa - Te Tetltley ey

 The Merger of  Tata Tea - Tetley Tetley  The first ever leveraged buybuy -out  out (LBO), largest crosscross  border acquisition by any Indian company

 The Merger of Tata Tea - Tetley Tetley 

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cross-border acquisition that Largest cross-

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 Tetley 

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The size of the deal was big, and was the first ever  leveraged buybuy-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 Tetley 

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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 Tetley 

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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, Devan, Chakra Gold and Gemini

 The Merger of Tata Tea - Tetley Tetley 

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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 

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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 

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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 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 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 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 Tetley Synergies 

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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  ±Tata Tea has been successful in the marketing of packet teas,  ±Tetley  ±Tetley is strong in tea bags .

 Tata Tea ± Tetley Synergies 

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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, f lavored lavored teas, 

Herbal teas,

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Organic teas and

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decaffeinated teas.

Merger -- the the process 

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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 the process 

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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 the process 

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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 the process 

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The entire debt amount of 235mn pounds comprises of four Tranches bearing interest @ 11%, divided into four tranches ± ±  A, 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  £ 185mn

£ 60mn £ 10mn

Intermediate Capital Group

Tata Tea (Gr Britain) SPV

Prudential Mezzanine Capital

Schroder  Ventures

£ 10mn Equity £ 70mn

£ 30mn

£ 10mn

Debt £ 235mn

 A fine blend of debt and  equity Tetley Acquisition

Legal Services & Bank Charges

Tetley¶s Working Capital requirements

Debt Repayment Structure A

B

C

D

 Amount

110mn pounds

25mn pounds

10mn pounds

20mn pounds

Loan Type

Long-term  

Long-ter m

Long-ter m

Revolving

Purpose

Funding  Acquisition

Funding  Acquisition

C APEX

WC exp

Year of  maturity

2007

2007

2008

2007

Pay-back method

Semi-annual installments

2 installments in 07-08

2 installments in 07-08

Cessation of credit

C oncept 

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of SPV SPV  -- explained 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.

C oncept 

of SPV SPV  -- explained 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 

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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.

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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 !