Post on 18-Apr-2015
TATA TEA’S 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 80’s.
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 Tea’s gardens and production base and the latter gets Tetley’s 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, Tetley’s 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 company’s 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:-
Debt :- Raising and Usage
Debt of £235 mn ASenior Term
Funding the
acquisition
BSenior Term
Funding the
acquisition
CSenior Term
CAPex and WC
DRevolving
LoanCAPex
and WC
Market reaction to deal
03/0
1/20
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17/0
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31/0
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14/0
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28/0
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24/0
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08/0
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22/0
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05/0
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19/0
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03/0
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17/0
7/20
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31/0
7/20
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14/0
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28/0
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11/0
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25/0
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09/1
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23/1
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06/1
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20/1
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04/1
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18/1
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01/0
1/20
010
10
20
30
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50
60
70
Tata Tea Prce(Rs)
Tata Tea Prce(Rs)
EPS Pre/Post Acquisition
1997 1998 1999 2000 20010
5
10
15
20
25
EPS(Rs)
EPS(Rs)
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%.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
200
400
600
800
1000
1200
1400
1600
1800
Revenue(Cr)
Revenue(Cr)
Post acquisition Performance
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
5
10
15
20
25
ROE
ROE
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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