Case Study – LBO Tata Tea and Tetley The case 'The Leveraged Buyout Deal of Tata & Tetley' provides insights into the concept of Leveraged Buyout Buyout (LBO) and its use as a financial financial tool in acquisitions, with specific reference to Tata Tea's taeover of glo!al tea "a#or Tetley$ This deal which was the !iggest ever cross%!order acquisition, was also the first%ever successful leveraged !uy%out !y any ndian co"pany$ "We were very clear that the burden on Tata tea should be such that the company would be able to absorb it. And it would not materially affect Tata Tea's bottomline." % N.A.Soonavala, N.A.Soonava la, Vice-Chairman, Vice-Chair man, Tata Tea. Tea. "It was important to make the right decision on the comprehensiveness of the transaction. The model has been driven by existing and future earnings potential of the Tetley Tetley group and the resultant postac!uisition cash flows to immediately ustify the business and financial model." % Rana a!oor, "#, Ra$o %ndia &inance Ltd.,
%ntroduction n the su""er of , the ndian corporate fraternity was witness to a path!reaing achieve"ent, never heard of or seen !efore in the history of corporate ndia$ n a land"ar deal, heralding a new chapter in the ndian corporate history, Tata Tea acquired the * heavyweight !rand Tetley for a staggering + "illion pounds$ This deal which happened to !e the largest cross%!order acquisition !y any ndian co"pany, "ared the cul"ination of Tata Tea's stra strate tegy gy of push pushin ing g for for aggr aggres essi sive ve grow growth th and and world worldwi wide de e-pa e-pans nsio ion$ n$ The acquisition of Tetley Tetley pitch fored Tata Tata Tea into a position where it could ru! shou should lders ers with with glo! glo!al al !ehe !ehe"o "oth thss lie lie nil nilev ever er and and Lawr Lawrie ie$$ The The acquisition of Tetley Tetley "ade Tata Tata Tea Tea the second !iggest tea co"pany in the world$ (The first !eing nilever, owner of BrooeBond and Lipton)$
.oreover it also went through a "eta"orphosis fro" a plantation co"pany to an international consu"er products co"pany$ /atan Tata, 0hair"an, Tata group said, 1t is a great signal for glo!al industry !y ndian ndustry$ t is a "o"entous occasion as an ndian co"pany has !een a!le to acquire a !rand and an overseas co"pany$1 A!art 'rom the si(e o' the deal, )hat made it !articularly s!ecial )as the 'act that it )as the 'irst ever levera*ed $uy-out +LBO $y any %ndian com!any. This "ethod of financing had never !een successfully atte"pted !efore !y any ndian co"pany$ Tetleys !rice ta* o' /0 mn !ounds +1S 2345 m )as more than 'our times the net )orth o' Tata tea )hich stood at 1S 2 003 m. This David & 2oliath aspect was what "ade the entire transaction so unusual$ 3hat "ade it possi!le was the financing "echanis" of LBO$ This "echanis" allowed the acquirer (Tata Tea) to "ini"i4e its cash outlay in "aing the purchase$
The Tale o' Tata Tea Tata Tea was incorporated in 56 as Tata 7inlay Li"ited, and co""enced !usiness in 568$ The co"pany, in colla!oration with Tata 7inlay & 0o"pany, 2lasgow, *, initially set up an instant tea factory at .unnar (*erala) and a !lending9pacaging unit in Bangalore$ Over the years, the co"pany e-panded its operations and also acquired tea plantations$ n 5+6, the co"pany acquired :terling Tea co"panies fro" ;a"es 7inlay & 0o"pany for /s < "illion, using /s 5$= "illion of equity and /s$ 5<$ "illion of unsecured loans at <> per annu" interest$ n 5=, Tata ndustries Li"ited !ought out the entire stae of ;a"es 7inlay & 0o"pany in the #oint venture, Tata 7inlay Ltd$ n 5=8, the co"pany was rena"ed Tata Tea Li"ited$ n the "id 5=s, to offset the erratic fluctuations in co""odity prices, Tata Tea felt it necessary to enter the !randed tea "aret$ n .ay 5=?, the co"pany revolutioni4ed the value%added tea "aret in ndia !y launching #anan $evan tea8 in polypac$ n 5=?, the co"pany set up a research and develop"ent center at .unnar, *erala$ n 5=6, it launched Tata Tea $ust in .aharashtra$ n 5==, the Tata Tea %eaf was launched in .adhya @radesh$
n 5=5, Tata Tea !ought a <> stae in *arnataa%!ased 0onsolidated 0offee Li"ited%the largest coffee plantation in Asia, in order to e-pand its coffee !usiness$ n 55, Tata Tea for"ed a #oint venture with Tetley nternational, *, to "aret its !randed tea a!road$ n 55, Tata Tea too a 5$<> stae in Asian 0offee%the ydera!ad !ased > e-port oriented unit nown for its instant coffee, through an open offer$ This offer was the first of its ind in ndian corporate history$ Later, in 55?, Tata Tea increased its stae in Asian 0offee to 6?$<> through another open offer$ This helped it to consolidate its position in the coffee industry$ n 55<, Tata Tea unveiled a "assive physical upgradation progra" at a cost of /s $6 !illion$$$
#e-"ysti'yin* LBO The Tata%Tetley deal was rather unusual, in that it had no precedence in ndia$ Traditionally, ndian "aret had preferred cash deals, !e it the /s$$= !illion taeover of ndal !y indalco or the /s$ ?$55 !illion acquisition of ndiaworld !y :atya"$ 3hat set the deal apart was the LBO "echanis" which financed the acquisition$ The LBO see"ed to have inherent advantages over cash transactions$ n an LBO, the acquiring co"pany could float a :pecial @urpose vehicle (:@C) which was a > su!sidiary of the acquirer with a "ini"u" equity capital$ The :@C leveraged this equity to gear up significantly higher de!t to !uyout the target co"pany$ This de!t was paid off !y the :@C through the target co"pany's own cash flows$ The target co"pany's assets were pledged with the lending institution and once the de!t was redee"ed, the acquiring co"pany had the option to "erge with the :@C$$$
Structure o' the #eal The purchase of Tetley was funded !y a co"!ination of equity, su!scri!ed !y Tata tea, #unior loan stoc su!scri!ed !y institutional investors (including the vendor institutions .e44anine 7inance, arranged !y nter"ediate 0apital 2roup @lc$) and senior de!t facilities arranged and underwritten !y /a!o!an nternational$
Tata Tea created a :pecial @urpose Cehicle (:@C)%christened Tata Tea (2reat Britain) to acquire all the properties of Tetley$ The :@C was capitalised at + "n pounds, of which Tata tea contri!uted 6 "n pounds this included ?< "n pounds raised through a 2D/ issue$ The : su!sidiary of the co"pany, Tata Tea nc$ had contri!uted the !alance "n pounds$ The :@C leveraged the + "n pounds equity 8$86 ti"es to raise a de!t of 8< "n pounds, to finance the deal (/efer 72/E )$ The entire de!t a"ount of 8< "n pounds co"prised ? tranches (A, B, 0 and D) whose tenure varied fro" + years to 5$< years, with a coupon rate of around > which was ?? !asis points a!ove LBO/$$$
The 6ay to 7o8 :o"e analysts felt that Tata Tea's decision to acquire Tetley through a LBO was not all that !eneficial for shareholders$ They pointed out that though there would !e an i""ediate dilution of equity (after the 2D/ issue), Tata Tea would not earn revenues on account of this invest"ent in the near future (as an i""ediate "erger is not planned)$ This would lead to a dilution in earnings and also a reduction in the return on equity$ The shareholders would, thus have to !ear the !urden of the invest"ent without any i""ediate !enefits in ter"s of enhanced revenues and profits$ 7ro" the lenders point of view too there see"ed to !e so"e draw!acs$$$
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