The Merger of Tata Tea - TetleyThe first ever leveraged buy-out (LBO), largest cross- border acquisition by any Indian company
The Merger of Tata Tea - Tetley Largest cross-border acquisition that marked the culmination of Indian company’s - Tata Teas 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 The size of the deal was big, and was the first ever leveraged buy-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 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 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, Chakra Gold and Gemini
The Merger of Tata Tea - Tetley Tata Teas 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 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 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 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 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 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 Synergies 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 Tea has been successful in the marketing of packet teas, –Tetley is strong in tea bags.
Tata Tea – Tetley Synergies 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, flavored teas, Herbal teas, Organic teas and decaffeinated teas.
Merger - the process 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 process 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 process 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 process The entire debt amount of 235mn pounds comprises of four Tranches bearing interest @ 11%, divided into four tranches – 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 DealTata Tea Inc Tata Tea Rabobank Intermediate £ 185mn Capital Group £ 60mn £ 10mn Tata Tea (Gr Britain) Prudential Schroder £ 30mn SPV Mezzanine Ventures Capital £ 10mn £ 10mn Equity £ 70mn Debt £ 235mn A fine blend of debt and equity Tetley Legal Services & Tetley’s Working Acquisition Bank Charges Capital requirements
Debt Repayment Structure A B C DAmount 110mn 25mn 10mn 20mn pounds pounds pounds poundsLoan Type Long-term Long-term Long-term RevolvingPurpose Funding Funding CAPEX WC exp Acquisition AcquisitionYear of 2007 2007 2008 2007maturityPay-back Semi-annual 2 2 Cessationmethod installments installments installments of credit in 07-08 in 07-08
Concept of SPV - 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.
Concept of SPV - explained This debt was paid off by the SPV(TATA TEA GB) through the target companys own cash flows. The target companys 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 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 companys own cash flows. The target companys 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.
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 Teas equity contribution to the SPV.