PROJECT ON MERGER & ACQUISITION<br />THE LEVERAGED BUY OUT DEAL OF TATA & TETLEY<br />GROUP MEMBERS<br />ANANYA MITRA<br />SOUMALI BANERJEE<br />SYED MD. NAHIN IQUEBAL<br />SOUMYABRATA DUBEY<br />TANMOY NASKAR<br />RAHUL SHAW<br />Genesis of the Merger<br />In 2000 Tata acquired Tetley UK for £271 Million. It was the first ever Leveraged Buyout Deal by an Indian company. Tata’s net worth $114 Million was of one-fourth of Tetley’s market value ($450 Million). Post integration, today, the market shares of Tetley has increased from 22% to 28% in UK and 32% to 44% in Canada.<br />Working together to: (a) Capture cost synergies (b) Capture revenue synergies. Revenue synergy is accomplished by utilizing the complementary strengths of both organisations in marketing. Tata Tea has been successful in the marketing of packet tea whereas Tetley is strong in tea bags.<br />Structure of the Tata Tea’s LBO Deal: A fine blend of Debt & Equity<br />RabobankTata TeaTata Tea Inc.Intermediate Capital Group<br />£185 mn<br />£30 mn£60 mnSchroder VenturesPrudential Mezzanine Capital<br />Tata Tea (Gr Britain)SPV£10 mn<br />£10 mn<br />£10 mnEquity £70 MillionDebt £23 Million<br />Tetley’s Working Capital RequirementLegal Services & Bank ChargesTetley Acquisition<br />Debt-Repayment Structure<br />ABCDAmount110 mn pounds25 mn pounds10 mn pounds20 mn poundsLoan TypeLong-termLong-termLong-TermRevolvingPurposeFunding AcquisitionFunding AcquisitionCAPEXWorking Capital ExpenditureYear of Maturity2007200720082007Pay-Back MethodSemi-annual Installments2 Installments in 2007-082 Installments in 2007-08Cessation of Credit<br />Concept of SPV<br />
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.
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.
The Rationale<br />
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.
Te 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.