The document discusses Tata Tea's acquisition of Tetley in 2000 through a leveraged buyout (LBO). Key points: 1) Tata Tea formed a special purpose vehicle (SPV) called Tata Tea (Great Britain) to acquire Tetley's assets using £70M in equity and £235M in debt financing. 2) The SPV used a structured financing approach with multiple debt tranches to raise funds and acquire Tetley for £271M. 3) The deal provided synergies for both companies by giving Tata Tea access to Tetley's global distribution network and premium brands, and Tetley access to Tata Tea's production facilities.

2. FLOW OF PRESENTATION
 Introduction
 Tetley
 Tale of Tata Tea
 LBO
 Structure of the Deal
 Synergies
 Pre-Post Merger

3. INTRODUCTION
 One of the most important milestones in the Indian
corporate history.
 In the Year 2000, Tata Tea acquired the iconic Tetley
Brand in a 450 m. $ deal from Schroeder Ventures
and PPM ventures.
 Tata Tea managed to fend off bids from Sara Lee and
Nestle
 At the time of acquisition, Tata Tea’s net worth was
only $ 114 m.
 It was also the largest cross-border acquisition by an
Indian company at that time.
 This was also the first ever leveraged buy-out by an
Indian Company.

4. TETLEY
 Established by Joseph and Edward Tetley in
1837 in Yorkshire, England.
 An Iconic brand, Tetley is considered to be
the inventor of teabags
 At the time of acquisition, Tetley was the
Second largest tea company in the World
 In India, Tata and Tetley Tea entered into a
joint venture to produce tea bags in the Year
1992

5. THE TALE OF TATA TEA
 Incorporated in 1962 as Tata Finlay Limited
 Tea factory in Munnar(Kerala) and
blending/packaging unit in Banglore
 In 1982, renamed Tata Tea ltd. after Tata
Industries Ltd. bought out the entire stake of
James Finlay and co.
 Set up Tata tea Inc in Florida to meet the
demands of US market
 In order to meet the needs of Japan market
entered into JV with Hitachi to form Tata Hitachi
Sales Limited

6.  In 1984, set up R&D facility in Munnar
 In 1989, bought 52% stake in Consolidate
coffee limited of Karnataka
 By 1994 bought 64.5% stake in Asian Coffee
to consolidate its position in the coffee
industry

7. WHY THE DEAL MADE SENSE?
 Complementary specializations.
 Readymade access to the European and
North American market.
 Financial setbacks for Tetley in recent years.
 Acquisition enabled Tetley to reduce its debt-
equity ratio.
 Integration structure.

8. LEVERAGE BUY-OUT
● Acquisition of a company through a combination of equity and
debt
● Jerome Kohlberg, Jr. and Henry Kravis coined the term
● Formation of SPV
● Stock Purchase Format
● Asset Purchase Format
● Management Buyout
● Future Cash Flows or the Assets of the company as security
● Increased Debt Equity ratio

10. ADVANTAGES OF LBO:
● Heavy Interest & principal forces management to improve
performance & operating efficiencies such as
● Cost improvisation – cost reduction
● Divesting non-core business
● Investing in technological upgrades
● Significant reduction in agency cost
● Tax shield

11. DISADVANTAGES OF LBO
● Financial distress – uncertainties
● Increased fixed costs associated with debt financing
can worn out the effect in case of downturn in
business cycles.
● In Leveraged acquisition, banks have a say in what is
being done.

12. LARGEST ACQUISITIONS BY INDIAN COMPANIES

13. STRUCTURE OF THE DEAL
 Special Purpose Vehicle - Tata Tea(Great
Britain)
 To acquire all the assets of Tetley
 To ensure that Tata Tea's balance sheet does
not suffer additional funding costs
 Will be merged into Tata Tea Ltd, once it has
paid its debt obligations

14. SPV
100%
TATA TEA TATA TEA INC
subsidiary
(₤15 mn)
GDR Issue
(₤45 mn) SPV (₤10 mn)
TATA TEA
GREAT BRITAIN
(₤70 mn)

15. SPV
 The SPV leveraged the ₤70 mn equity 3.36
times to raise a debt of ₤235 mn to finance the
deal
 Entire debt amount of ₤235 mn comprised 4
tranches A, B, C and D whose tenure varied
from 7 to 9.5 years
 Coupon rate of around 9% (LIBOR + 424 bps)
 Where did it go?
 Tetley Acquisition – ₤271 mn
 Legal, Banking and Advisory services – ₤9 mn
 Tetley’s WC requirements - ₤25 mn

16.  Netherland based RABOBANK - ₤185mn
 Intermediate Capital Group - ₤30 mn
 Venture capital funds
 Mezzanine - ₤10 mn
 Schroders - ₤10 mn
 Debt raised against Tetley’s brands and
physical assets
 Valuation on the basis of future cash flows

17. DEBT REPAYMENT STRUCTURE
A B C D
Amount ₤110 mn ₤25 mn ₤10 mn ₤ 20mn
Loan Type Long Term Long Term Long Term Revolving
Purpose Funding Funding CAPEX WC
Acquisition Acquisition
Year of 2007 2007 2008 2007
Maturity
Pay Back Semi Annual 2 instalments 2 instalments Cessation of
Method Installments in 07-08 in 07-08 Credit

18. TATA TEA SCHRODER
TATA TEA MEZZANINE
S
INC
₤10 mn ₤10 mn
GDR ₤15 mn INTERMEDIA
₤45 mn TE CAPITAL
GROUP
₤30 mn
₤10 mn TATA TEA
GB RADO BANK
₤185 mn
EQUITY DEBT
₤70 MN ₤235 MN
₤271 mn ₤9 mn ₤25 mn
TETLEY LEGAL AND
ACQUISITIO BANK TETLEY WC
N CHARGES

19. MERGER - THE PROCESS
 In structured finance the word tranche refers to
one of several related securitized bonds that are
offered as part of the same deal. They are called
tranches since each bond is a slice of the deal's
risk.
 All the tranches together make up what is referred
to as the deal's capital structure or liability structure

20. STRUCTURED FINANCE….
 Tailored financing solutions
 Financing with hybrid securities
 Asset-backed securitization
 Leveraged and acquisition finance
 Uses of structured finance:
 aligning securities to investor needs - term, credit
risk, prepayment risk, interest rate risk, etc

21. CONCEPT OF SPV - EXPLAINED
 Tata Tea (GB) and SPV was created as a part of
securitization process.
 Securitization is the process of pooling and
repackaging of homogenous illiquid financial assets
into marketable securities, that can be sold to
investors.
 Tata Tea (GB) took over all the properties of Tetley

22. CONCEPT OF SPV - EXPLAINED
 Tata Tea originated Assets of Tetley through
receivables, leases, any other form of debts and
funded the same on it‟s BS. ( Originator)
 Portfolio of Tetley assets were then sold to Tata Tea
(GB) – SPV for funding the assets.

23. CONCEPT OF SPV - EXPLAINED
 Tata Tea (GB) issues debts and purchased the assets
from Tata Tea.
 Tata Tea (GB) was owned by Tata Tea
 Debts issued by Tata Tea are secured by assets
acquired from Tetley ( Obligor).
 Tata Tea (GB) subcontracts the administration of
assets back to Tata Tea.

24. CONCEPT OF SPV - EXPLAINED
 Tata Tea (GB) issued tradable securities – tranches to
fund the purchase of assets.
 The performances of these tranches were directly
linked to the performance of the assets
 RaboBank, Prudential Mezzanine Capital, Schroder
Ventures and Intermediate Capital Group purchased
the securities offered by Tata Tea (GB).

25. CONCEPT OF SPV - EXPLAINED
 They all invested because they were confident that the
securities would be paid in full and on time from the
cash flows that is made available from the asset pool.
 Money collected by Tata Tea (GB) was paid to Tata
Tea.
 As cash flow arises on the assets, Tata Tea (GB) used
for repaying funds to the investors in the securities.

26. SECURITIZATION – THE PROCESS
Advisor of the program
- Financial Advisor Receivables
- Legal Advisor Originator Obligors
- Tax/Accounting Advisor
Sales of pool Third parties
of assets
• Transaction Servicer
• Transaction Administrator
• Corporate Administrator
Credit Enhancement SPV • Bondholders Representative
• Credit Enhancer
• Paying Agent
• Liquidity Provider ABS • Credit Rating Agency
• etc. Issuance • Underwriter(s)
Investors

27. SECURITIZATION – THE PROCESS
Tetley Ancillary Service
Obligor Provider
Sale of Assets Issue of Securities
Tata Tea Tata Tea ( GB )
Investors
Originator Special Purpose Vehicle
Consideration Subscription of securities
for Assets purchased

28. SECURITIZATION – THE PROCESS
 Originator – Tata Tea
 Sell/transfer the right to receive future cash flows (“receivables”) due
under certain contracts to SPV (I)
 Special Purpose Vehicle (SPV) – Tata Tea (GB)
 Purchase the right to receive future cash flow (I)
 Enter into contracts with originator, third parties and others relating to
the transaction (I)
 Issue ABS to investors, ABS repayment relies on future cash flow due
under contracts (I)

29. SECURITIZATION – THE PROCESS
 In traditional methods of corporate finance, a
corporation raises equity/obligations to own
assets.
 In securitization, a corporation creates and
„securitizes‟ assets - that is, transfers assets in
form of securities.
 The claim is on assets, and not on the entity,
hence, asset-based funding
 Asset backed funding lies in reducing the equity,
and increasing the leverage

30. SECURITIZATION – THE PROCESS
 SPV are used in securitization transactions as devices
of hiving off assets and converting assets into
securities.
 SPV are not companies in substantive operations; they
do not have any business except acting as a legal
instrumentality. This is necessary to ensure “asset-
backed” securities

31. SYNERGIES
 Tetley
 Access to Tata Tea’s gardens and production
base
 Access to Indian market
 Tata Tea
 Tetley’s premium brands and global distribution
network
 2nd largest in India to 2nd largest in the world
 Tetley’s technical expertise
 Upgrade product portfolio and increase

32. POST MERGER
•Tetley was expected to bring TTL volumes in the
short term and greater opportunities in the long
term
•Tata and Tetley formed several groups – tea
procurement group, geographic expansion group,
R&D sharing
•Legal merger took time as Tetley D/E ratio was too
high and it needed to come down to 1:1
•Initial Cultural differences

33. •Acquisition contributed to significant increase in sales
volume – Rs. 6870 mn before acquisition to Rs. 67256 mn
in FY12 (CAGR of 18% approx.)
•As of FY12, Tetley brand contributes to 40% of Tata
Global Beverages revenue
•As of FY12, Tetley is the only brand under Tata Global
Beverages stable with presence across the globe

34. THANK YOU

35. EFFECT OF LEVERAGE ON ACQUISITION.
Mr. A bought house on 31Dec 2003 costing Rs.
7,50,000 at down payment of Rs. 75,000 – 10%
For balance amount he took bank loan – Rs. 6,75,000
@ 7.5%. Mr. A will get rental income from this house
Rs. 2,50,000 p.a. He will incur Rs. 10,000 towards
house tax and additionally would require Rs. 50,000
for maintenance p.a. All cash flows accrue at year end
, and also rental remains fixed for next 5 years. Free
cash flows of each year is used to repay debt.

36.  Income Statement of Mr. A for 2003 – 2008
2003 2004 2005 2006 2007 2008
Rental - 2,50,000 2,50,000 2,50,000 2,50,000 2,50,000
Less
Maintenance - 50,000 50,000 50,000 50,000 50,000
House Tax - 10,000 10,000 10,000 10,000 10,000
Rental Income 1,90,000 1,90,000 1,90,000 1,90,000 1,90,000
Interest - 50,625 40,172 28,935 16,855 3,869
Free Cash Flow - 1,39,375 1,49,828 1,61,065 1,73,145 1,86,131

37.  Income Statement of Mr. A for 2003 – 2008
2003 2004 2005 2006 2007 2008
Loan Amount 6,75,000 6,75,000 5,35,625 3,85,797 2,24,732 51,587
Payments
Free Cash flows -- 1,39,375 1,49,828 1,61,065 1,73,145 51,587
- Free Cash flow as calculated earlier from rental income after expenses & interest.
Closing Bal. 6,75,000 5,35,625 3,85,797 2,24,732 51,587 0
Interest -- 50,625 40,172 28,935 16,855 3,869
- Closing bal = (opening bal – free cash flow )
Interest is calculated on closing bal.
Debt 6,75,000 5,35,625 3,85,797 2,24,732 51,587 0
Equity 75,000 2,14,375 3,64,203 5,25,268 6,98,413 7,50,000
Ratio
Debt 90% 71.4% 51.4% 30% 6.9% 0%
Equity 10% 28.6% 48.6% 70% 93.1% 100%

38. LBO - INFERENCES
 Thus it is evident from Equity ownership as % of total
capitalization increases from 10% to 100%.
 We can conclude that advantage of leverage in
financing enable to own an asset of relatively
significant equity value with regards to amount of initial
equity investment.