Presented By: Sameep Bansal
Topics covered <ul><li>Case Study – TATA Tetley </li></ul><ul><li>Definitions </li></ul><ul><li>Real Life Examples </li></...
Case Study - TATA Tetley <ul><li>Tata Tea one of the largest company in the world was sheltered from competition by a prot...
Possible Strategies/Solutions <ul><li>To enhance its position in the current brand </li></ul><ul><li>Acquire a well-known ...
Some disturbing questions??? <ul><li>Tata Tea company has to beat the growing global competition – but how?  </li></ul><ul...
Pros and Cons of acquiring Tetley <ul><li>Pros  </li></ul><ul><li>Acquiring Tetley would mean capturing the higher end of ...
Pros and Cons of acquiring Tetley - Cont <ul><li>Cons  </li></ul><ul><li>Tata had already tried acquiring Tetley five year...
Finally <ul><li>TATA choose to acquire Tetley. </li></ul><ul><li>The major challenge was financing </li></ul><ul><ul><li>T...
LBO = Definition <ul><li>Buyout : The purchase of a company or a controlling interest of a company's shares. </li></ul><ul...
Example of LBO in Daily life <ul><li>Mortgaging a Home. </li></ul><ul><li>Buying a Car/Taxi, financed by bank. </li></ul>
Other Similar Term <ul><li>Management buy-out (MBO)  - A private equity firm will often provide financing to enable curren...
Characteristics <ul><li>LBOs are a way to take a public company private, or put a company in the hands of the current mana...
How LBO is done? Ref: The McGraw-Hill Guide to Acquiring and Divesting Businesses <ul><li>Asset Purchase </li></ul><ul><li...
Asset Purchase <ul><li>Suitable for Small and Medium sized transactions. </li></ul><ul><li>Allows selection or rejection o...
Stock Purchase <ul><li>In Stock purchase , the target shareholders simply sell their stock and all their interest in targe...
Successful Strategy <ul><li>Finding cheap assets – buying low and selling high (value arbitrage or multiple expansion) </l...
Scanning target Company <ul><li>History of profitability. </li></ul><ul><li>Predictable cash flows to service financing. <...
LBO Financing <ul><li>LBO sponsors have equity funds raised from institutions like pensions & insurance companies </li></u...
SPV – Special purpose vehicle <ul><li>In our case SPV -  Tata Tea Great Britain Ltd ., was created. </li></ul><ul><li>The ...
Sources of Gains <ul><li>LBO ‘s are done at high premium price. </li></ul><ul><li>The premium paid is 40% or more than ave...
Tax Savings <ul><li>Most of the premium paid is financed by Tax savings. </li></ul><ul><li>New company can operate Tax fre...
Management Incentives <ul><li>Control and hence stakes are with few people. </li></ul><ul><li>Incentives of Management inc...
Underpricing <ul><li>Investors have more information on the value of firm than public shareholders. </li></ul><ul><li>Inve...
Tata – Tetley LBO; Solution <ul><li>First Leveraged Buy-out ( Rs. 2,135 cr) </li></ul><ul><ul><li>Instant access to Tetley...
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Going Private – Leverage Buyout

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Going Private – Leverage Buyout

  1. 1. Presented By: Sameep Bansal
  2. 2. Topics covered <ul><li>Case Study – TATA Tetley </li></ul><ul><li>Definitions </li></ul><ul><li>Real Life Examples </li></ul><ul><li>Characteristics </li></ul><ul><li>Methods of LBO </li></ul><ul><li>Financing LBO </li></ul><ul><li>Sources of Gain </li></ul><ul><li>Conclusion with help of Case solution. </li></ul>
  3. 3. Case Study - TATA Tetley <ul><li>Tata Tea one of the largest company in the world was sheltered from competition by a protectionist Indian government for most of its history. </li></ul><ul><li>In 1999, Tata Tea company faced several new challenges: </li></ul><ul><ul><li>Upcoming deregulation. </li></ul></ul><ul><ul><li>Changing consumer tastes. </li></ul></ul><ul><ul><li>Ban on tea imports scheduled to be lifted in 2001 </li></ul></ul><ul><li>Majority of the company’s tea is sold in India, with 12% total international sales only. </li></ul><ul><li>Possibility of future stiff competition from Nestle, Sara Lee Corporation, and Associated British Foods. </li></ul>
  4. 4. Possible Strategies/Solutions <ul><li>To enhance its position in the current brand </li></ul><ul><li>Acquire a well-known brand </li></ul>
  5. 5. Some disturbing questions??? <ul><li>Tata Tea company has to beat the growing global competition – but how? </li></ul><ul><li>Any possibilities for further growth in the Indian stagnant market? </li></ul><ul><li>If popular brand in India can penetrate into the global markets? </li></ul><ul><li>Perhaps it would need to develop a brand of international demand or taste. </li></ul><ul><li>Or acquire an other company </li></ul><ul><li>These questions become more urgent as Tetley Tea, well-known in the US and UK, unexpectedly comes up for sale. Provide refernce </li></ul>
  6. 6. Pros and Cons of acquiring Tetley <ul><li>Pros </li></ul><ul><li>Acquiring Tetley would mean capturing the higher end of the value chain </li></ul><ul><li>Tetley is well-established in international markets </li></ul><ul><li>Tata’s gross margin is 36%, while Tetley’s is a more efficient 55% </li></ul><ul><li>The combination of the two companies would allow for synergies that competitors couldn’t match </li></ul><ul><li>Opportunity to buy a brand the likes of Tetley is rare </li></ul>
  7. 7. Pros and Cons of acquiring Tetley - Cont <ul><li>Cons </li></ul><ul><li>Tata had already tried acquiring Tetley five years prior and failed </li></ul><ul><li>Tata may have difficulty raising the required £200-300 million purchase price </li></ul><ul><ul><li>The £200-300 million asking price is much higher than the £190 million the company was valued at in 1995 </li></ul></ul><ul><li>The sheer size of the transaction could prove unwieldy </li></ul><ul><li>Wouldn’t investing in building its own global brand be more efficient than buying a foreign brand? </li></ul>
  8. 8. Finally <ul><li>TATA choose to acquire Tetley. </li></ul><ul><li>The major challenge was financing </li></ul><ul><ul><li>The value of Tata Tea was $114 million. </li></ul></ul><ul><ul><li>Tetley was valued at $450 million. </li></ul></ul><ul><li>The solution was provided by Leverage Buy outing the Deal. </li></ul>
  9. 9. LBO = Definition <ul><li>Buyout : The purchase of a company or a controlling interest of a company's shares. </li></ul><ul><li>Leverage buyout : The acquisition of a company using debt and equity finance. As the word leverage implies, more debt than equity is used to finance the purchase, e.g. 90% debt to 10% equity. Normally, the assets of the company being acquired are put up as collateral to secure the debt. (Beatrice Foods by Esmark, Levis Strauss, etc.) </li></ul><ul><li>Going Private: Refers to transformation of a public corporation into a privately held firm. </li></ul>
  10. 10. Example of LBO in Daily life <ul><li>Mortgaging a Home. </li></ul><ul><li>Buying a Car/Taxi, financed by bank. </li></ul>
  11. 11. Other Similar Term <ul><li>Management buy-out (MBO) - A private equity firm will often provide financing to enable current operating management to acquire at least 50% of the business they manage. In return, the private equity firm usually receives a stake in the business. </li></ul>
  12. 12. Characteristics <ul><li>LBOs are a way to take a public company private, or put a company in the hands of the current management, MBO. </li></ul><ul><li>LBOs are financed with large amounts of borrowing (leverage), hence its name. Debt:Equity ratio can go more than 90:10 </li></ul><ul><li>LBOs use the assets or cash flows of the company to secure debt financing, bonds or bank loans, to purchase the outstanding equity of the company. </li></ul><ul><li>After the buyout, control of the company is concentrated in the hands of the LBO firm and management, and there is no public stock outstanding. </li></ul>
  13. 13. How LBO is done? Ref: The McGraw-Hill Guide to Acquiring and Divesting Businesses <ul><li>Asset Purchase </li></ul><ul><li>Stock Purchase </li></ul><ul><li>The choice is dictated by balancing Legal, Financial, Tax and Accounting advantages and disadvantages. </li></ul>
  14. 14. Asset Purchase <ul><li>Suitable for Small and Medium sized transactions. </li></ul><ul><li>Allows selection or rejection of assets and liabilities. </li></ul><ul><li>Leads directly to price allocation and stepped up asset value, that are part of Tax and Accounting aspects of transactions. </li></ul>
  15. 15. Stock Purchase <ul><li>In Stock purchase , the target shareholders simply sell their stock and all their interest in target corporation to the buying group and then the two firms may be merged. </li></ul><ul><li>This method cannot be used if one or more minority share holders refused to sell. </li></ul>
  16. 16. Successful Strategy <ul><li>Finding cheap assets – buying low and selling high (value arbitrage or multiple expansion) </li></ul><ul><li>Targetting firms with low Q-Ratio </li></ul><ul><ul><ul><li>(Market Value/Asset Value) </li></ul></ul></ul><ul><li>Unlocking value through restructuring: </li></ul><ul><ul><li>Financial restructuring of balance sheet – improved combination of debt and equity </li></ul></ul><ul><ul><li>Operational restructuring – improving operations to increase cash flows </li></ul></ul>
  17. 17. Scanning target Company <ul><li>History of profitability. </li></ul><ul><li>Predictable cash flows to service financing. </li></ul><ul><li>Low current debt and high excess cash. </li></ul><ul><li>Strong management team - risk tolerant. </li></ul><ul><li>Known products, strong market position. </li></ul><ul><li>Little danger of technological change (high tech?). </li></ul><ul><li>Low-cost producers with modern capital. </li></ul><ul><li>Take low risk business, layer on risky financing. </li></ul>
  18. 18. LBO Financing <ul><li>LBO sponsors have equity funds raised from institutions like pensions & insurance companies </li></ul><ul><li>Balance from commercial banks (bridge loans, term loans, revolvers). </li></ul><ul><li>Banks concentrate on collateral of the company, cash flows, level of equity financing from the sponsor, coverage ratios, ability to repay (5-7 yr) </li></ul><ul><li>Some have “Mezzanine Funds” as well that can be used for junior subordinated debt and preferred </li></ul><ul><li>Occasionally, sponsors bring in other equity investors or another sponsor to minimize their exposure </li></ul>
  19. 19. SPV – Special purpose vehicle <ul><li>In our case SPV - Tata Tea Great Britain Ltd ., was created. </li></ul><ul><li>The cash flow from the Tetley and hence this SPV, was used to repay the debt. </li></ul><ul><li>SPV merged with TATA after repayment of the debt. </li></ul>
  20. 20. Sources of Gains <ul><li>LBO ‘s are done at high premium price. </li></ul><ul><li>The premium paid is 40% or more than average stock value of last two months. </li></ul><ul><li>What are the sources of these gains? </li></ul><ul><ul><li>Tax Savings. </li></ul></ul><ul><ul><li>Management Incentives. </li></ul></ul><ul><ul><li>Asymmetric Information and under pricing. </li></ul></ul>
  21. 21. Tax Savings <ul><li>Most of the premium paid is financed by Tax savings. </li></ul><ul><li>New company can operate Tax free for as long as 4-5 years. </li></ul><ul><li>In this time period the debt/equity ratio is pulled down from 10 to 1. </li></ul><ul><li>Often the LBO is sold after this time horizon or reverse LBO is done. </li></ul>
  22. 22. Management Incentives <ul><li>Control and hence stakes are with few people. </li></ul><ul><li>Incentives of Management increases. </li></ul><ul><li>Dividends are not necessary. </li></ul><ul><li>Debt payment is effective substitute for dividend payment. </li></ul><ul><li>To save company from the Bankruptcy. </li></ul><ul><li>Restructuring of the acquired firm saves substantial amount of costs. </li></ul><ul><ul><li>Changes in marketing strategies. </li></ul></ul><ul><ul><li>Employee reduction </li></ul></ul><ul><ul><li>Economies of Scale. </li></ul></ul>
  23. 23. Underpricing <ul><li>Investors have more information on the value of firm than public shareholders. </li></ul><ul><li>Investors buy firms that have low Q-Ratio. </li></ul><ul><li>Net value of the firm may still be higher than LBO price paid. </li></ul><ul><li>Such firms are generally resold at much higher price after the new management brings the firm to its true value by restructuring activities. </li></ul><ul><ul><li>Example, Kohlberg Kravis Roberts and Thomas H Lee Company started in 1970’s, seas opportunity in inefficient and undervalued corporate. </li></ul></ul>
  24. 24. Tata – Tetley LBO; Solution <ul><li>First Leveraged Buy-out ( Rs. 2,135 cr) </li></ul><ul><ul><li>Instant access to Tetley’s worldwide operations, combined turnover at Rs 3,000 crores. </li></ul></ul><ul><li>Financial Innovation at its best </li></ul><ul><ul><li>SPV created to ring fence risk with equity contributed by Tata Tea and Tata Tea Inc </li></ul></ul><ul><ul><li>Debt of 235 mn pounds raised in the form of long term debt and revolver; charge against Tetley’s brand and assets. </li></ul></ul><ul><ul><li>Tata Tea’s exposure only to the extent of equity component of 70 mn pounds </li></ul></ul> March 2000 Tata Tea Limited Acquisition of 100% equity stake in Tetley Tea (UK) INR 21,350,000,000

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