1. MERGER AND
ACQUISITION OF TATA
TEA AND TETLEY
SUBMITTED TO: DR.ABHIJEET DESHPANDE
SUBMITTED BY:SHIKHA MISHRA
11040141090
2012

2. REPORT ON MERGER AND ACQUISITION OF TATA TEA
AND TETLEY
AN OVERVIEW OF TATA TEA LIMITED
TATA Tea was set up in 1964 as a joint venture with a UK based James Finlay and
Company to develop value added tea. From a mere share of 3% in the mid 70's to become
India's second largest tea producer, Tata tea has come a long way.
The operations of Tata tea and its subsidiaries focus on branded product offerings in tea but with
a significant presence in plantation activity in India and Sri Lanka. The Tata tea brand leads
market share in terms of value and volume in India and has been accorded the „super brand'
recognition in the country.
Tata tea also has 100% export oriented unit manufacturing instant tea in the state of Kerela,
which is the largest such facility outside the United States.
AN OVERVIEW OF TETLEY
In 1837, two brothers, Edwards and Joseph Tetley started to sell tea and became so famous that
they set up as tea merchants. In 1856, in partnership with Joseph Ackland, they set up “Joseph
Tetley and Co., wholesale tea dealers”.
Tea was rationed during World War II, it was not until 1953, just after rationing finished, that
Tetley launched the tea bag to the UK and it was an immediate success. The rest, as they say, is
history. The tea bag had captured the public‟s imagination and desire for convenience. Within 10
years it revolutionized how Britons drank their tea and the old fashioned tea pot had given way
to making tea in a cup using a tea bag.
1974 Tetley Tea Company was bought by J Lyons who merged it with the Lyons tea business to
form Lyons Tetley. 1978 Allied Breweries acquired J Lyons‟ Businesses then as Allied Domecq
sold them in the 1990s. The Tetley Group was created in July 1995, when a group of investors
bought what was then the world-wide beverage business from Allied Domecq. On 10th March
2000, The Tetley Group was sold to Tata Tea Limited, one of the world‟s largest integrated tea
businesses.
THE HISTORY OF TATA TEA‟S MERGER AND ACQUISITION DEALS
Earlier, after a pitched battle among the MNC's in the domestic arena, not many Indian tea
manufacturing companies thought of going global. Devour competitors and destroy competition -
the mantra that the global conglomerates had been chanting so far, had not gone well with the
Indian counterparts.
But fortunately, that doesn‟t remain the prerogative anymore. The war-averse domestic
companies are shedding their inhibitions. The roles, have undoubtedly changed. And, after
fighting in out in the global commodities arena, it is time now for a global tea cup.
Taking a plunge in the global tea war in the year 2000 was India‟s corporate tea giant
Tata Tea. Though it was not an easy decision to make, that to when the competitor was no less
than a stature of Unilever, a global food and beverage behemoth, but the Tata Tea had little
choice - shape up or be swapped. It chose the former. And, what else could have been a better

3. vehicle than Tetley for Tata tea to take on the might of global tea giants like Lever and
Hillsdown.
But that has not come to it easily. After a long drawn out battle first with Schroder Ventures,
followed by a bitter retreat in 1995, and then with Sara Lee, Tata tea finally tasted victory on
March 10, 2000 when it bought Tetley for a staggering INR2,135 crore ( 305 million sterling).
Such a deal had never been heard or seen before in the Indian Corporate world. What makes this
deal special is the fact that it is the first ever LBO (Leveraged Buy Out) by any Indian company.
In fact, this also happened to be the largest ever cross-border acquisition by an Indian company.
But more than the temptation was the urgency to perform, which caused a storm in Tata
Tea's cup. Glaring in the face were , and still are , the factors such as fall in exports to
Russia, growing competition in the domestic market, and above all the emergence of
competitors from Sri Lanka and Kenya, which the tea major could have afforded to
overlook at the cost of its own peril. Surely the deal could have not come at a better time
than this.
The buy-out which Tata tea masterminded, would pitchfork it to a position where it can
rub shoulders with global behemoths like Unilever and Lawrie. The deal gives Tata Tea
an instant access to Tetley‟s worldwide operations, including new territories and product
categories for both Tat Tea and Tetley. The combined turnover of Tata Tea was estimated
to be worth INR2800-2900 crore and would put it at the second position in the global
arena.
BLENDING WITH PERFECTION
With a reserve of just over around INR400 crore in the year 1999-2000, it could not have been
possible for Tata Tea to go for such a gigantic acquisition on its own. Or, even bringing such a
colossal debt upon its own books could have meant putting enormous pressure on the bottom
line. So it went for Leveraged Buyout.
The deal was structured in such a way that although Tata tea retains full control over the venture,
the debt portion of the deal does not affect its balance sheet. The deal was tied up through a
leveraged buyout based on Tetley‟s assets so that Tata Tea's gearing is not impaired as a result of
it. Tata Tea created a Special Purpose Vehicle(SPV) - christened as Tata Tea(Great Britain) - to
acquire all the properties of Tetley. The idea of the SPV essentially was to ensure that Tata Tea's
balance sheet does not suffer additional funding costs, while at the same time, allowing it to
benefit from the acquisition of the international brand. The SPV had then capitalized at 70
million pounds out of which Tata Tea had contributed 60 million pounds, which included 45
million pounds raised through its GDR issue. The US subsidiary of the company, Tata Tea Inc.,
had contributed the balance 10 million pounds. The SPV had leveraged the 70mn pounds equity
3.36 times to raise a debt o 235mn pounds to finance the deal. The entire debt amount of 235 mn
pounds comprised of 4 tranches whose tenor varied from 7 to 9.5 years, with a coupon of around
11%, 424 basis points over the LIBOR. Of that, the Netherland-based Rabobank had provided
215 mn pounds while venture capital funds Mezzanine and Schroders each contributed 10mn
pounds. The debt was divided into four tranches, namely - A, B, C and D. While A, B, C were
senior term loans, tranch D was a revolving loan that takes the form of recurring advances and
letters of credit. Of the four tranches , the money from tranches A and B was meant for funding
the acquisition, while tranches C and D were meant for capital expenditure and working capital

4. requirements respectively. Tranch A was a 110 million pounds loan scheduled to retire in 2007
this year through semi-annual installments. Tranch B was a 25 mn pounds loan which is also
maturing this year in 2007 and would be paid back in two equal installments at the end of 7.5
years and 8 years respectively. Tranch C was a 10 million pound loan, maturing in 2008 and
would also be paid in two equal installments at the end of 7.5 and 8 years respectively. Tranch D
was a 20 million pound loan which was made available through advances, letters of credit,
overdrafts and is due to retire also this year. The debt was raised against Tetley's brands and
physical assets. The valuation of the deal was done on the basis of future cash flows that the
brand was expected to generate in the foreign market as well as the synergy and benefits that
Tata Tea was expected to receive. Though the actual cost of the Tetley takeover comes through
271million pounds, Tata tea spent 9 million pounds on legal, banking and advisory services and
another 25 million pounds for Tetley's working capital requirements and additional funding plans
, thereby swelling the total acquisition cost to 305 million pounds. Since entire securitization was
based on Tetley's operations, Tata Tea's exposure was limited to the equity component only that
as 70 million pounds only.
6.5. THE CHALLENGES
The challenges before the Indian tea companies were manifold in the last decade. And it is not an
exaggeration to say that their honeymoon with Russia was over then; the vigor seemed to be out
of the cup for most of them.
Rising competition from African nations such as Kenya and Malawi, where production of tea is
new and expanding, posed potential threats to tea exporters from India. Progressive dismantling
of quantitative restrictions had put the margins further under pressure. Adding to the woes was
the fact that the Indian tea exports to Russia had been continuously declining. In fact the exports
to Russia fell drastically over the last decade. In 1999, the exports were around 87million Kg,
which was almost half of 160 million Kg exported in 1989. The overall export also fell
substantially. During the last fiscal itself, the exports saw much volatility. The total exports fell
of tea fell from 27,839 ton recorded in August 1999 to 9,766 ton in February 2000.
The litany of woes of the tea players also stems from the fact that the traditional user markets
like the UK and Ireland where Tea consumption, historically, had been very high, however ,
actually has been showing a decline in the tea consumption. As per the rough estimate, The UK
and the Ireland accounted for one-third of the world‟s tea consumption in 1955. However their
share in tea consumption currently is around 5% only. Though, the popularity of tea has been
growing rapidly in developing countries like China, India , Pakistan and the Middle-Eastern
countries, the worrying factor is that the traditional savior of Indian Tea companies, Russia, is no
more an assured market for it.
The Tea consumption which grew rapidly in the erstwhile USSR in the eighties has actually
declined after its disintegration. In developed countries such as USA, Canada and Japan also the
consumption is quiet stagnant.
In recent years, the tea prices have falling worldwide because of an oversupply in production.
While world market prices in real terms have declined the cost of production, on the other hand,
has increased steadily thereby putting pressure on the producer‟s margins. Moreover, big buyers
like Russia, Iran and Iraq have become inactive due to political reasons. Above all, the fact that
Sri Lanka is selling tea to Russia at far lower prices than India, has also been causing major
concerns.

5. It has to be mentioned that tea prices show a great variation due to enormous diversity of quality
and unlike coffee, there is no single world market for tea, and prices are subject to strong
fluctuations. Though, given India's major share in the world tea production (around 30% of
world tea production in 1995), it might be expected that this would give the country a key
position in establishing tea prices, but this is not the case. And, although the quality and quantity
of the Indian tea crop has some effect on tea prices, the impact is limited. The fact is that what is
of far importance is the economic relationships and the power of transitional companies.
And these apart, the premium that Indian tea commanded in the past has also been gradually
eroded through the quality of improved African teas. Which means, to ward of the challenge
from African countries like Kenya and Malawi, marketing campaigns have to be built up quiet
aggressively and that could be easier said than done. All these, no doubt, have caused much
storm in the teacup of domestic tea majors including biggies like Tata Tea and HLL.
FLAVOUR OF SYNERGIES
In the backdrop of the difficult domestic scenario and dwindling exports to Russia is was not
difficult to conclude what prompted Tata Tea to go for an acquisition, that too at such a
mammoth scale. As far as the scale of acquisition is concerned it could be said that nothing less
than this kind of acquisition could have been meaningful for the company. That is because the
domestic market comparatively growing at a better rate than the other developed markets, 3%
versus 1%, and rival HLL having benefits of access of access to parent Unilever's latest
technology in product innovation, development and packaging, it could have been a difficult task
for Tata Tea to go on its own to develop such technologies and to face the competition. With the
threats of imports from rival companies looming large, its woes could have aggravated even
further.
The major driving force behind Tata Tea- Tetley deal was the fact that Tetley fitted perfectly into
Tata Tea's globalization drive and could be a perfect launch vehicle to achieve greater synergies
in the global arena. This seems understandable because of the three major factors:
• The acquisition brought with it a greater market penetration.
• This helped Tata Tea's operating efficiency, as Tetley's operating margins were superior in
comparison to Tata Tea, 20% v/s 14% in 1999-2000.
• The acquisition would have resulted in instant expansion of product lines of Tata Tea- Tetley
combine.
The synergies that would have accrued to the combine entity as a result of the deal were
supposed to be quiet significant. On the one hand, while Tata Tea was supposed to get access to
Tetley's strong brands and its worldwide distribution network and about INR1900 crore of sales,
on the other hand, Tetley was supposed to benefit from Tata Tea's competencies in managing
plantations and processing units. Tata Tea though didn‟t have expertise in blending and
branding. It was here that the acquisition was coming handy to Tata Tea, as Tetley had proven
expertise in the area of product innovation and in sourcing tea from auction houses and which
also was a major blending and packaging company and owns a host of well-known international
brands which the latter can leverage.
Tea is usually exported at a relatively early stage in the production chain and blending and
packing, the most lucrative part of the tea trade, is mostly done by the tea companies in the buyer
country. The large profits therefore don‟t accrue to the tea producing countries. The big money is

6. made abroad. In Europe, 30% to 50% of the consumer price of tea goes to blending, packaging,
materials and promotion.
It was there that the acquisition would help Tata Tea to take advantage of the existing scenario
by virtue of Tetley‟s proven skills an blending and branding, not to mention exotic packaging,
which too fetches higher premiums. Also, many producers try to sell processed tea bags or
repacked consumer units, but the export of ready-for-use tea is often hampered by poor market
information and the absence of funds for expensive marketing strategies.
It could be rightly said then that the deal was supposed to bring together the two companies, one
of which was the largest integrated tea company (Tata Tea) in the world, while the other world's
largest brand (Tetley). Together they make a world-class integrated outfit. But the rival Unilever
was not far behind either. In fact, it became even more aggressive after the Tata Tea- Tetley deal
came through. The Unilever through its Indian outfit HLL acquired Rossell Industry's tea
gardens, and stepped up efforts to vertically integrate its operation by acquiring some more tea
garden in India and African nations like Kenya, Uganda and Mozambique.
The deal was supposed to facilitate downstream segment also. Tata Tea has over 60 tea gardens
in India and Sri Lanka, besides its own blending and packaging units. Tetley on the other hand,
buys tea from the major auction markets of the world and processes them to be sold under its
own brands like Earl Grey , English Breakfast and Traditional Afternoon - in the US, Canada UK
and Australia. Both the companies were supposed to streamline their downstream operations
quite efficiently thereby cutting the costs. Tetley plans to give special thrust to the US market,
which has been fast emerging as a growing tea market, with consumers shifting from coffee to
tea due to health reasons. This is turn was thought to help Tata Tea to push greater volumes in
the instant tea segment, where it had so far struggled to get a strong foothold.
In the domestic market, on the branding and packaging front, there has been a major strategic
shift towards brand consolidation. In fact, with increase in the value added segments over the
years, the share of this segment has risen quite significantly. The value additions, through
changes in the product forms, branding, consumer awareness and delivery systems, which has
been part of the winning tool in the international markets was bound to be replicated in the
Indian markets too. And it was there that the Tata Tea - Tetley combine's wider product portfolio
downstream would compliment the upstream synergies. As while, Tata Tea catered primarily to
the lower end of the market segment, Tetley had presence in the premium segment. Apart from
that, adding to Tata Tea's brand strengths in developing packaged tea was Tetley's well-
entrenched presence across a wider range of categories such as decaffeinated, herbal, lemon tea,
and tea bags, etc.
As far as other major benefits from the deal were concerned, the domestic company can benefit
from the standardized management practices including quality performance norms and consumer
focus of Tetley, the world leader in tea bags. This was supposed to be more so when new
products are envisaged for the Indian markets. On the other hand, Tata Tea's strong R&D base
and expertise in tea cultivation and manufacturing was immensely helpful to Tetley.
Post-acquisition, the decision was that the two organizations work under a unified global
strategy. The combine strengths were thought to be helpful to create opportunities to expand
sales in both the existing and new markets and realize synergies. Apart from that, the two
companies‟ breadth of experience and vertical integration was equipping them to compete
anywhere in the world and that assumed importance in the context of WTO, which would
terminate tea import curbs under its predetermined timeframe.

7. The joint buying power and commercially relevant use of tea produced by Tata Tea was also
supposed to facilitate cost control. Also among the other immediate priorities was the strategy to
increase tea bag sales in East Europe and to improve upon the currently token presence of Tetley
in the packet tea segment. On the product size, Tetley proposed to promote the draw size string
bags in a bigger way, because of the higher margins and planned to replace all the round tea bags
cartons with an innovative soft-pack format then.
Another area that Tata Tea was eyeing was the private label tea business in the UK. Tetley which
holds sway over the market, with 6 out of every 10 retailers sourcing tea from it to sell under
their own brand names, was a perfect launch vehicle to push greater volumes into that highly
lucrative segment, more so when its exports to the Russian markets had been had been on a
continuous decline. The key reason why the private label was lucrative was that there were no
marketing costs attached to it. That meant, by sourcing tea directly from its 26,000, hectares of
gardens, or from the auction markets, Tata Tea would be able to boost its margins. Surely the
deal could not have come at a more opportune time than that one for Tata Tea.
The acquisition impact on Tata Tea's presence in the global tea trade aside, Tata-Tetley ltd., the
already existing joint venture between the two companies, was seen aligned with the group‟s
international operations. Equally significant was the domestic company's plan to open an instant
tea factory in South India, which was improved for the instant tea shipments to the US, where
Tetley had a major presence. Tata tea hoped to garner greater market share and stave off the
competition, riding on Tetley's strength.
Acting swiftly, Tata Tea initiated a comprehensive operation restructuring of the world's second-
largest tea company, in a bid to move a step closer to unseating Unilever Plc. The restructuring
took forms of the broader plan to venture out into new market in East Europe, Russia, the CIS
and West Asia through both the joint venture and franchise route. The move was critical to
increasing the UK based transitional earnings potential as Tata Tea had leveraged the company‟s
future cash flows to fund the 271 million pound acquisition.
As part of the recast plan, Tetley, which had the world‟s single largest tea brand, was shifting its
focus from black tea to higher value added products like green tea, flavored tea and herbal tea.
GLOBAL SCENARIO
The tea industry worldwide in the last decade was going through a phase of transition. And, over
the past few years many new development have taken place. The spate of mergers and
acquisitions, in the tea industry, had touched the Indian shore in a big way. And it was the
awakening call that got a prompt response and witnessed the coming of the world's two tea
giants, Tata Tea and Tetley, together. Surely, there was a flavor of uneasiness in everyone's cup
of tea. The following factors could throw a light on some of the reasons for this uneasiness and
that concerned one and all in the tea industry worldwide.
1) Growing Disparities
Developing countries in South Asia and East Africa account for 85% of the world tea production
and exports. India and Sri Lanka are dominant in both. Developed countries account for about
62% of the world tea imports. The larger tea imports include the UK, The US, the Netherlands,
Australia, Canada, Japan, South Africa, Ireland and Russia. India and China rank as the largest
and second largest in tea production as well as consumption. They export about a quarter of their
production and have about 30% of share in global trade. Kenya Indonesia and Sri Lanka produce

8. 25% of the world tea but control 50% of the global trade. They export around 85% of their
production.
The area under cultivation, during the last four decades has gone up by 33% in India whereas in
Kenya, it got multiplies the times during the same period. Tea production is concentrated in a
few countries due to suitable climate, soil and availability of cheap labor. India is placed poorly
as far as labor cost and crop productivity is concerned. The stringent labor laws have also caused
much hardship to the domestic companies. Whereas countries like Sri Lanka and Kenya are not
only having not-so-stringent labor laws, but also enjoy superior crop-yield and cheaper labor.
The UK is the second largest importer of tea after the Russian federation. In 1995, the UK
imported around 1.36 lakh tons of tea, around 135 of total tea imports. This is more than that
imported by the rest of Europe. Which means that any changes in the UK market would,
therefore, have a direct impact on producers? But this traditionally staid market is currently
undergoing considerable change. The demand of tea has been slowly bur steadily been falling as
customers have been switching to coffee and especially to soft drinks. Nevertheless, tea is still
the most preferred and number one drink there and the world tea major's have been fighting hard
to maintain market share and stimulate the demand. Total demand for tea was estimated at 2.7 bn
kg in 1998, which is growing at about 2% p.a.
2) Competing For The Global Tea Cup
The world over, there has been a discernible trend towards consolidation of the existing tea
plantation in the hands of a few large corporates, stemming from the compulsions of production
and economies of scale This had been in the form of estates and companies being bought over by
larger estates to have a larger corpus of tea. Most tea companies had been sharply redefining
their scales of production costs and are being looked at more closely. And this trend is expected
to continue in future too, in the wake of increased competitiveness which would compel
companies to go for a complete reorganization of production parameters be its machinery, leaf
handling, plucking standards, and configuration in drying technology, etc.
Even today, the tea industry worldwide is highly concentrated in the hands of a very few firms
like Unilver, Hillsdown Holdings, Lawrie Group, James Finlay, The Cooperative Wholesale
Society , Tata Tea, etc. And above all, the concentration of the industry is such that the top three
firms have a 60% share of the market of the UK, 9% in France, 67% in Germany and 66% in
Italy.
These companies enjoy tremendous bargaining power over the others in terms of pricing. This
could be gauged from the fact that though the prices of tea is largely determined by supply and
demand , large tea companies such as Unilever and Tetley have tremendous influence on supply
and demand and thus on the price fixing process As far as market concentration is concerned,
this too is extremely high and around 90% of the western trade is in the hands of seven
transnational‟s and almost 70% of the world tea production is sold by transnational‟s. The
market power is a major determinant at tea auctions. With their buying policy, these companies
strongly influence both price movement and the demand for certain qualities of tea. While on one
hand, their ownership of both plantations and processing factories give them the advantage of
horizontal integration, on the other hand, they also have the vertical integration as they control
transportation companies, shipping agencies and so on. This concentration of power, with
companies sometimes controlling the entire production process from tea shrub to tea bag, offers
ample scope for manipulation.

9. Transnational giants can afford such auctions thanks to their high degree of flexibility, their
buffer stocks and their speculative auctions.
3) Demand Pattern
Shifts in the consumption of demand for tea in the developed importing countries have
had unfavorable effects on aggregate export earnings from tea. The increasing use of tea
bags and soluble instant tea effectively reduces the quantity of tea needed per cup and
also raises the demand for plain cheaper tea at the expense of that of high quality. Tea
bags, alone, account for about 10% of the volume of world production. Factors that seem
to have stimulated consumption of instant tea include its ease of use as a cold drink and
growing prevalence of vending machines. It is these changes in the consumption patterns
of tea that contribute to the decline in tea prices.
4) Changing Faces Of Tea
Tea has undergone a shift in its image in many markets. There has been a shift in the
production form from hot to cold, from the conservative to the flavored, from sheer cup
page to convenience. And, it is the transnational tea companies that have cashed in on
this trend.
Tea bags, the most common form of value-addition, dominate the world market. Almost
75% of the UK tea drinking population prefers tea bags, tagged, round and pyramid
shaped bags for a convenient brew. Tetley remains the market leader in tea bags right
from its inception way back in the 40's. 14
Significant innovations have been introduced in the instant tea segment also. It has been
most preferred form tea drink in the US, so far. Recently, the European markets have also
evinced interest in instant tea.
Product innovations have continued with introduction of iced tea, specialty tea, and
gourmet tea in the ready-to-drink market. In the US, this category has grown by leaps and
bounds. Flavored tea is also fast catching up the fancy of both tea drinkers and makers as
well, in the western markets.
5) Gatt (WTO) Impact on World Tea Economy
In the last decade there has been a lot of hue and cry over the WTO impact, especially in
the domestic market. But the domestic industry's fear about one of the major implications
of GATT Treaty (which was in the form of reduction in import tariffs) does not seem to
have much substance. It was to be mentioned there that WTO required member nations to
reduce import duty by 24% from the existing rates, by 2005. Among the importing
nations, Pakistan and Egypt have high import duty of 45%. The developed nations (UK,
USA) already have nil duty and therefore, require a special license. The impact on Indian
domestic industry would have been negligible. Tariff reduction was likely to cause higher
imports by Pakistan, Iran, Iraq and Egypt. India and other exporting countries were
supposed to benefit from free trade and lower trade barriers. According to a rough
estimate done in 1999, the consumption was supposed to grow at 3.3 % p.a. in the
developing nations and at 1% p.a. in the developed nations, till the year 2005. Developing
countries share in the world consumption was estimated to rise from 63% to 72%15.
FINANCIAL ANALYSIS OF TATA-TEA PRE-ACQUISITION

10. An analysis of Tata Tea's financials for the last five years ending March 31, 1999
suggests that there had been a significant improvement in the pre-tax income from
operation. It increased from INR1180.60 million in FY ' 98 to INR1578.10 mn in FY' 99.
The pre-tax income in 1998 itself grew tremendously by 74% over previous years figure's
of INR.4854 crores . Though other income has been showing a decline over the last four
years, it increased marginally in 1998-99.
Net sales and net profit registered at CAGR of 20.8 % and 21.4% over the last five year
period ending March 31, 1999. On a y-to-y basis, net sales declined 2.5% in the FY'99,
due to discontinuation of company's international coffee trading business. The continuing
business recorded 22% y-o-y growth in sales in FY'99.
Return on net worth (RONW) had been showing a healthy improvement on y-o-y basis. It
grew to 30.82% in 1999, as against 28.53% recorded in 1998. It showed a huge jump in
1998 as against 18.55% registered in 1997. Return on capital employed (ROCE) too has
improved gradually over the period, indicating efficient utilization of funds and improved
productivity. It grew to 37.60% in1999 from 35.07% registered in 1998.
Both Operating Profit Margin (OPM) and Net Profit Margin (NPM) rose significantly to
26.71% and 14.55% in 1999 from 22.05% and 11.62% respectively in 1998. PBDIT
margin excluding other income jumped from 18.9% in FY'98 to 23.8% in FY'99, despite
rise in packing, advertising as well as employee cost, mainly on account of lower raw
material, cultivation and manufacturing costs.
Although Cash Flow, as a percent of gross sales, declined substantially to 18.86 % in
1999 from 25.07% in 1998, it clearly showed considerable improvement over a low of
6.47% recorded in 1997.
Value sales of tea, both loose as well as poly packs, registered a growth of 23% on y-o-y
basis, whereas volume declined by 2.4% on y-o-y basis, indicating higher realizations.
Both the gross profit margins and the net profit margins have risen significantly over the
years. The gross profit margin grew to 26% in 1999 from 23% in 1998. The net profit
margin, at the same time, rose to 13.6% from 11.6%, during the said period.
The tax outgo has been showing a continuous increase during the last few years. And, in
fact, recorded almost 100% jump in 1997-98 when it rose to INR.420mn as against INR.
240mn in 1996-97. In 1998-99, the total tax outgo was to the tune of INR 560mn. The
cash profit recorded similar growth between FY'96 and FY'99. It grew to INR.14, 643mn
in 1998-99 from INR. 558.2mn in 1995-96.
The inventories recorded a significant jump in 1999 to INR.487.2mn from INR.205.3mn
in 1996. Sundry debtors have shown a declining trend in the year 1998-99. It fell to INR
11.8mn in 1999 from INR 356.9mn in 1998. Sundry creditors too have shown a similar
trend during the period. the decrease in sundry creditors was to the tune of INR 256.7mn
as against INR 92.7mn in 1998.
Fixed asset increased to the tune of INR 503.6mn in 1999 compared to an increase of
INR 432.9mn in 1998. Investments were to the tune of INR 532.8mn in 1999. Loan and
advances declined to the tune of INR 380.8mn in 1999.
Raw material cost fell to INR 232.18 crore in 1999 from INR 286.96 crore in 1998 on
account of lower purchase of finished goods. It declined quite substantially to INR 35.40
crore in 1999 as against INR 131.93 crore in 1998.
Gross working capital cycle increased from 176 days in 1998b to 185 days in 1999.

11. However, net working capital cycle fell to 126 days in 1999, as against 132 days in 1998,
as a result of rise in creditors' days, which grew to 59 days in 1999 from 44 days in 1998:
reflecting company's ability to avail credits for a good number of days from its creditors.
Also, fall in debtors days to 35 in 1999 to 43 in 1998 meant efficient management of
receivables. as a result of rise in creditors' days, net working capital requirements fell to
INR 197.50 crore in 1999 as compared to INR 227.82 crore in 1998.
Short-term liquidity got affected, although marginally, as cash-to-current liability ratio
fell slightly to 0.26 in 1999 from 0.28 in 1998. Quick ratio similarly showed a marginal
decline to 0.51 in 1999 from 0.53 in 1998. Current ratio fell to 1.53 in 1999 from 1.72 in
1998.
The excise duties saw a steep rise to INR32.96 crore in 1999 from INR6.72 crore in
1998. The sales and advertising costs too rose significantly to INR102.16 crore in 1999
from INR70.58 crore in 1998. Of this, advertising expenses, alone, increased sharply
from 5.1% of net sales in FY'98 to 8.7% of net sales in FY‟99. The distribution cost on
the other hand actually declined, albeit marginally, to INR17.10 crore in 1999 from
INR17.71 crore in the previous year.
Interest cost declined by 24% on the y-o-y basis in FY‟99, with the prepayment of the
part of the foreign currency loan from ICICI bank and repayments of NCDs. This was
result of the company's short-term debt portfolio. Keeping in view of the remaining
tenure of this loan and the depreciation in the value of rupee vis-à-vis US dollar, the
restructuring of the loans could work out to be effective. As a consequence of decline in
debt position, interest coverage ratio rose to 7.13 in 1999 from 5.60 in 1998, indicating
improved debt-servicing ability.
Though, the debt-to-equity ratio declined from 0.8 in 1998 to 0.5 in 1999, as a result of
prepayment of FOREX loan from ICICI, with the issuance of 75.98 lakh Global
Depository Receipts (GDRs) to part finance the acquisition of Tetley, it would rise, albeit
marginally. Depreciation has increased over the years with the company incurring capital
expenditure on modernization of its facilities and acquisition of plantations. In 1999 itself
the depreciation rose to INR17.67 crore to INR14.66 crore in 1998.
The company distributed dividends to the tune of INR53.49 crore in 1999, up from
INR49.11 crore distributed in 1998. Cash profits were to the tune of INR146.43 crore in
1999 as against INR116.83 crore in 1998. Total reserve and surplus at the end of the
financial year 1999 was a comfortable 399 crore. The effective tax rate has been around
32-33% in the year 1998 and 1999.
LEVERAGED BUY-OUT
An LBO is defined as the acquisition, financed largely by borrowing, of all the stocks, or assets,
of the hitherto public company by a small group of investors. In an LBO, debt financing typically
represents 50% or more of the purchase price. The debt is secured by the assets of the acquired
firm and is usually amortized over a period of less than ten years. As funds are generated by
operations or from the sales of the assets of the acquired firm the debt to be paid off is scheduled.
The sale of the assets occurs when the investor group is motivated to take control in part because
of what it considers unwise or ill-fitting acquisitions by the firms in the past.

12. There may be limited equity participation on the part of outside investors such as pension funds
and insurance companies often with the provision that the equity interest would be repurchased
after pre-determined period to provide a specified yield.
Following completion of the buy-out, the company is usually run as a privately held corporation
rather than a public corporation, at least for some years, after which resale of firm at a profit is
anticipated.
LBO is implemented for the following:
To generate additional cash flow from interest tax shields.
Reduce capital expenditures.
Sale of assets.
CONCLUSION:
Mergers and Acquisitions are the most important components of modern corporate finance. The
growing tendency of capital concentration and company‟s preference for external expansion,
rather than internal way of development, determines the significance of mergers and acquisitions
within the bounds strategic planning of company‟s development.
Both the companies engaged in M&A activities because they wanted to increase their market
shares and increase profitability. When Tata Tea acquired Tetley, it was concerned with
strengthening its position and to diversify geographically through a dynamic merger activity.
Tata Tea Ltd. Steadily increased its market share and had significant variations in the market
share over the last few years. The overall affect of the acquisition on market share ranged from
neutral to positive. Nevertheless Tata Tea boosted sales revenue and shareholders value.