PROJECT ON MERGER & ACQUISITION

THE LEVERAGED BUY OUT DEAL OF TATA & TETLEY

GROUP MEMBERS

ANANYA MITRA

SOUMALI BANERJEE

SYED MD. NAHIN IQUEBAL

SOUMYABRATA DUBEY

TANMOY NASKAR

RAHUL SHAW

Genesis of the Merger

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.

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.

Structure of the Tata Tea’s LBO Deal: A fine blend of Debt & Equity

Debt-Repayment Structure

A B C DAmount 110 mn pounds 25 mn pounds 10 mn pounds 20 mn poundsLoan Type Long-term Long-term Long-Term RevolvingPurpose Funding

AcquisitionFunding

AcquisitionCAPEX Working Capital

ExpenditureYear of Maturity 2007 2007 2008 2007Pay-Back Method Semi-annual

Installments2 Installments in

2007-082 Installments in

2007-08Cessation of

Credit

Tata Tea Inc. Tata Tea

Tata Tea (Gr Britain)SPV

Rabobank

Prudential Mezzanine

Capital

Schroder Ventures

Intermediate Capital Group

Tetley Acquisition

Legal Services & Bank Charges

Tetley’s Working Capital Requirement

Equity £70 Million Debt £23 Million

£10 mn

£10 mn £10 mn

£30 mn

£185 mn£60 mn

Concept of SPV

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

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.