The Merger of Tata Tea and Tetley

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The Merger of Tata Tea - Tetley

Transcript of The Merger of Tata Tea and Tetley

Page 1: The Merger of  Tata Tea and Tetley

The Merger of Tata Tea - Tetley

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The Merger of The Merger of Tata Tea - TetleyTata Tea - Tetley

The first ever leveraged buy-The first ever leveraged buy-out (LBO), largest cross-out (LBO), largest cross-border acquisition by any border acquisition by any

Indian companyIndian company

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Largest cross-border acquisition that marked the Largest cross-border acquisition that marked the culmination of Indian company’s - Tata Tea's strategy culmination of Indian company’s - Tata Tea's strategy of pushing for aggressive growth and worldwide of pushing for aggressive growth and worldwide expansion. expansion.

The acquisition of Tetley made Tata Tea the second The acquisition of Tetley made Tata Tea the second biggest tea company in the world with the expected biggest tea company in the world with the expected combined turnover worth Rs. 2,800 – 2,900 crore. combined turnover worth Rs. 2,800 – 2,900 crore. (The first being Unilever, owner of Brooke Bond and (The first being Unilever, owner of Brooke Bond and Lipton).Lipton).

The Merger of Tata Tea - TetleyThe Merger of Tata Tea - Tetley

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The size of the deal was big, and was the first ever The size of the deal was big, and was the first ever leveraged buy-out (LBO) by any Indian company – leveraged buy-out (LBO) by any Indian company – Tata Tea allowing to minimize it’s cash outlay in Tata Tea allowing to minimize it’s cash outlay in making the deal.making the deal.

Acquisition price paid to Tetley was 271 mn pounds Acquisition price paid to Tetley was 271 mn pounds (US $450 m) representing more than four times the (US $450 m) representing more than four times the net worth of Tata tea at US $ 114 mn.net worth of Tata tea at US $ 114 mn.

The Merger of Tata Tea - TetleyThe Merger of Tata Tea - Tetley

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Tata TeaTata Tea Limited (TTL), is the second largest tea Limited (TTL), is the second largest tea company in India. company in India.

It has a significant presence in over 35 countries. It has a significant presence in over 35 countries. Branded teas contribute 88% of the consolidated Branded teas contribute 88% of the consolidated

turnover of the group, turnover of the group, 12% comes from bulk tea, spices and investment 12% comes from bulk tea, spices and investment

activitiesactivities

The Merger of Tata Tea - TetleyThe Merger of Tata Tea - Tetley

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The Merger of Tata Tea - TetleyThe Merger of Tata Tea - Tetley

18,000 hectares under tea cultivation.18,000 hectares under tea cultivation. Produces around 40 million kg of Black Tea Produces around 40 million kg of Black Tea

annually.annually. Five major brands in the Indian market – Five major brands in the Indian market –

Tata Tea, Tata Tea, Tetley, Tetley, Kanan Devan, Kanan Devan, Chakra Gold and Chakra Gold and GeminiGemini

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The Merger of Tata Tea - TetleyThe Merger of Tata Tea - Tetley

Tata Tea's distribution network in the country with 38 Tata Tea's distribution network in the country with 38 C&F agents and 2500 stockists caters to over 1.7 C&F agents and 2500 stockists caters to over 1.7 million retail outlets.million retail outlets.

"Super Brand" recognition in the country with market "Super Brand" recognition in the country with market share in terms of value and volume in India.share in terms of value and volume in India.

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The Merger of Tata Tea - TetleyThe Merger of Tata Tea - Tetley

Tetley world’s second largest branded tea company. Tetley world’s second largest branded tea company.

Tetley blends, packs and distributes tea products Tetley blends, packs and distributes tea products (mainly tea bags) in the UK, Canada, Australia, USA (mainly tea bags) in the UK, Canada, Australia, USA and a number of European countries.and a number of European countries.

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The Merger of Tata Tea - TetleyThe Merger of Tata Tea - Tetley

Tetley recorded turnover worth more than 2,000 Tetley recorded turnover worth more than 2,000 crore in 1999 with growth rate of 15% over 1998crore in 1999 with growth rate of 15% over 1998

Tetley is the second largest tea bag brand in the Tetley is the second largest tea bag brand in the world, and Tetley products are on sale in over 40 world, and Tetley products are on sale in over 40 countries countries

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Tata Tea – Tetley SynergiesTata Tea – Tetley Synergies

The deal offer significant synergies – Tetley gets The deal offer significant synergies – Tetley gets access to Tata Tea’s gardens and production access to Tata Tea’s gardens and production base and the latter gets Tetley’s premium brands base and the latter gets Tetley’s premium brands and global distribution network.and global distribution network.

Vertical IntegrationVertical Integration

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Tata Tea – Tetley SynergiesTata Tea – Tetley Synergies

The Tetley acquisition catapulted Tata Tea from The Tetley acquisition catapulted Tata Tea from the second largest branded tea marketer in India the second largest branded tea marketer in India to the second largest tea multinational in the world to the second largest tea multinational in the world with combined sales of over US$600m.with combined sales of over US$600m.

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Tata Tea – Tetley SynergiesTata Tea – Tetley Synergies

Tea prices are on a structural downturn with Tea prices are on a structural downturn with supply exceeding demand. In such a scenario, supply exceeding demand. In such a scenario, Tetley’s technical expertise should enable Tata Tetley’s technical expertise should enable Tata Tea to upgrade its product portfolio and thus Tea to upgrade its product portfolio and thus improve its competitive position.improve its competitive position.

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Tata Tea – Tetley SynergiesTata Tea – Tetley Synergies

Integration of branding, marketing, and Integration of branding, marketing, and distribution, as well as manpower .distribution, as well as manpower .

Working together to Working together to - Capture cost synergies- Capture cost synergies.. – Capture revenue synergiesCapture revenue synergies

revenue synergy is accomplished by utilizing revenue synergy is accomplished by utilizing the complimentary strengths of both the complimentary strengths of both organizations in marketingorganizations in marketing . . –Tata Tea has been successful in the marketing of packet teas,Tata Tea has been successful in the marketing of packet teas,–Tetley is strong in tea bagsTetley is strong in tea bags..

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Tata Tea – Tata Tea – TetleyTetley Synergies Synergies

Jointly developing the markets where one or the Jointly developing the markets where one or the other company has so far worked singly thereby, other company has so far worked singly thereby, leveraging the Tetley international brand name.leveraging the Tetley international brand name.

Bringing Tetley brand at the premium end of the Bringing Tetley brand at the premium end of the Indian market, fIndian market, flavored teas,lavored teas,

Herbal teas, Herbal teas, Organic teas and Organic teas and decaffeinated teas.decaffeinated teas.

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Merger - the processMerger - the process

Phase I - monitoring, guiding and watching over.Phase I - monitoring, guiding and watching over. Phase II - acquisition by way of ‘quasi-equity’, which Phase II - acquisition by way of ‘quasi-equity’, which

brought down some of the very high-cost debt & brought down some of the very high-cost debt & increases the ownership stake.increases the ownership stake.

Phase III – legal merger Phase III – legal merger re-financing the acquisition re-financing the acquisition so that the interest burden comes down.so that the interest burden comes down.

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Merger - the processMerger - the process

Tetley was acquired for £271m (equity: £70m, debt: Tetley was acquired for £271m (equity: £70m, debt: £201m) by a special purpose vehicle, Tata Tea GB.£201m) by a special purpose vehicle, Tata Tea GB.

Financing mechanism of LBO was used to finance the Financing mechanism of LBO was used to finance the deal.deal.

TATA Tea (Great Britain), the special purpose vehicle TATA Tea (Great Britain), the special purpose vehicle was created for the Tetley acquisition, will be merged was created for the Tetley acquisition, will be merged into Tata Tea as soon as it has repaid it’s debt into Tata Tea as soon as it has repaid it’s debt obligations. obligations.

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Merger - the processMerger - the process

The purpose of setting up the SPV was to ring-The purpose of setting up the SPV was to ring-fence Tata Tea from any liabilities that may have fence Tata Tea from any liabilities that may have arisen, post-acquisition. arisen, post-acquisition.

The SPV has leveraged the 70mn pounds equity The SPV has leveraged the 70mn pounds equity that amounts to 3.36 times to raise a debt of 235 that amounts to 3.36 times to raise a debt of 235 mn pounds so as to finance the dealmn pounds so as to finance the deal

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Merger - the Merger - the processprocess

Take over deal comprises ofTake over deal comprises of– 271mn pounds as Takeover cost271mn pounds as Takeover cost– 9mn pounds as legal & banking charges9mn pounds as legal & banking charges– 25mn pounds as WC & additional funding25mn pounds as WC & additional funding

The acquisition was financed with $70 million in The acquisition was financed with $70 million in equity, of which $60 million was brought in by equity, of which $60 million was brought in by Tata Tea and $10 million by Tata Tea, USA -- a Tata Tea and $10 million by Tata Tea, USA -- a 100 per cent subsidiary of Tata Tea.100 per cent subsidiary of Tata Tea.

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Merger - the Merger - the processprocess

The entire debt amount of 235mn pounds The entire debt amount of 235mn pounds comprises of four Tranches bearing interest @ comprises of four Tranches bearing interest @ 11%, divided into four tranches – A, B, C and D.11%, divided into four tranches – A, B, C and D.

Amount raised via tranches A and B were used for Amount raised via tranches A and B were used for funding the acquisition whereas C and D tranches funding the acquisition whereas C and D tranches were used capital expenditure & WC requirements were used capital expenditure & WC requirements

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Structure of the Tata Tea’s LBO Structure of the Tata Tea’s LBO DealDeal

Tata Tea IncTata Tea Inc Tata Tea Tata Tea

Tata Tea (Gr Britain)

SPV

Tata Tea (Gr Britain)

SPV

Equity £ 70mn Debt £ 235mn

Tetley Acquisition

Tetley Acquisition

Legal Services & Bank Charges

Legal Services & Bank Charges

Tetley’s Working Capital requirements

Tetley’s Working Capital requirements

£ 60mn

£ 10mnPrudential Mezzanine

Capital

Prudential Mezzanine

Capital

Schroder Ventures Schroder Ventures

Intermediate Capital GroupIntermediate

Capital Group

RabobankRabobank

£ 60mn

£ 30mn

£ 10mn£ 10mn

A fine blend of A fine blend of debt and equitydebt and equity

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Merger - the processMerger - the process In In structured finance the word the word tranchetranche refers to refers to

one of several related one of several related securitized bonds that are that are offered as part of the same deal. They are called offered as part of the same deal. They are called tranchestranches since each since each bond is a slice of the deal's is a slice of the deal's risk. .

All the tranches together make up what is referred All the tranches together make up what is referred to as the deal's to as the deal's capital structure or or liability structure

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Structured Finance….Structured Finance….

Tailored financing solutionsTailored financing solutions Financing with hybrid securitiesFinancing with hybrid securities Asset-backed securitizationAsset-backed securitization Leveraged and acquisition financeLeveraged and acquisition finance Uses of structured finance:Uses of structured finance:

– aligning securities to investor needs - term, credit aligning securities to investor needs - term, credit risk, prepayment risk, interest rate risk, etcrisk, prepayment risk, interest rate risk, etc

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Concept of SPV - explainedConcept of SPV - explained

Tata Tea (GB) and SPV was created as a part of Tata Tea (GB) and SPV was created as a part of securitization process.securitization process.

Securitization is the process of pooling and Securitization is the process of pooling and repackaging of homogenous illiquid financial assets repackaging of homogenous illiquid financial assets into marketable securities, that can be sold to into marketable securities, that can be sold to investors.investors.

Tata Tea (GB) took over all the properties of TetleyTata Tea (GB) took over all the properties of Tetley

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Concept of SPV - explainedConcept of SPV - explained

Tata Tea originated Assets of Tetley through Tata Tea originated Assets of Tetley through receivables, leases, any other form of debts receivables, leases, any other form of debts and funded the same on it’s BS. ( Originator)and funded the same on it’s BS. ( Originator)

Portfolio of Tetley assets were then sold to Portfolio of Tetley assets were then sold to Tata Tea (GB) – SPV for funding the assets.Tata Tea (GB) – SPV for funding the assets.

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Concept of SPV - explainedConcept of SPV - explained

Tata Tea (GB) issues debts and purchased the Tata Tea (GB) issues debts and purchased the assets from Tata Tea.assets from Tata Tea.

Tata Tea (GB) was owned by Tata TeaTata Tea (GB) was owned by Tata Tea Debts issued by Tata Tea are secured by Debts issued by Tata Tea are secured by

assets acquired from Tetley ( Obligor).assets acquired from Tetley ( Obligor). Tata Tea (GB) subcontracts the administration Tata Tea (GB) subcontracts the administration

of assets back to Tata Tea.of assets back to Tata Tea.

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Concept of SPV - explainedConcept of SPV - explained

Tata Tea (GB) issued tradable securities – Tata Tea (GB) issued tradable securities – tranches to fund the purchase of assets.tranches to fund the purchase of assets.

The performances of these tranches were The performances of these tranches were directly linked to the performance of the assetsdirectly linked to the performance of the assets

RaboBank, Prudential Mezzanine Capital, RaboBank, Prudential Mezzanine Capital, Schroder Ventures and Intermediate Capital Schroder Ventures and Intermediate Capital Group purchased the securities offered by Tata Group purchased the securities offered by Tata Tea (GB).Tea (GB).

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Concept of SPV - explainedConcept of SPV - explained

They all invested because they were confident that They all invested because they were confident that the securities would be paid in full and on time from the securities would be paid in full and on time from the cash flows that is made available from the asset the cash flows that is made available from the asset pool.pool.

Money collected by Tata Tea (GB) was paid to Tata Money collected by Tata Tea (GB) was paid to Tata Tea.Tea.

As cash flow arises on the assets, Tata Tea (GB) As cash flow arises on the assets, Tata Tea (GB) used for repaying funds to the investors in the used for repaying funds to the investors in the securities.securities.

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Securitization – the processSecuritization – the process

Credit Enhancement• Credit Enhancer• Liquidity Provider• etc.

Third parties• Transaction Servicer • Transaction Administrator• Corporate Administrator• Bondholders Representative• Paying Agent• Credit Rating Agency• Underwriter(s)

Third parties• Transaction Servicer • Transaction Administrator• Corporate Administrator• Bondholders Representative• Paying Agent• Credit Rating Agency• Underwriter(s)

SPVSPV

Sales of pool of assets

Advisor of the program- Financial Advisor- Legal Advisor- Tax/Accounting Advisor

Originator ObligorsReceivables

Investors

ABS Issuance

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Securitization – the processSecuritization – the process

Tata Tea ( GB )Tata Tea ( GB )Special Purpose VehicleSpecial Purpose Vehicle

Tata Tea ( GB )Tata Tea ( GB )Special Purpose VehicleSpecial Purpose Vehicle

Ancillary Service Ancillary Service ProviderProvider

Ancillary Service Ancillary Service ProviderProvider

InvestorsInvestorsInvestorsInvestorsTata TeaTata TeaOriginatorOriginatorTata TeaTata Tea

OriginatorOriginator

TetleyTetleyObligorObligorTetleyTetley

ObligorObligor

Sale of AssetsSale of Assets

Consideration Consideration for Assets purchasedfor Assets purchased

Issue of SecuritiesIssue of Securities

Subscription of securitiesSubscription of securities

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Securitization – the processSecuritization – the process

OriginatorOriginator – Tata Tea – Tata Tea– Sell/transfer the right to receive future cash flowsSell/transfer the right to receive future cash flows

(“receivables”)(“receivables”) due under certain contracts to SPV due under certain contracts to SPV (I) (I)

Special Purpose Vehicle (SPV) – Tata Tea (GB)Special Purpose Vehicle (SPV) – Tata Tea (GB)– Purchase the right to receive future cash flow Purchase the right to receive future cash flow (I)(I)– Enter into contracts with originator, third parties and others rEnter into contracts with originator, third parties and others r

elating to the transactionelating to the transaction (I) (I)– Issue ABS to investors, ABS repayment relies on future casIssue ABS to investors, ABS repayment relies on future cas

h flow due under contractsh flow due under contracts (I) (I)

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Securitization – t he processSecuritization – t he process In traditional methods of corporate finance, a In traditional methods of corporate finance, a

corporation raises equity/obligations to own assets.corporation raises equity/obligations to own assets. In securitization, a corporation creates and In securitization, a corporation creates and

‘securitizes’ assets - that is, transfers assets in form ‘securitizes’ assets - that is, transfers assets in form of securities.of securities.

The claim is on assets, and not on the entity, The claim is on assets, and not on the entity, hence, asset-based fundinghence, asset-based funding

Asset backed funding lies in reducing the equity, Asset backed funding lies in reducing the equity, and increasing the leverageand increasing the leverage

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Securitization – the processSecuritization – the process

SPV are used in securitization transactions as SPV are used in securitization transactions as devices of hiving off assets and converting devices of hiving off assets and converting assets into securities.assets into securities.

SPV are not companies in substantive SPV are not companies in substantive operations; they do not have any business operations; they do not have any business except acting as a legal instrumentality. This is except acting as a legal instrumentality. This is necessary to ensure “asset-backed” securitiesnecessary to ensure “asset-backed” securities

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Merger - the processMerger - the process

At the time of acquiring Tetley, Tata Tea GB’s At the time of acquiring Tetley, Tata Tea GB’s debt-equity ratio stood at 3:1, but has since fallen debt-equity ratio stood at 3:1, but has since fallen to 1.8:1 and is expected to further fall to 1.7:1 to 1.8:1 and is expected to further fall to 1.7:1

Tetley’s cash accruals have grown 2.6 times and Tetley’s cash accruals have grown 2.6 times and is expected that it would help in repaying debt is expected that it would help in repaying debt faster. faster.

The company plans to pay $8 million of debt from The company plans to pay $8 million of debt from internal accruals,"internal accruals,"

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Leverage Buy-Out?Leverage Buy-Out?

Leverage buyout (LBO) refers to financing Leverage buyout (LBO) refers to financing mechanism for purchasing of a company by a mechanism for purchasing of a company by a small group of investors using a high small group of investors using a high percentage of debt financingpercentage of debt financing

Leveraged Buyout or LBO investing, involves Leveraged Buyout or LBO investing, involves the provision of leveraged capital (i.e., a the provision of leveraged capital (i.e., a mixture of debt and equity, with an emphasis on mixture of debt and equity, with an emphasis on debt) and business development assistance to debt) and business development assistance to enable the restructuring of existing businesses.enable the restructuring of existing businesses.

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Leverage Buy-Out?Leverage Buy-Out?

Each LBO mechanism is unique – Capital Each LBO mechanism is unique – Capital Structure.Structure.

Leveraged buyout uses Financial Leverage to Leveraged buyout uses Financial Leverage to complete the acquisition of Target Company.complete the acquisition of Target Company.

In a LBO, equity holders often receive very In a LBO, equity holders often receive very high returns because the debt holders are high returns because the debt holders are locked with fixed return, while the equity locked with fixed return, while the equity holders receive all the benefits from any capital holders receive all the benefits from any capital gains.gains.

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Leverage finance…Leverage finance…

Leveraged buyout?

Leveraged buyout?

Company has unused debt capacity

Company has unused debt capacity

Leveraged recapitalization?

Leveraged recapitalization?

Takeover? Takeover?

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Leverage Buy Out – the Leverage Buy Out – the sequencesequence

Company gets bloated or slack and stock price falls

LBO offer made

LBO completed

Restructuring Efficiencies Divestitures Financial

? years 3-9 months 5-7 years

IPO or sale of company

LBO financing lined up

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LBO – Capital StructureLBO – Capital Structure

COST

OF

CAPITAL

DEBT

RATIO

Stage 1: Pre-LBO

Stage 4: Debt paydown

Stage 2: LBO financing

Stage 3: LBO refinancing

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Leverage Buy-Out?Leverage Buy-Out?

Value created by LBO are exclusively for Value created by LBO are exclusively for shareholders of the restructured firm and for shareholders of the restructured firm and for the specialist engage in the LBO operation.the specialist engage in the LBO operation.

LBO refers to Wealth transfer mechanism LBO refers to Wealth transfer mechanism because of the financial leverage gain accrues because of the financial leverage gain accrues to shareholders at the expense of firm’s Debt to shareholders at the expense of firm’s Debt holdersholders

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Leverage Buy-Out?Leverage Buy-Out?

Value gains to shareholders are partly the Value gains to shareholders are partly the result of:result of:– Efficiency gainsEfficiency gains– Tax BenefitsTax Benefits– Transparency Transparency – Reduction in Agency costReduction in Agency cost

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When LBO as financing mechanism should be used?

Steady and predictable cash flow Steady and predictable cash flow Divestible assetsDivestible assets Clean balance sheet with little debt Clean balance sheet with little debt Strong management teamStrong management team Strong, defensible market position Strong, defensible market position Viable exit strategyViable exit strategy Limited working capital requirements Limited working capital requirements Synergy opportunitiesSynergy opportunities Minimal future capital requirements Minimal future capital requirements Potential for expense reductionPotential for expense reduction Heavy asset base for loan collateralHeavy asset base for loan collateral

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Advantages of using LBO as a financing mechanism

Heavy Interest & principal forces management Heavy Interest & principal forces management to improve performance & operating to improve performance & operating efficiencies such asefficiencies such as

Cost improvisation – cost reductionCost improvisation – cost reductionDivesting non-core businessDivesting non-core business Investing in technological upgradesInvesting in technological upgrades

Significant reduction in agency costSignificant reduction in agency cost Tax shieldTax shield

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Disadvantages of using LBO as a financing mechanism

Financial distress – uncertainties Financial distress – uncertainties Increased fixed costs associated with debt Increased fixed costs associated with debt

financing can worn out the effect in case of financing can worn out the effect in case of downturn in business cyclesdownturn in business cycles..

In Leveraged acquisition, banks have a say in In Leveraged acquisition, banks have a say in what is being done.what is being done.

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LBO - inferences

A firm can increase its value by increasing A firm can increase its value by increasing leverage up to the point where financial risk makes leverage up to the point where financial risk makes the cost of Equity relatively high compared to the cost of Equity relatively high compared to others.others.

As the debt equity ratio increases, the equity As the debt equity ratio increases, the equity portion of the acquisition financing decrease to a portion of the acquisition financing decrease to a level at which private equity firm can acquire a level at which private equity firm can acquire a company by putting say 20-40% of the total company by putting say 20-40% of the total purchase price.purchase price.

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Sources of strength from LBO Sources of strength from LBO Tata Tea – Tetley - MergerTata Tea – Tetley - Merger

Closely related to the followings:Closely related to the followings:– Sales growth ratesSales growth rates– Margins – operating efficienciesMargins – operating efficiencies– Working Capital ManagementWorking Capital Management– Capital expendituresCapital expenditures

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Sources of strength from LBO Sources of strength from LBO Tata Tea – Tetley - MergerTata Tea – Tetley - Merger

Sales growth ratesSales growth rates Gross Forecasted Sales for Tata TeaGross Forecasted Sales for Tata Tea

20012001 20022002 %%11,331mn11,331mn 122,691mn122,691mn 982.27982.27

Margins – operating efficienciesMargins – operating efficienciesPBTPBT

20012001 20022002 %%1,873mn1,873mn 2,144mn2,144mn 14.1614.16

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Sources of strength from LBO Sources of strength from LBO Tata Tea – Tetley - MergerTata Tea – Tetley - Merger

Margins – operating efficienciesMargins – operating efficienciesGPM as %GPM as %

20012001 20022002 %%21.521.5 21.521.5 --

NPM as %NPM as %20012001 20022002 %%11.111.1 11.311.3 1.81.8

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Sources of strength from LBO Sources of strength from LBO Tata Tea – Tetley - MergerTata Tea – Tetley - Merger

Margins – operating efficienciesMargins – operating efficienciesCapital expendituresCapital expendituresDepreciationDepreciation

20012001 20022002 %%225mn225mn 251mn251mn 11.55 11.55

InterestInterest20012001 20022002 %%338mn338mn 333mn333mn 1.47 1.47

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Sources of strength from LBO Sources of strength from LBO Tata Tea – Tetley - MergerTata Tea – Tetley - Merger

Net WorthNet Worth20012001 20022002 %%6,238mn6,238mn 7,140mn7,140mn 14.4514.45

EPSEPS20012001 20022002 %%29.8329.83 34.1134.11 14.3414.34

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Post -Merger performancePost -Merger performance

1999/ 00

Acquisition Year

2003/ 04 Growth

%

Turnover 246 251 2.03

EBI TDA 28 46 64.29

PAT 6 16 166.67

£ mn

Post Acquisition Perf ormance

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Effect of Leverage on Effect of Leverage on Acquisition.Acquisition.

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

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Income Statement of Mr. A for 2003 – 2008Income Statement of Mr. A for 2003 – 2008

20032003 2004 2005 2006 2004 2005 2006 2007 2007 2008 2008

Rental Rental - - 2,50,000 2,50,000 2,50,000 2,50,000 2,50,0002,50,000 2,50,000 2,50,000 2,50,000 2,50,000

Less Less

MaintenanceMaintenance -- 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000

House TaxHouse Tax -- 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000

Rental Income Rental Income 1,90,000 1,90,000 1,90,000 1,90,000 1,90,000 1,90,000 1,90,000 1,90,000 1,90,000 1,90,000

InterestInterest -- 50,625 40,172 28,935 16,855 3,869 50,625 40,172 28,935 16,855 3,869

Free Cash FlowFree Cash Flow -- 1,39,375 1,49,828 1,61,065 1,73,145 1,86,131 1,39,375 1,49,828 1,61,065 1,73,145 1,86,131

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Income Statement of Mr. A for 2003 – 2008Income Statement of Mr. A for 2003 – 200820032003 2004 2005 2006 2004 2005 2006 2007 2007 2008 2008

Loan Amount 6,75,000 6,75,000 5,35,625 3,85,797 2,24,732 51,587Loan Amount 6,75,000 6,75,000 5,35,625 3,85,797 2,24,732 51,587

PaymentsPayments

Free Cash flows -- 1,39,375 1,49,828 1,61,065 1,73,145 51,587Free 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.- Free Cash flow as calculated earlier from rental income after expenses & interest.

Closing Bal.Closing Bal. 6,75,000 5,35,625 3,85,797 2,24,732 51,587 06,75,000 5,35,625 3,85,797 2,24,732 51,587 0

InterestInterest ---- 50,625 40,172 28,935 16,855 3,869 50,625 40,172 28,935 16,855 3,869

- Closing bal = (opening bal – free cash flow )- Closing bal = (opening bal – free cash flow )

Interest is calculated on closing bal.Interest is calculated on closing bal.

DebtDebt 6,75,000 5,35,625 3,85,797 2,24,732 51,587 06,75,000 5,35,625 3,85,797 2,24,732 51,587 0

EquityEquity 75,000 2,14,375 3,64,203 5,25,268 6,98,413 7,50,000 75,000 2,14,375 3,64,203 5,25,268 6,98,413 7,50,000

RatioRatio

DebtDebt 90%90% 71.4% 71.4% 51.4% 30% 6.9% 0% 51.4% 30% 6.9% 0%

EquityEquity 10% 28.6% 48.6% 70% 93.1% 100%10% 28.6% 48.6% 70% 93.1% 100%

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LBO - inferences

Thus it is evident from Equity ownership as % Thus it is evident from Equity ownership as % of total capitalization increases from 10% to of total capitalization increases from 10% to 100%.100%.

We can conclude that advantage of leverage in We can conclude that advantage of leverage in financing enable to own an asset of relatively financing enable to own an asset of relatively significant equity value with regards to amount significant equity value with regards to amount of initial equity investment.of initial equity investment.

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LBO - inferences

Financing the purchase with significant amount Financing the purchase with significant amount of debt enhances & significantly influences ROI.of debt enhances & significantly influences ROI.

In other words increasing financing leverage In other words increasing financing leverage magnifies IRR either positively or negatively magnifies IRR either positively or negatively depending upon several other factors.depending upon several other factors.

However levering up to make an investment However levering up to make an investment increases the financial risk and accordingly increases the financial risk and accordingly influences gain or loss on the investment.influences gain or loss on the investment.

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Closing remarksClosing remarks

Given the intensity of competition and fast Given the intensity of competition and fast changing business environment in the tea changing business environment in the tea segment, the world over, the acquisition, segment, the world over, the acquisition, undoubtedly, is a strategic fit for Tata Tea, as far undoubtedly, is a strategic fit for Tata Tea, as far as its globalization gambit is concerned. And, the as its globalization gambit is concerned. And, the number one spot, which it is aiming at, may not be number one spot, which it is aiming at, may not be far away. far away. But of course, it would have to put its But of course, it would have to put its best cup forwardbest cup forward..

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Thanx !Thanx !