Tea Story “ A classic leveraged buyout of cross-border finance” By Prof. VP Singh

The acquisition which marked the first ever LBO deal by any Indian company, fits well in the global gambit of the Indian tea company. The deal brings together the two companies, one of which is 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.

Tata Tea  Tata Finlay established  1983 – Tata Tea established  1987 – Tata Tea sets up subsidiary, Tata Inc in USA.  1991 – Tata Tea acquires Consoliated Coffee Ltd (now Tata Coffee Ltd)  1992 – Tata Tea & Tetley entered into joint venture.  Tata Tea owns 54 tea producing estates with approximately 25,700 hectares under tea cultivation across India.

 Tetley Group was started in early 19 th century by Joseph & Edward Tetley.  1913 – Tetley Inc was formed.  1953 – Tetley introduced tea bags to UK.  1997 – Tetley ranked # 1 in UK with market share of 24% TETLEY

TETLEY for SALE!!!!  In 1995, Tetley was put on auction block  Bidders – Nestle SA & Sara Lee  Tata Tea also in contention  Tata Tea bids £170 million by raising funds through US bonds.  Tetley Management bids at £190 million cash down.  IPO of £400 million backfires  VC’s put Tetley on sale  Sara Lee offered £ million.  Tata Tea thought of bidding for Tetley

Management Vision for Acquisition  Structural Changes: Supply Exceeds Demand - Factors operating on the supply side - Factors operating on the demand side  Value Addition Is Now Key  Stronger Brand Portfolio  Competition against global Giants

David v/s Goliath The mismatch: Tata Tea was half the size of its acquisition company Tata Tea would get access to key markets in USA, Australia. Significant marketing & packaging expertise along with production Can Tata Tea Tango with Tetley?

Valuation Model  Cash Flow Valuation Model The Entity DCF Model : The entity DCF model values the value of a company as the value of a company’s operations less the value of debt and other investor claims, such as preferred stock, that are superior to common equity Value of Operations: The value of operations equals the discounted value of expected future free cash flow.  Tata Tea valued Tetley on the basis of future cash flows that the brand is expected to generate in the foreign market as well as synergies & benefits.  Tata Tea expected Tetley brand to generate £48 million every year.

Structure of LBO Deal

Te(a)sting Time Ahead A & B Acquisition Trench A – To be matured in 2007 through semi-annual installment Trench B – To be matured in 2007 in two equal installment Trench C – To be matured in 2008 in two equal installment Trench D – To be matured in 2007 C & D Capital expenditure & Working Capital req

Winner’s Curse & Financial Shortfall  Tata Tea paid too much for acquisition  Tetley’s deteriorating financial performance  Managing cash flows  Internal conflicts

Post Merger Synergies  Purchasing  Brands  Technology  Cost synergies  Infotech  Competition

Challenges 1)Integration problem 5)Demand for Tea 2)Size Difference 6)Cultural Differences 3)Financial Constraint 7)Corporate Philosophy 4)Regional Players 8)Brand Name

Current Scenario  Tata Tea Tetley ranks # 2 globally.  Market share has climbed from 22% to 28% in UK.  In Canada, Tetley has raced ahead from 32%to 44% share of the market.  Australia & France also have seen market share gains.

Lets Break…