The Leveraged Buy Out Deal of Tata & Tetley

            
 
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Case Details:

Case Code : FINC001
Case Length : 7 Pages
Period : 2000
Pub. Date : 2001
Teaching Note : Available
Organization : Tata Tea Tetley
Industry : Food, Beverages & Tobacco
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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"We were very clear that the burden on Tata tea should be such that the company would be able to absorb it. And it would not materially affect Tata Tea's bottomline."

- N.A.Soonavala, Vice-Chairman, Tata Tea.

"It was important to make the right decision on the comprehensiveness of the transaction. The model has been driven by existing and future earnings potential of the Tetley group and the resultant post-acquisition cash flows to immediately justify the business and financial model."

- Rana Kapoor, MD, Rabo India Finance Ltd., Commenting on the deal.

Introduction

In the summer of 2000, the Indian corporate fraternity was witness to a pathbreaking achievement, never heard of or seen before in the history of corporate India.

In a landmark deal, heralding a new chapter in the Indian corporate history, Tata Tea acquired the UK heavyweight brand Tetley1 for a staggering 271 million pounds. This deal which happened to be the largest cross-border acquisition by any Indian company, marked the culmination of Tata Tea's strategy of pushing for aggressive growth and worldwide expansion.

The acquisition of Tetley pitchforked Tata Tea into a position where it could rub shoulders with global behemoths like Unilever and Lawrie. The acquisition of Tetley made Tata Tea the second biggest tea company in the world. (The first being Unilever, owner of BrookeBond and Lipton).

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Moreover it also went through a metamorphosis from a plantation company to an international consumer products company.

Ratan Tata, Chairman, Tata group said, "It is a great signal for global industry by Indian Industry. It is a momentous occasion as an Indian company has been able to acquire a brand and an overseas company." Apart from the size of the deal, what made it particularly special was the fact that it was the first ever leveraged buy-out (LBO)2 by any Indian company. This method of financing had never been successfully attempted before by any Indian company. Tetley's price tag of 271 mn pounds (US $450 m) was more than four times the net worth of Tata tea which stood at US $ 114 m. This David & Goliath aspect was what made the entire transaction so unusual. What made it possible was the financing mechanism of LBO. This mechanism allowed the acquirer (Tata Tea) to minimise its cash outlay in making the purchase.

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1] Tetley was the second largest brand of packaged tea in the global market, behind Unilever's Brooke Bond and Lipton brands.

2] The Lectic Law library's Lexicon defines a leverage buyout as "a mechanism under which a company is acquired by a person or entity using the value of the company's assets to finance its acquisition. This allows (for) the acquirer to minimise its outlay of cash in making a purchase."

 

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