FLOW OF PRESENTATION

Introduction Tetley Tale of Tata Tea LBO Structure of the Deal Synergies Pre-Post Merger

INTRODUCTION

One of the most important milestones in the Indian corporate history.

In the Year 2000, Tata Tea acquired the iconic Tetley Brand in a 450 m. $ deal from Schroeder Ventures and PPM ventures.

Tata Tea managed to fend off bids from Sara Lee and Nestle

At the time of acquisition, Tata Tea’s net worth was only $ 114 m.

It was also the largest cross-border acquisition by an Indian company at that time.

This was also the first ever leveraged buy-out by an Indian Company.

TETLEY

Established by Joseph and Edward Tetley in 1837 in Yorkshire, England.

An Iconic brand, Tetley is considered to be the inventor of teabags

At the time of acquisition, Tetley was the Second largest tea company in the World

In India, Tata and Tetley Tea entered into a joint venture to produce tea bags in the Year 1992

THE TALE OF TATA TEA

Incorporated in 1962 as Tata Finlay Limited Tea factory in Munnar(Kerala) and

blending/packaging unit in Banglore In 1982, renamed Tata Tea ltd. after Tata

Industries Ltd. bought out the entire stake of James Finlay and co.

Set up Tata tea Inc in Florida to meet the demands of US market

In order to meet the needs of Japan market entered into JV with Hitachi to form Tata Hitachi Sales Limited

In 1984, set up R&D facility in Munnar In 1989, bought 52% stake in

Consolidate coffee limited of Karnataka By 1994 bought 64.5% stake in Asian

Coffee to consolidate its position in the coffee industry

WHY THE DEAL MADE SENSE?

Complementary specializations. Readymade access to the European

and North American market. Financial setbacks for Tetley in recent

years. Acquisition enabled Tetley to reduce its

debt-equity ratio. Integration structure.

LEVERAGE BUY-OUT

● Acquisition of a company through a combination of equity and debt

● Jerome Kohlberg, Jr. and Henry Kravis coined the term

● Formation of SPV

● Stock Purchase Format

● Asset Purchase Format

● Management Buyout

● Future Cash Flows or the Assets of the company as security

● Increased Debt Equity ratio

ADVANTAGES OF LBO:

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

● Cost improvisation – cost reduction

● Divesting non-core business

● Investing in technological upgrades

● Significant reduction in agency cost

● Tax shield

DISADVANTAGES OF LBO

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

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

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

LARGEST ACQUISITIONS BY INDIAN COMPANIES

STRUCTURE OF THE DEAL

Special Purpose Vehicle - Tata Tea(Great Britain)

To acquire all the assets of Tetley To ensure that Tata Tea's balance sheet

does not suffer additional funding costs Will be merged into Tata Tea Ltd, once it

has paid its debt obligations

SPV

SPVTATA TEA

GREAT BRITAIN(₤70 mn)

TATA TEA INCTATA TEA

(₤10 mn)

(₤15 mn)GDR Issue(₤45 mn)

100% subsidiary

SPV

The SPV leveraged the ₤70 mn equity 3.36 times to raise a debt of ₤235 mn to finance the deal

Entire debt amount of ₤235 mn comprised 4 tranches A, B, C and D whose tenure varied from 7 to 9.5 years

Coupon rate of around 9% (LIBOR + 424 bps) Where did it go?

Tetley Acquisition – ₤271 mn Legal, Banking and Advisory services – ₤9 mn Tetley’s WC requirements - ₤25 mn

Netherland based RABOBANK - ₤185mn Intermediate Capital Group - ₤30 mn Venture capital funds

Mezzanine - ₤10 mn Schroders - ₤10 mn

Debt raised against Tetley’s brands and physical assets

Valuation on the basis of future cash flows

DEBT REPAYMENT STRUCTURE

A B C D

Amount ₤110 mn ₤25 mn ₤10 mn ₤ 20mn

Loan Type Long Term Long Term Long Term Revolving

Purpose Funding Acquisition

Funding Acquisition

CAPEX WC

Year of Maturity

2007 2007 2008 2007

Pay Back Method

Semi Annual Installments

2 instalments in 07-08

2 instalments in 07-08

Cessation of Credit

TATA TEATATA TEA

INC

TATA TEA GB

DEBT₤235 MN

EQUITY₤70 MN

TETLEY WCLEGAL AND

BANK CHARGES

TETLEY ACQUISITIO

N

RADO BANK

INTERMEDIATE CAPITAL

GROUP

SCHRODERSMEZZANINE

₤10 mn

₤15 mnGDR₤45 mn

₤10 mn ₤10 mn

₤30 mn

₤185 mn

₤271 mn

₤9 mn ₤25 mn

MERGER - THE PROCESS

In structured finance the word tranche refers to one of several related securitized bonds that are offered as part of the same deal. They are called tranches since each bond is a slice of the deal's risk.

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

STRUCTURED FINANCE….

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

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

CONCEPT OF SPV - EXPLAINED

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

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

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

CONCEPT OF SPV - EXPLAINED

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

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

CONCEPT OF SPV - EXPLAINED

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

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

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

assets back to Tata Tea.

CONCEPT OF SPV - EXPLAINED

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

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

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

CONCEPT OF SPV - EXPLAINED

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

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

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

SECURITIZATION – 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

SECURITIZATION – THE PROCESS

Tata Tea ( GB )Special Purpose Vehicle

Ancillary Service Provider

InvestorsTata Tea

Originator

TetleyObligor

Sale of Assets

Consideration for Assets purchased

Issue of Securities

Subscription of securities

SECURITIZATION – THE PROCESS

Originator – Tata Tea Sell/transfer the right to receive future cash flows (“receivables”) due

under certain contracts to SPV (I) Special Purpose Vehicle (SPV) – Tata Tea (GB)

Purchase the right to receive future cash flow (I) Enter into contracts with originator, third parties and others relating to

the transaction (I) Issue ABS to investors, ABS repayment relies on future cash flow due

under contracts (I)

SECURITIZATION – THE PROCESS In traditional methods of corporate finance, a

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

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

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

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

SECURITIZATION – THE PROCESS

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

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

SYNERGIES

Tetley Access to Tata Tea’s gardens and production

base Access to Indian market

Tata Tea Tetley’s premium brands and global

distribution network 2nd largest in India to 2nd largest in the world Tetley’s technical expertise Upgrade product portfolio and increase

competitive position

POST MERGER

•Tetley was expected to bring TTL volumes in the short term and greater opportunities in the long term

•Tata and Tetley formed several groups – tea procurement group, geographic expansion group, R&D sharing

•Legal merger took time as Tetley D/E ratio was too high and it needed to come down to 1:1

•Initial Cultural differences

•Acquisition contributed to significant increase in sales volume – Rs. 6870 mn before acquisition to Rs. 67256 mn in FY12 (CAGR of 18% approx.)

•As of FY12, Tetley brand contributes to 40% of Tata Global Beverages revenue

•As of FY12, Tetley is the only brand under Tata Global Beverages stable with presence across the globe

THANK YOU

EFFECT OF LEVERAGE ON ACQUISITION.

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

Income Statement of Mr. A for 2003 – 2008

2003 2004 2005 2006 2007 2008

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

Less

Maintenance - 50,000 50,000 50,000 50,000 50,000

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

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

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

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

Income Statement of Mr. A for 2003 – 2008

2003 2004 2005 2006 2007 2008Loan Amount 6,75,000 6,75,000 5,35,625 3,85,797 2,24,732 51,587

Payments

Free 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.

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

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

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

Interest is calculated on closing bal.

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

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

Ratio

Debt 90% 71.4% 51.4% 30% 6.9% 0%

Equity 10% 28.6% 48.6% 70% 93.1% 100%

LBO - INFERENCES

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

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