Analysis of

M&A TATA TEA AND TETLEY- FIRST LBO DEAL OF INDIA

Submitted in partial fulfilment of the course Mergers & Acquisitions

NOTE: No portion of this document may be copied and/or reproduced. Subject to plagiarism regulations.
Table of Contents

I. Executive Summary ......................................................................................................................................................... 3

II. Industry overview ........................................................................................................................................................... 4
III. Motives for the deal .................................................................................................................................................... 4
1. Revenue Synergies: ..................................................................................................................................................... 4
2. Cost Synergies ............................................................................................................................................................. 4
3. R&D Motive ................................................................................................................................................................. 5
4. Economies of Learning ................................................................................................................................................ 5
5. Other motives ............................................................................................................................................................. 5
IV. What is LBO? ............................................................................................................................................................... 6
V. Deal Structure ................................................................................................................................................................. 7
VI. Integration .................................................................................................................................................................. 8
VII. Learnings ..................................................................................................................................................................... 9
1) Pre-estimating the importance of cultural differences: ................................................................................................. 9
2) Overcoming Liability of Emergingness: ........................................................................................................................... 9
3) Sharing of Tacit Knowledge and Network Theory .......................................................................................................... 9
4) Preferring Partnering Approach over Integration: ......................................................................................................... 9
5) Cut the Fat: ..................................................................................................................................................................... 9
6) LBO was a strategic tool for TATA not a financial one: ................................................................................................... 9
VIII. The Road Ahead ........................................................................................................................................................ 10
IX. Sources ...................................................................................................................................................................... 11
 I. Executive Summary
“Tata Tea & Tetley merger shows how Tatas changed their destiny from being an Indian tea maker to International
brand. Indeed, this merger is a cup that cheered the world” -India Today Cover Story1

In the summer of 2000, the Indian corporate fraternity witnessed a path-breaking achievement, never heard, never seen
before in the corridors of business houses or on the hustling Dalal streets. In the eventful deal, writing a new chapter in
corporate history Tata Tea acquired the UK heavyweight brand Tetley for a staggering £ 271 millionn (effectively 305 mn
pounds).

This deal which happened to be the largest cross-border acquisition by any Indian company, boldly declared Tata tea’s
strategy for aggressive growth and worldwide expansion. The acquisition brought 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. Moreover, it also went through a
metamorphosis from a plantation to an international consumer products company. The deal was packed with not only
revenue-cost synergies, economies of learnings and cross selling opportunities but also issues of limiting liability of
emergingness, cultural differences and misfits.

Apart from the size of the deal, what made it particularly special was the fact that it was the first ever leveraged buy-out
by any Indian company. This method of financing had never been successfully attempted before by any Indian giant.
Tetley’s price tag of £ 271 mn pounds (US $ 450 mn) was more than four times the net worth of Tata tea which stood at
US $ 114mn. The David & Goliath aspect was what made the entire transaction so unusual. However, this mechanism
allowed TTL to minimize its cash outlay in making the purchase.

For Tata, numbers were just stories on paper. What really concerned them was the post mergers integration. TTL had
attempted Tetley’s failed acquisition in 1995, out rightly rejected by Allied Domecq.2 However in 2000, Financial
Institutions Prudential and Schroeder (both of which controlled 33% each in Tetley’s equity) and smaller venture capital
companies wanted to book profits by offloading their stakes. With Sara Lee’s underbid value of £ 200-225 mn and
Unilever restriction on bidding due to competition laws in the UK, TTL became the front runner.

Cultural issues like ill treatment of Tata executives and finding defects in each management’s style were prominent
factors seen in the due diligence. Tetley strongly perceived TTL as a sleepy plantation. Other stumbling blocks were
compensation structures and overlaps in functions.

Tata however handled these cultural differences effectively by preferring a partnering approach instead of integration.
The merger took 6 months for completion, where tacit knowledge by both organizations were shared. Tetley was
brought in India and leveraged the wide supplier network of TATA. Meanwhile TTL got the expertise of procuring quality
leafs from the Tea Procurement team of Tetley and expanding in different geographies through the Geographic
Expansion Group (GEG).

Some drastic measure were also undertaken by TTL to make the merger cost effective. Australian Manufacturing hubs
were sold and capacity was transferred to Cochin leveraging on the low cost resources in India.

Very little mentioned in the literatures, but success of TTL was also marked by effective management of the LBO.TTL
ensured that Tetley had minimum cash balance of £ 25 million YoY. Debt payments were properly structured in four
tranches and payments were made as per the schedules. (Please refer the Tear-sheet).

Indeed, the Tetley acquisition was almost the clarion call. Almost prophetically, Tata Sons chairman Ratan Tata said, "It is
a bold move and I hope that other Indian corporates will follow".
 II. Industry overview
The Indian Tea Industry produced 853.7 Million Kgs of bulk tea in the year 2001. Roughly 20% of this was exported to
Africa, Europe, South-Asia and other countries. The value of exports was defined to be Rs. 1682 crores, at that time. The
remaining 80% was used for internal consumption in the form of packaged tea powder or tea dust.

The largest importers of tea that time were U.K. and west European countries, U.S.A and North Africa. Exports were
seen to be growing steadily and there was potential for Indian exporters to expand and overtake competitors from
South-East Asia (Nepal, Indonesia, Japan etc.)

Tata Tea was incorporated in 1962 as Tata Finlay Limited. It started off with Instant tea production and acquired many
tea plantations. In mid 1980s, Tata Tea entered the branded tea market, by launching Kanan Devan tea (1984), Tata Tea
Dust (1986) and Tata Tea Leaf (1988).

Tata Tea had a joint venture with Tetley International, in 1991, to market its products in U.K. Tata had allocated over 1.6
Billion for capacity expansion in late 1990s. They were looking to become a global brand and considered the acquisition
of Tetley, a U.K. based company.

III. Motives for the deal

The various synergies and motives behind the deal are as follows.

1. Revenue Synergies:
a. Product portfolio: Tata Tea was mainly into selling packaged tea. However, with the 1991 reforms
in the Indian economy, consumption was set to increase and hence Tata had to diversify beyond
traditional packaged tea in order to cater to the new demand. Tetley had a range of value-added
products like tea bags, fruit-infused teas, herbal teas, iced teas and ready-to-drink teas. Therefore,
there were a lot of revenue synergies by going for this deal.
b. Market expansion: Tata Tea’s main markets were India, West Asia and Middle East. It was also
selling in USA through its subsidiary Tata Tea Inc. USA. However, it did not have a strong position in
other developed markets like Europe and Australia. Tetley was the second largest selling tea brand
in the world, only behind Unilever’s Lipton. Tetley also had strong market positions in America,
Europe and Australia. Therefore, Tata could sell its products in these new markets and Tetley could
also sell in India.

2. Cost Synergies
The main cost synergies of this deal lay in procurement and sourcing. The two companies had different
sourcing models. Tata Tea was vertically integrated with 51 own estates in India and 20 in Sri Lanka. With a
total area of 26500 hectares under tea cultivation, Tata Tea was able to maintain good quality control right
from the sourcing stage.
Tetley, on the other hand, bought tea from international tea auctions across the globe. Some of these
were famous markets like Colombo, Calcutta, Chittagong and Mombasa. This gave Tetley access to a
variety of teas – 35 countries and nearly 10,000 estates.
Therefore, by going for this acquisition, each party would have access to the other’s tea sources and at
optimum prices. Tata would also gain access to the wide variety of teas that Tetley had.
3. R&D Motive
Tetley had a history of innovation and successfully commercializing the innovations. For example, Tetley
was the first brand to popularize round-edged tea bags in the UK. The draw-string tea bags were also first
popularized by Tetley. Besides this, Tetley had also introduced teas in various new formats such as ready-
to-drink tea and drink-cool teas. This would prove very valuable to Tata.

4. Economies of Learning
With the imminent threat of foreign entrants with new products, Tata had to consolidate its position by
scaling up as well as scaling across product lines by acquiring brands with new brands of products. There
was also local competitive threat from the likes of HUL. Therefore, since the time required to build these
capabilities was very long, inorganic growth was the only possible option for Tata.

5. Other motives
Two aspects from Tata Tea’s Vision statement are worth noting here.

“Challenging for leadership in tea around the world.”

Tea…
“The product scope of our vision, encompassing the widest definition of the category; the production and
marketing of black and green teas, specialty fruit and herbal teas, ready-to-drink teas, tea serving systems
and retailing of teas.”

The world…
“The geographic scope of our vision, building a global business by leveraging and building our brands and
forging partnerships to mutual advantage.”

Therefore, Tata had a brownfield growth strategy and had formed successful JVs in the past. This gave it
more confidence to go for this acquisition.
IV. What is LBO?
Leveraged Buyout (LBO) is one of a financial instrument through which Private Equity firms, existing management or any
potential acquirer can buyout a target company using predominantly debt to meet the cost of acquisition3. LBO was
conceived by corporate financers, most notably Jerome Kohlberg Jr. and his protégé Henry Kravis (co-founder of
Kohlberg Kravis and Roberts(KKR)), in 1960s4. LBOs were on a boom in 1980s, when as per the Anglo-Saxon model,
managers looked only for short term wealth maximization of the stakeholders and ignored strategic visions for their
companies.

In a typical LBO, acquirer creates a Special Purpose Vehicle(SPV) and infuse little equity to gain control 5. The SPV then
borrows funds from Banks and Debt markets to fuel the acquisition. Once the shareholders of the target are paid, the
SPV merges with the target and all the debt is transferred in the balance sheet of the latter. Hence the balance sheet of
the acquirer is untampered, gaining full corporate control of the target board. Figure 1 depicts the LBO process.

Fig 1. LBO Process

One of the prime aspects to be kept in consideration while going for an LBO is the current operating cash flows of the
target. LBO is not made for organizations that have fluctuating or negative cash cycles. The very rationale to go for an
LBO is that target’s YoY cash flows will pay the debt and interest charges. The assets of the target are kept as collaterals
with the bank and in-case there are defaults, some of the assets are sold. Hence P/E buyers look out for companies that
have stable cash flows and are saturated in growth (not much cash left for market expansion or product innovation).
Also, the time frame for an LBO is usually for 7-8 years, because post that the company might face bankruptcy and
distress costs owning to huge interest payments.

Fig 2: Debt Structure in a LBO8

D/E ratio for firms increases drastically for the target post-merger, shooting to 3.2x-6.3x.6 Several sponsors might team
up in an LBO which is known as “club deal”. Figure 2 shows the type of debt structure in an LBO7.Since Senior Debt has
lower market risk and hence less interest rate the proportionate weight is more as compared to Junior debt.
 V. Deal Structure
The purchase of Tetley was unique not only because it was the first LBO of India, but the largest cross border acquisition
by an Indian corporate on a foreign soil. However, like all successful TATA deals, Tetley acquisitions was full of hurdles
and TTL had to come with a unique strategic/financial instrument that can overcome them.

1) None of the Indian Banks were ready to lend debt to TTL. The primary reason was RBI norms which restricted
banks to provide funding for the M&As.9
2) Big capital outflows abroad required various official approvals. Indian accounting rules did not allow
consolidation of account of parent and subsidiaries, making it difficult to use the target company’s balance sheet
to raise funds for a takeover.
3) Tetley’s price tag was £ 271 million (US $ 450 million), nearly four times TTL’s net worth of US $114 million. TTL
knew that it cannot muster such humungous cash payments all by itself. Also taking loans from other TATA
subsidiaries will spoil its balance sheet.10
4) TTL had a failed bid £ 200 million for acquiring Tetley in 1995, when Allied Domecq (parent holding of Tetley)
rejected the offer. Hence TTL not only had to overcome the Liability of Emergingness but also pay the
stockholders of Tetley adequately.

The purchase of Tetley was funded by a combination of equity, subscribed by TATA tea, junior loan stock subscribed by
institutional investors and senior debt facilities arranged and underwritten by Rabobank International. The finer details
of the deal structure are mentioned in Fig 3.

Fig 3. Structure of Tata Tea’s LBO Deal10,11

The entire debt amount of 235 mn pounds comprised of four tranches (A, B, C and D) whose tenure varied from 7 years
to 9.5 years, with a coupon rate of around 11%, 424 basis points above the LIBOR.12 Of this, the Netherlands based
Rabobank provided £ 185 mn pounds, while mezzanine bonds and senior notes contributed £ 20 mn and £30 mn each.
TTL ensured that £ 25 mn is kept for working capital (cash balance maintained) and Legal services/banking charges
accumulated to £9 mn. Hence the total cost of acquisition was in fact £305mn.
VI. Integration
Integration posed many key challenges as the acquired company was much bigger in stature compared to Tata Tea and
the fact that it was a cross border deal with both brands operating in different segments of the Tea Industry
compounded the issues.

Tatas came up with a two-phase process for integration:

Phase 1 goals: “Development of a common vision, goals and strategies for both companies, as also the creation
of a road map for capturing synergies” by the end of March 2002.

Phase 2 goals: “Actually working together to capture these synergies”

As a first measure, they hired external consultants BCG to guide the integration process. Tata began the integration by
forming many groups which comprised of key executives from both the companies.13 Two major groups were:

1. Tea Procurement Group (TPG)

2. Geographic expansion group (GEG)

TPG focused on sourcing of tea by Tetley in India and ensuring that cost was reduced, quality of the blend remained
acceptable in existing markets. GEG focused on coordinating forays into new markets. Together, Tetley and Tata Tea
tried to leverage each other’s expertise and brand in Tea bag and Packet tea businesses respectively. R&D was also a
focal point of collaboration with the focus being new products, packaging materials and tea quality.

Some factories of Tetley were de-commissioned and relocated elsewhere as a part of consolidation exercise. In 2001-02,
the company retired its “Tata Tetley” brand in the domestic brand and focused on exports. Its primary role became a tea
bag convertor for TTL.

Globally, Tetley decided to change its “working-class” image to a “modern, lifestyle choice” drink in its communications.
As Tata’s chose “ring-fence” structuring of the deal, the two companies were operating as separate companies. The D/E
ratio at the time of acquisition was 3/1. By 2002, D/E ratio had come down to 1.7/1 and TTL believed that when the ratio
became 1, two companies can integrate their Balance sheets and operations into a single operating company.
Company’s strategy was to use Tetley as the brand internationally and Tata in India. 14

Cultural differences were beginning to crop up with Tata executives believing that they were getting inferior treatment
and Tetley managers believing that Tata’s knew about Tea markets only in India and not the western markets. Regarding
this Homi Khusrokhan, Tata Tea MD, said “I call it the learning-to-think-for-two phase, where each organization has to
begin to appreciate that there are two ways of looking at every issue and appreciating each other’s point of view. It is
something like the adjustment phase in a marriage, which starts immediately after the honeymoon.” 15

It was decided that all TTL packs sold abroad would carry “A Tata Enterprise”. Since they were two different entities,
Tetley would pay Tata’s a license fee. Tetley restructured its business by closing its manufacturing facilities in Australia
and sourcing it from Kochi to achieve cost effectiveness. It also sold many of its private label businesses.
VII. Learnings
1) Pre-estimating the importance of cultural differences: They appreciated and worked towards adding to
each other's knowledge. Both the companies decided to leave behind the separate cultures of Tata and Tetley and move
towards defining a unified culture.

Initially, culture was a huge issue and had to be handled very carefully.

2) Overcoming Liability of Emergingness: TTL was an Indian company 1/4th the size of TETLEY. On the other
hand the world's second largest tea beverage producer TETLEY felt that TTL knew little about global markets taste. There
was a huge "We Vs. They" wall.

3) Sharing of Tacit Knowledge and Network Theory: TTL got the expertise of procuring quality leaves from
the Tea Procurement team of Tetley and expanding in different geographies through the Geographic Expansion Group
(GEG). Tetley positioned itself in India using the widespread distribution network of TTL (Economies of Scope)

4) Preferring Partnering Approach over Integration: Mostly revenue synergies were involved in this merger
and since TTL has earlier signed a JV10, transaction costs were low (knew their partners very well). Limited time pressures
shaped the merger towards a partnering approach

5) Cut the Fat: Some drastic decisions were made to make the merger cost effective. Australian Manufacturing hubs
were sold and capacity was transferred to Cochin leveraging on the low-cost resources in India.

6) LBO was a strategic tool for TATA not a financial one: TTL defied all odds of low tea prices, high debt
levels and cultural issues and restructured Tetley keeping its brand intact and premium. The stock increase is testimony
to this.

7) Digest

References: 16, 17

Fig 4. Share price movement of Tata Tea Limited (Presently - Tata Global Beverages) 18
VIII. The Road Ahead
The road ahead was long and bumpy for both firms but some major action plans were taken to gain most out of the
deal:

1. Development of a country wise strategy over the previous methods:

a. Tea in France was a drink consumed during special occasion and therefore focus was on premium
segment.
b. British people tend to have tea in their daily consumption and so the consumers there was a high price
elasticity.
c. The merger gave them an avenue to enter in countries like Pakistan and Bangladesh with both being like
tea consumers.
d. Tetley was then able to concentrate on the Middle Eastern and the African markets, both being
untapped for Tata Tea and Tetley.
e. The ability for each brand not to compete with each other freed up about 6 million pounds of marketing
expenses for both of them combined.
2. Tetley introduced a wide product variety like flavored tea bags, fruits tea and herbal teas, which accounted for a
mere 5 to 6% of the revenue but had tremendous potential across the world.
3. To realize some cost synergies for the merger the following steps were taken:
a. Closure of two facilities of tea manufacturing facilities in UK, which were prior being used by Tetley.
b. Tetley manner of procurement of tea was through open auctions and most of it came from Australia.
Post the merger the procurement of the tea for both firms happened from Cochin and the other estate
of Tata Tea.
4. Tata Tea followed a rather ‘heritage system’ of a touchy-feely system to for their purchases. Post the merger
they adopted the uniform computerized rating system, Broadbrush, the system used by Tetley for their
purchases. 19
5. In India HLL was the leader in the tea market but with the two firms together they are in a better position to be
able to take on Lipton in a more effective manner.
IX. Sources

1) India Today Cover Story: The cup that cheered the world – Accessed on 21st Aug 2017
2) Tatas hurtle back into reckoning for Corporate India's leadership - Accessed on 21st Aug 2017
3) Cost of Acquisition = Price paid to the shareholders+ Transaction Costs+ Amount set aside for working Capital
Requirements+ Any special clauses (Maintaining Escrow Account, CVR etc.)
4) Leveraged Buyouts- Wikipedia – Accessed on 16th Aug 2017
5) Design and impacts of securitized leveraged buyouts - Accessed on 16th Aug 2017
6) Data taken from Session 7: Leveraged Buyouts: Course Financial Aspects of Mergers and Acquisitions
7) Data taken from Session 7: Leveraged Buyouts: Course Financial Aspects of Mergers and Acquisitions
8) Figure taken from Session 7: Leveraged Buyouts: Course Financial Aspects of Mergers and Acquisitions
9) “Tea Producer Seeks a Stronger Brew”, Economic Intelligence Unit, Viewswire database, 5th December 2002
10) Tata Merger With Tetley Group, Case Studies on Mergers and Acquisitions Vol-1 and Vol-2, ICFAI center for
Management Research
11) Tata Merger With Tetley Group, Case Studies on Mergers and Acquisitions Vol-1 and Vol-2, ICFAI center for
Management Research
12) Tata Merger With Tetley Group, Case Studies on Mergers and Acquisitions Vol-1 and Vol-2, ICFAI center for
Management Research
13) The Financial Express: Tata Tea-Tetley business integration in full swing – Accessed on 25th Aug 2017
14) Business Standard: Tata Tea hires 2 consultants to pen Tetley Integration – Accessed on 25th Aug 2017
15) Tea for two – Accessed on 26th Aug 2017
16) Tata Merger With Tetley Group , Case Studies on Mergers and Acquisitions Vol-1 and Vol-2, ICFAI center for
Management Research – Accessed on 24th Aug 2017
17) Tea producer seeks a stronger brew – Accessed on 24th Aug 2017
18) Money Control – Tata Global Beverage – Data for 2000 to 2012.
19) Business Today: Abir Pal’s “Tata’s Tea Party”, 23rd November 2003 – Accessed on 25th Aug 2017