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 A process of inviting subscription to the securities of a

corporate issuer by means other than public offering.
 Private placement usually refers to non-public offering
of shares in a public company.
 Instruments issued in private placements are common
stock, preferred stock or other forms of membership
interests, warrants or promissory notes (including
convertible promissory notes), bonds and debentures.
 Unlike public offerings, the number of investors can be
at most 49.
 The company has to be listed on a stock exchange.
 Sold only to “sophisticated” investors, exempt from
SEC registration.
 Regulation D: Private issues cannot be advertised,
defines sophisticated investors
 SEC has provided that privately placed securities
cannot be sold for two years after purchase.
 SEC Rule 144a April 1990 eliminates two-year holding
period for institutions with over $100 million in the
security

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 The firms are unable to go public for a number of
reasons.
 The company may not be big enough;
 The markets may not have an appetite for IPOs,
 The company may be too young or not ready to be a
public company, or
 The company may simply prefer not to have its stock be
publicly traded.
 Such firms with solidly growing businesses make
excellent private placement candidates. Often, firms
wishing to go public may be advised by investment
bankers to first do a private placement, as they need
to gain critical mass or size to justify an IPO.
 PP, aiming ultimately to go public.
 The process of raising private equity or debt changes only
slightly from a public deal.
 Private placements do not require any securities to be
registered with the SEC, nor do they involve a roadshow.
 In place of the prospectus, I-banks draft a detailed
Private Placement Memorandum (PPM for short) which
divulges information similar to a prospectus.
 Instead of a roadshow, companies looking to sell private
stock or debt will host potential investors as interest
arises, and give presentations.
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 Fast and cost effective.
 Choice of investors.
 Flexibility in type and amount of
funding.
 Easier to negotiate on return.
 Less amount of scrutiny.
 Difficult to find investors.
 Danger of insufficient funds.
 Limited investors.
 Illiquidity.
 Private placement of shares or of convertible
securities by a listed company to selected group
of investors is called preferential allotment.
 Investors may have a lock-in period.
 The listed companies has to abide by the
guidelines as per Chapter XIII of SEBI (DIP), in
addition to requirements in Companies Act,
1956.
 QIP is another tool, whereby a listed
company can issue equity shares, fully
and partly convertible debentures, or any
securities other than warrants which are
convertible to equity shares to a QIB.
 Listing
 Investors
 Pricing
 Adjustments in price
 Placement document
 Number of allotees
 Role of Merchant Bankers
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 Case Study – TATA Tetley
 Definitions
 Real Life Examples
 Characteristics
 Methods of LBO
 Financing LBO
 Sources of Gain
 Conclusion with help of Case solution.
 Tata Tea one of the largest company in the world was
sheltered from competition by a protectionist Indian
government for most of its history.
 In 1999, Tata Tea company faced several new
challenges:
 Upcoming deregulation.
 Changing consumer tastes.
 Ban on tea imports scheduled to be lifted in 2001
 Majority of the company’s tea is sold in India, with 12%
total international sales only.
 Possibility of future stiff competition from Nestle, Sara
Lee Corporation, and Associated British Foods.
 To enhance its position in the current brand

 Acquire a well-known brand

 Tata Tea company has to beat the growing global
competition – but how?
 Any possibilities for further growth in the Indian stagnant
market?
 If popular brand in India can penetrate into the global
markets?
 Perhaps it would need to develop a brand of international
demand or taste.
 Or acquire an other company
These questions become more urgent as Tetley Tea, well-known in
the US and UK, unexpectedly comes up for sale. Provide
refernce
Pros
 Acquiring Tetley would mean capturing the higher end of the
value chain
 Tetley is well-established in international markets
 Tata’s gross margin is 36%, while Tetley’s is a more efficient
55%
 The combination of the two companies would allow for
synergies that competitors couldn’t match
 Opportunity to buy a brand the likes of Tetley is rare
Cons
 Tata had already tried acquiring Tetley five years prior and
failed
 Tata may have difficulty raising the required £200-300
million purchase price
 The £200-300 million asking price is much higher than the £190
million the company was valued at in 1995
 The sheer size of the transaction could prove unwieldy
 Wouldn’t investing in building its own global brand be more
efficient than buying a foreign brand?
 TATA choose to acquire Tetley.

 The major challenge was financing

 The value of Tata Tea was $114 million.
 Tetley was valued at $450 million.

The solution was provided by Leverage Buy

outing the Deal.
 Buyout: The purchase of a company or a controlling
interest of a company's shares.

 Leverage buyout: The acquisition of a company using

debt and equity finance. As the word leverage implies,
more debt than equity is used to finance the
purchase, e.g. 90% debt to 10% equity. Normally, the
assets of the company being acquired are put up as
collateral to secure the debt. (Beatrice Foods by
Esmark, Levis Strauss, etc.)

 Going Private: Refers to transformation of a public

corporation into a privately held firm.
 Mortgaging a Home.

 Buying a Car/Taxi, financed by bank.

 Management buy-out (MBO) - A private equity
firm will often provide financing to enable
current operating management to acquire at
least 50% of the business they manage. In
return, the private equity firm usually receives a
stake in the business.
 A management buyout (MBO) is a form of
acquisition where a company's existing
managers acquire a large part or all of the
company from either the parent company or
from the private owners.
 LBOs are a way to take a public company private, or
put a company in the hands of the current
management, MBO.
 LBOs are financed with large amounts of borrowing
(leverage), hence its name. Debt:Equity ratio can go
more than 90:10
 LBOs use the assets or cash flows of the company to
secure debt financing, bonds or bank loans, to
purchase the outstanding equity of the company.
 After the buyout, control of the company is
concentrated in the hands of the LBO firm and
management, and there is no public stock
outstanding.
 Asset Purchase
 Stock Purchase

The choice is dictated by balancing Legal,

Financial, Tax and Accounting advantages
and disadvantages.
 Suitable for Small and Medium sized
transactions.
 Allows selection or rejection of assets and
liabilities.
 Leads directly to price allocation and stepped
up asset value, that are part of Tax and
Accounting aspects of transactions.
 In Stock purchase , the target shareholders
simply sell their stock and all their interest in
target corporation to the buying group and
then the two firms may be merged.
 This method cannot be used if one or more
minority share holders refused to sell.
 Finding cheap assets – buying low and selling
high (value arbitrage or multiple expansion)

 Targetting firms with low Q-Ratio

▪ (Market Value/Asset Value)

 Unlocking value through restructuring:

 Financial restructuring of balance sheet –
improved combination of debt and equity
 Operational restructuring – improving
operations to increase cash flows
 History of profitability.
 Predictable cash flows to service financing.
 Low current debt and high excess cash.
 Strong management team - risk tolerant.
 Known products, strong market position.
 Little danger of technological change (high tech?).
 Low-cost producers with modern capital.
 Take low risk business, layer on risky financing.
 LBO sponsors have equity funds raised from institutions like pensions &
insurance companies

 Balance from commercial banks (bridge loans, term loans, revolvers).

 Banks concentrate on collateral of the company, cash flows, level of equity

financing from the sponsor, coverage ratios, ability to repay (5-7 yr)

 Some have “Mezzanine Funds” as well that can be used for junior
subordinated debt and preferred

 Occasionally, sponsors bring in other equity investors or another sponsor

to minimize their exposure
 In our case SPV - Tata Tea Great Britain Ltd.,
was created.
 The cash flow from the Tetley and hence this
SPV, was used to repay the debt.
 SPV merged with TATA after repayment of
the debt.
 LBO ‘s are done at high premium price.
 The premium paid is 40% or more than average stock value
of last two months.

 What are the sources of these gains?

 Tax Savings.
 Management Incentives.
 Asymmetric Information and under pricing.
 Most of the premium paid is financed by Tax savings.

 New company can operate Tax free for as long as 4-5 years.

 In this time period the debt/equity ratio is pulled down from

10 to 1.

 Often the LBO is sold after this time horizon or reverse LBO
is done.
 Control and hence stakes are with few people.
 Incentives of Management increases.
 Dividends are not necessary.
 Debt payment is effective substitute for dividend payment.
 To save company from the Bankruptcy.
 Restructuring of the acquired firm saves substantial amount
of costs.
 Changes in marketing strategies.
 Employee reduction
 Economies of Scale.
 Investors have more information on the value of firm than
public shareholders.
 Investors buy firms that have low Q-Ratio.
 Net value of the firm may still be higher than LBO price paid.
 Such firms are generally resold at much higher price after the
new management brings the firm to its true value by
restructuring activities.
 Example, Kohlberg Kravis Roberts and Thomas H Lee Company
started in 1970’s, seas opportunity in inefficient and undervalued
corporate.
 March 2000

 First Leveraged Buy-out ( Rs. 2,135 cr)

– Instant access to Tetley’s worldwide operations,

Tata Tea Limited
combined turnover at Rs 3,000 crores.

 Financial Innovation at its best Acquisition of 100% equity stake in

Tetley Tea (UK)
 SPV created to ring fence risk with equity
INR 21,350,000,000
contributed by Tata Tea and Tata Tea Inc

– Debt of 235 mn pounds raised in the form of long

term debt and revolver; charge against Tetley’s

brand and assets.

– Tata Tea’s exposure only to the extent of equity

component of 70 mn pounds