Leveraged Buyout (LBO)

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Meaning:

The acquisition of another company using a significant amountof borrowed money (bonds or loans) to meet the cost of acquisition. Often assets of the company being acquiredare used as collateral for the loans in addition to the assets of theacquiring company.

History Of LBO

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First leveraged buyout was in 1955 by McLean Industries , which purchased Waterman Steamship Corporation . McLean borrowed $42 million and raised additional $7 million through an preferred stock. Later $20 million of Waterman cash and assets were used to retire $20 million of the loan debt.

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One of the largestLBOs on record was theacquisition ofHCA Inc. in2006 by Kohlberg Kravis Roberts & Co.(KKR), Bain & Co., and Merrill Lynch. The three companiespaidaround $33 billionfor the acquisition.

Indian Leveraged Buyout

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First global LBO in India was Tata Teas acquisition of UK-based tea company Tetley in March 2000. In 2007, Corus Group was acquired by Tata steel for $12 billion. In 2007,Birla Group company Hindalco Industries acquired Canada-based aluminium producer Novelis for $6 billion In 2008, Jaguar was acquired by Tata Motors for $2.3billion.

TATA-CORUS Deal

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Official Announcement : April 2nd, 2007. Price of the deal: 608 pence per ordinary share in CASH. Total Value of the deal : $ 12 billion. Tata created a special purpose vehicle to take debt against the assets of the acquiree.

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Final Deal Structure

$3.53.8bn infusion from Tata Steel ($2bn as its equity contribution, $1.51.8bn through a bridge loan). $5.6bn through a LBO ($3.05bn through senior term loan, $2.6bn through high yield

Effects of the deal

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Raw-material Self sufficiency. Enhanced Product Portfolio. Enhanced Customer reach. Access to New Markets.

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