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Tata Tea swallows Tetley, looks out for more - Views on News from Equitymaster
 
 
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  • Feb 18, 2000

    Tata Tea swallows Tetley, looks out for more

    According to newspaper reports, Tata Tea Limited has got government approval for issuing American Depository Receipts (ADRs) for US$ 75 m. The company is planning to acquire more tea companies in the international market.

    Tata Tea (FY99 Total Income Rs 8,832 m) is the world's largest integrated tea company, accounting for over 8% of the tea grown in India. The company, which is the second largest blender/marketer in the domestic packaged tea segment, operates the largest instant tea EOU outside the United States of America.

    The proceeds from the ADR issue will help part finance the company's acquisition of Tetley, which is estimated to be in the range of US$ 430 m. Tata Tea plans to use the rest of the proceeds for pursing fresh acquisitions.

    The decision to pursue further acquisitions is aimed at consolidating the company's leadership position in global markets. Prior to the acquisition of Tetley, the company was largely a bulk tea supplier in international markets, lacking international brands. However, there seems to be a strategic shift in the company's focus. Tata Tea is increasingly focusing on packet tea (branded) segment, which offers better realisations. Revenues (not margins) from packet tea are relatively insulated from the cyclical nature of the tea market. Thus, this forward integration would help the company in improving realisations and, possibly, margins.

    The concerns pertaining from such a shift in focus relate to the lack of experience of the management and the likely rise in marketing and advertising expenditure. Although the management has been successful in the domestic markets, it lacks experience in international branded tea markets and this could pose a hurdle in launching and managing international brands. Furthermore, given the competition in this segment of the business, the company's advertisement and marketing budgets would rise significantly as measures are initiated to establish and manage brands. This could take a toll on margins.

     

     

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