Tata Tea, a part of the Tata Group (combined turnover in excess of US$ 8.8 bn), has reaffirmed its plans to acquire Tetley, a UK based tea company. This is the Tata's second bid after its earlier bid of US$ 300 m for Tetley buyout fell through due to price disagreement and uncertainty in the Tata camp.
Tata Tea (FY99 total income Rs 8.8 bn) is the world's largest integrated tea company and accounts for over 8% of the tea grown in India. The company is the second largest blender/marketer in the domestic packaged tea segment and operates the largest instant tea export oriented unit (EOU) outside USA.
The Tetley acquisition will enhance Tata Tea's presence in the international market. Tetley has a 7% share (valued at US$ 600 m) of the world tea market. Synergies could emerge as the tea that Tetley currently buys from the open market can now be procured from Tata Tea (FY99 production 59.7 thtpa).
The acquisition is likely to cost around US$ 420 m. The board of Tata Tea has already cleared the submission of a bid to Tetley and an investment of US$ 110 m for the acquisition. The company proposes to raise up to US$ 100 m to fund its plans. To meet the balance Tata Tea will have to look at other sources. According to newspaper reports the company likely to fund the acquisition by debt.
Tata Tea's current debt equity ratio stands at a comfortable 1:2.5. However if the acquisition of Tetley is done with debt finance, then the debt equity levels could increase to risky levels. Company would also feel the pinch of higher interest outgo. The strain on profits and cash flow will be accentuated in the light of poor earnings growth in FY2000. Though tea prices are moving up it will not be enough to compensate for the lower tea production this year.
In the light of improving tea prices, some analysts have rated the stock as a 'Buy'. But there are concerns over its Tetley acquisition, which may deteriorate its balance sheet. The stock has appreciated by over 40% in the recent rally and is currently trading at Rs 530 plus levels.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407