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Tata Tea: Not just tea! - Views on News from Equitymaster
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Tata Tea: Not just tea!
Sep 13, 2006

Tata Tea has transferred itself from a tea plantation company to a beverage company and in the process has gradually moved up the value chain. From a tea plantation company in 1980, it launched packet tea in 1990 and by the end of the decade, became India’s second largest player in the branded packet tea market. In 2000, it made a transformational change with the acquisition of the UK based Tetley and the group became the world’s second largest branded tea marketer. Tata Tea also announced a number of large acquisitions in the last 2 years. Now, the acquisition of Glaceau Water marks the company’s entry in the fast growing enhanced water category and Eight o’ clock coffee (EOC) significantly increases the group’s presence in the coffee space. Besides these, there have been two other smaller acquisitions – Czech based Jemca specialty tea earlier this year and the US West coast based Good Earth specialty tea last year. Glaceau deal
Tata Tea (TTL) and Tata Sons have jointly acquired 30% stake in US-based Energy Brands through Tata Tea GB, TTL’s subsidiary. TTL acquired the stake from TSG Consumer Partners. The acquisition is valued at US$ 677 m, making it the largest overseas acquisition by an Indian company. Energy Brands is the parent company of Glaceau. Glaceau is one of the early starters in the enhanced-water segment, growing at 200% CAGR since its launch in 1996. The company is currently selling its products under three brands – Vitaminwater, Fruitwater and Smartwater – in the US markets. Revenues for 2005 were US$ 355 m and are estimated to touch US$ 700 m in this year (Glaceau’s estimates). This acquisition is being funded via debt to equity ratio of 1.7 to 1, i.e., US$ 427 m of debt and US$ 250 m of equity. Out of this equity portion, Tata Tea and Tata Sons will contribute US$ 192 m and US$ 58 m respectively. The debt portion will be entirely funded through money to be raised by Tata Tetley GB.

Impact of the deal
The US beverages market is valued at US$ 100 bn per annum, of which US$ 80 bn is cold drinks share. The enhanced water segment in the US bottled water industry is expected to grow at a CAGR of 31.8% till 2010, to US$ 8.6 bn. The segment has very few players with the likes of GWC, Gatorade, and Hansen Natural Corporation (Hansen). This segment enables the customers to crossover from carbonated drinks to more healthy drinks. The acquisition would thus expand TTL’s product portfolio in the North American beverage market. TTL is likely to benefit from Glaceau’s focus on providing health conscious drinks by emphasizing on specialty teas for their nutrition value. Moreover, the sales for TTL’s speciality and ready-to-drink teas are likely to increase due to Glaceau’s strong network across 40 states in the US and its portfolio of fast-growing brands.

The price paid
For the 30% stake in Energy brands, TTL’s acquisition is valued at US$ 677 m. The deal has been done at CY05 price to sales of 1.9 times and estimated CY06 estimated price to sales of 0.9 times. Glaceau is a debt free company. Also, as per terms of the deal, TTL has the option to raise its stake in Energy Brands from 30% to 40%. However, no time frame has been decided for this move.

Being a minority shareholder, the revenues of Glaceau would not add to TTL’s consolidated revenues. However, interest on account of the US$ 427 m debt (raised through Tata Tetley GB) would affect its bottomline for the next 2 years and the debt/ equity ratio is likely to increase from the current 1:1. Also there will be dilution of equity for Tata Tea and increasing stake of Tata Sons in Tata Tea. Post this transaction, Tata Tea is to hold 77% share of Tata Tetley GB with rest being held by Tata Sons. However, Glaceau’s strong revenue growth and consequently higher profits are likely to offset the impact of the interest rate burden on TTL after 2 years.

What to expect?
At Rs 767, Tata Tea is trading at a price to earnings multiple of 14.7 times its trailing 12 month earnings. We view Tata Tea’s acquisitions very positively. In mature categories of tea and coffee, acquisitions are clearly the path to growth. We believe these acquisitions besides offering new categories for growth will also help expand distribution for the existing Tetley business.

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