Tata Tea, part of the US$ 9 bn Tata Group, is embarking on a due diligence exercise to determine whether the acquisition of Tetley is feasible at the asking price (between US$ 410 m to US$ 450 m). The company had earlier bid US$ 300 m for Tetley buyout.
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 consolidate Tata Tea's branded product portfolio and also enhance its presence in the international market. Tetley has a 7% share (valued at US$ 600 m) of the world tea market. Over all, the new entity will command a dominating 15% of the world market. This is just the beginning. If the acquisition goes through it will give Tata Tea a chance to re-define its markets and add value (read premium) to its products.
If the acquisition were to go through, the merged entity would benefit from the cost savings that will arise on account of the synergies between the operations of the two companies. Tata Tea could make up for shortfalls in Tetley's tea requirements, which is sourced from the open market. Moreover, there would be savings on account of rationalisation of employees and coordinated selling and distribution efforts.
Tata Tea will probably have to raise debt in order to finance the acquisition. This will entail a higher interest servicing expenditure, which could suppress growth in bottomline.
In the light of improving tea prices and the company's dominating position, some analysts have rated the stock as a 'Buy'. But there are concerns over its Tetley acquisition, which will increase its interest outgo and hence, adversely affect its future earnings potential.
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