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Tata Tea likely to bag Tetley - Views on News from Equitymaster
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  • Sep 30, 1999

    Tata Tea likely to bag Tetley

    According to reports in a leading financial daily, Tata Tea will invest US$ 117 m (Rs 5 bn) as equity contribution to buy out the entire equity held by Schroders and Prudential, the current owners of UK-based tea major Tetley. The leveraged buy out is expected to be completed by October 1999.

    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.

    Tata Tea is directly infusing equity on the insistence of international bankers who will finance the debt. This will make Tetley a wholly owned subsidiary of Tata Tea. The deal size is estimated between will be in the in the range of US$ 420 m (Rs 18 bn) and excludes Tetley's coffee business in the USA. The due diligence for the acquisition is currently on, but the final deal size may be brought down marginally as Tetley would now be acquired minus its US coffee business.

    The balance amount of around US$ 303 m is to be raised as debt from the international markets. The forex debt will be securitised against the future cash flows of Tetley and will be raised by a special purpose vehicle (SPV).

    The acquisition will give Tata Tea instant access to vast matured markets in the USA, Canada, Europe and Australia, and give it a fillip as a global scale player. Moreover, while in India Tata Tea is seen mainly as a producer of medium quality teas, Tetley blends and packages premium tea. In effect, not only will the acquisition give Tata Tea a global presence in terms of reach, it will also add to its portfolio of brands. Tetley's retail reach in the overseas markets may also encourage Tata Tea to enter into other product categories once it gets the feel of these markets.

    On the flip side, the acquisition will increase Tata Tea's debt levels and have an adverse impact on its debt equity ratio. 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.

    Market view: 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 will increase its interest outgo and hence, adversely affect its future earnings potential.



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