The final round of negotiations is underway between Tata Tea and Tetley executives to arrive at a mutually acceptable ‘bidding’ price for Tata’s Tetley acquisition.
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. On the other hand Tetley is a global packaging and blending company, with a 7% market share in the global tea market. It is owned by a cluster of banks and institutional investors, with venture capital major Schroder Ventures exercising management control.
The deal is likely to be sealed in the next few days. The Tata group had earmarked 270 million pounds for the acquisition, however, Tetley is expecting a higher price of around 300 million pounds. In a bid to arrive at a mutually acceptable solution, the Tata's have decided against picking up Tetley's coffee businesses in an effort to bring down the asking price.
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.
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