News: The re-brewing of Tata Tea

(BS 25/08/2006) Mumbai - With the global tea market, Tata Tea's mainstay, growing at 1.5 per cent, the company needed another avenue for growth. The acquisition of 30 per cent equity in Energy Brand Inc (EBI) of the US provides just that, since the flavoured water market, where EBI is a force to reckon with, has been growing at 30 per cent.

Energy Brands, which has grown at 200 per cent CAGR in the recent past, expects to grow 70 per cent over the next three to five years.

Analysts said the acquisition -- Tata Tea's second overseas buy after Eight O Clock Coffee, also in the US -- would expedite Tata Tea's transformation from a plantation firm making tea into a complete beverage company.

It began with the company handing over its south Indian plantations to the workers' co-operative. It is believed to be doing an encore in the north.

Today, Tata Tea is the world's second largest branded tea company, commanding 30 per cent share of the global tea bags market and present in 40 countries.

Said Shardul Pradhan, an analyst with IL&FS Investsmart: "There has been a silent move towards establishing itself in a niche market. So, we were expecting something novel anyway."

There is considerable synergy between enhanced water, one of EBI's strengths along with specialty drinks, and tea. Polyfelins, an additive in EBI's water production process, is an extract from speciality tea.

Tata Tea will use EBI's distribution network to expand its speciality tea in north America.

Managing director Krishna Kumar said EBI, a debt-free company, expected to finish this year with sales of $ 350 million and the next year with $700 million.

The Tata Tea management said there would be no direct positive impact of EBI's performance on the books of Tata Tea. However, indirectly, Tata Tea would receive dividends from the investment.

However, some analysts warned that the possibility of failure was higher than in previous acquisitions as this left the balance sheet highly leveraged and stifled future investment opportunities in the tea and coffee space in the US.

Critics said Tata Tea would have gained more by directly acquiring EBI. However, in that case, Tata Tea would have had to fork out much more. In the current deal, it would infuse $58 million as equity in Tata Tea GB.

However, the Tata Tea management has a good record of acquiring lucrative business.

This is evident from the rise in return on capital employed (RoCE) over the past five years. Its RoCE has gone up from 9.5 per cent in FY02 to 14 per cent in FY06. EBIDTA increased from 11.8 per cent to 17.6 per cent during the period. This means the acquisitions boosted its profitability as well.