The Hindu Business Line : Testing the waters

"Worldwide the emergence of new competitors, new formats and business models that challenge our current revenue streams are the underlying threats that affect our business. In each country, this takes different forms. In India, it is the emergence of local brand operations, the development of the out-of-home sector of the market, the re-energised organised brand competitors. In the UK, it is the steady decline in mainstream black consumption, where we currently dominate brand share and revenue earnings. In the US, we trail significantly behind the brand leader due to our marginal share in terms of the total tea market. Overall, across the business, our dependence on black tea revenues as a major proportion of our total revenue leads us to pursue a strategy to grow the business in product categories other than black tea, which show faster growth. Acquisitions are one such avenue of threat management and consequent growth." — From a section on the Opportunities, threats and risks faced by Tata Tea in its latest annual report.

The announcement of a late evening press conference by Tata Tea came as a surprise a few weeks ago. Its decision to buy a 30 per cent stake in the US-based Energy Brands Inc for an astounding $677 million (Rs 3,146 crore) along with its holding company (Tata Sons) came as a bigger surprise. While the Tata Group gets a chance to expand its global presence, it also gives Tata Tea a chance to get into an entirely new segment - enhanced water - and hedge its risks in the competitive beverage markets across the world.

The New York-based Energy Brands or Glaceau, as it is commonly known, has three product lines of vitaminwater, fruitwater and smartwater in the enhanced water segment. Founded by J. Darius Bikoff in 1996, Glaceau had a turnover of $355 million in 2005 and turned profitable two years ago. When R. K. Krishna Kumar, Vice-Chairman, Tata Tea, approached the company, one of its private equity partners (TSC Consumer Partners) was in the process of shedding its 30 per cent stake and the Tatas merely replaced the stake by buying into the company.

"It all happened very quickly and we immediately saw that the Tatas shared our vision for Glaceau. We saw an opportunity to work together closely to build this vision for future," explains its 42-year-old CEO and Founder Darius Bikoff, who was not aware of the Tata Group till he was approached by Krishnakumar.

Tapping into the synergies between the two entities, Darius is now betting on the power of the Tata Tea brands. Says Bikoff, "As we grow globally, we will look at the assets which Tata Tea has across the world. I like the their Tetley, Eight O'Clock and Good Earth brands and we will look at opportunities with these." There are possibilities of co-branding initiatives in the future, especially in the new markets waiting to be explored by Energy Brands.

The company is also planning to bring in its own brand, Glaceau, to India and the UK, Tata Tea's biggest markets. But for now, Energy Brands will continue on consolidating its operations in the US market. "At the moment our mandate is to satisfy the demand for our products in the US but in the course of the evolutionary process we will look at opportunity in new markets," said Bikoff.

Registering a 200 per cent CAGR, Energy Brands has never advertised and only relied on word-of-mouth publicity for its products. Competing with carbonated and bottled water brands in the US, Energy Brands has created a new category of `enhanced water' in the US market. "There have been attempts by Coke and Pepsi to copy our products but so far all their attempts have failed," claimed Bikoff.

R. K. Krishna Kumar, Vice-Chairman, Tata Tea

With the Tatas picking up a 30 per cent stake in the company, Energy Brands' operations will also be boosted. As Bikoff said, "With this transaction, there will be a significant growth in our capital which will help us in gathering manpower and resources for the company. We are now going to be executing our operations on the same level as Coke and Pepsi."

While some analysts tracking the company describe the deal as being `expensive' for a 30 per cent stake, others highlight the advantages of paying a steep price. Says an analyst at Enam Securities, "We expect the Glaceau stake to be treated as a strategic investment and the dividend payouts to be included as other income in Tata Tea's financials. This deal will provide Tata Tea with a big boost from the black tea segment, which is growing at a benign 2 per cent, to the enhanced water market with an estimated growth rate of 25 per cent in the next five years." Adds Nikhil Vora, analyst at SSKI Securities, "Apart from the scale of transaction (largest overseas acquisition by an Indian company), what impresses us the most is the direction. The move is a clear indication of Tata's intention to extend presence to many more non-carbonated and non-alcoholic beverages business. At $677 million, prima facie, the valuations look steep, and the deal will stretch Tata Tea's balance sheet in the near term and likely drag earnings. However, the movement from a stagnant tea business to a rapidly growing beverages business will more than compensate for the amount paid for the deal."

At Tata Tea's recent analysts' meet, a presentation outlined the directional change taken by the company to capitalise on the `convergence' trend witnessed in the beverages sector. While tea and coffee were showing stable growth rates, the developed markets were showing clear trends in favour of unconventional drinks such as enhanced water. The strategic benefits through the acquisition for Tata Tea would be to include significant sales from the high growth in the new-age drinks segment and having a more balanced portfolio of brands. The company will have to take the Glaceau brand to new, developed markets outside the US. It would also have the task of developing opportunities in emerging markets with new or enhanced formats of its beverage brands.

Other operational synergies would include cross-utilisation of distribution channels for tea, coffee and enhanced water sales and coordinating an agenda for its own brands in the US along with Glaceau's. Other benefits comprise tax shields on the interest paid on debt to finance the acquisition and avoidance of double taxation of any dividends or capital gains repatriated from the US. Tata Tea is already considering increasing its stake to 40 per cent in Glaceau and Ratan Tata has been inducted into the board as Chairman of the company. With analysts betting on the success of the deal made by the Tatas, it is going to be a win-win situation for both the beverage companies.

As Vora says: "Given the fact that the global tea business is stagnating, we had always maintained that Tata Tea will have to look beyond the pure tea business and also believed that the inorganic route is the only way to grow. Acquisition of Energy Brands is the perfect step in this direction. While this gives Tata Tea an entry into the fast growing bottled water market, it also indicates that Tata Tea will extend itself to every beverage business opportunity globally."

More Stories on : Strategy | Mergers & Acquisitions | Beverages

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page