The Hindu Business Line : A power brew

Tata Coffee's recent acquisition from private equity firm Gryphon Investors of Eight O'Clock (EOC), a coffee manufacturer and distributor in the US, appears to be a surprise concoction, size-wise. The deal comes after Tata Coffee tested the waters with coffee retailing though a joint venture investment in Barista. The $220-million (about Rs 1,000 crore) acquisition is on the lines of Tata Tea's takeover of Tetley. Through the deal, Tata Coffee will acquire a company almost twice its size. In 2005, EOC brewed about Rs 500 crore in revenues and Rs 125 crore in operating profits.

Although the deal appears steep on a price-to-sales basis, it augurs well for Tata Coffee, as it would help the company become an integrated coffee player. It will also serve as a hedge against the coffee cycle as the company will have presence across the value chain from coffee growing to retailing. Tata Coffee, like its holding company Tata Tea, may consider introducing the EOC brand in India.

Tata Coffee plans to fund the acquisition by floating a special purpose vehicle. The company has announced a rights offer of about Rs 230 crore ($50 million) to part-finance the deal while it has arranged funding for about $170 million with Rabo Bank, which had funded Tata Tea's Tetley takeover. Though the debt option considered by Tata Coffee will raise its consolidated debt-equity ratio to about 2:1, cash flows would be considerable over the longer term. Tata Coffee's plans of setting up an instant-coffee-making facility in India and Uganda could, however, go on the back-burner for now.

Alagappan Arunachalam

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