Mumbai: Tata Tea Ltd, the world’s second-largest branded tea company, and Tata Sons will sell their 30% stake in Energy Brands Inc. (aka Glaceau) to Coca-Cola Co. for $1.2 billion (Rs 4,920 crore) after the world’s biggest carbonated drinks maker agreed to acquire the US vitamin water maker for $4.1 billion. The two Tata companies made a profit of $523 million (around Rs2,144 crore) on the deal; they had acquired their stake in Glaceau for $677 million in August 2006. Tata Tea, which will get $1 billion for its 25% stake in Glaceau, will use the money to retire debt financing for the deal ($427 million) and other debt on its books, and acquire beverages companies in the US.
R.K. Krishna kumar, vice-chairman, Tata Tea
Coca-Cola’s $4.1 billion purchase is motivated by the company’s desire to boost its lagging position in the race to dominate the fast-growing market for non-carbonated drinks. John Sicher, editor and publisher of industry publication Beverage Digest, said this deal had huge potential benefits for Coca-Cola. “Coke lags Pepsi in the non-carbonated area, and it now has a brand which can get it back in the game in a significant way,” he said. “It’s a game changer for Coke,” he added.
According to Beverage Digest, Glaceau sold 77 million cases last year, compared with 95 million cases for Pepsi’s Propel Fitness Water.
But Sicher said Glaceau could soon experience a “huge” volume growth due to the reach of Coke’s bottling system and its presence in international markets.
Tata Tea’s vice-chairman R.K. Krishna Kumar said that the company had “identified a few targets” for acquisition, “mainly in the US”. The target could be a company with more than $100 million in sales,he said. Kumar said that the company was a “minority stakeholder” in Glaceau and didn’t “want to stand in the way of Coke and create problems”. “That’s not Tata’s style,” he said.
“Companies normally have to wait for five years to earn returns from their investments. Tata Tea has been lucky to get such a high return in less than one year,” said an analyst who did not wish to be identified.
“This news is positive for Tata Tea as the value of their stake has appreciated,” said Raj Bhandari, director at Mumbai’s Networth Stock Broking Ltd.
The Tata Tea share surged more than 7% to a 15-month high of Rs941.25 on the Bombay Stock Exchange on Friday after the announcement of the deal, before closing at Rs913.65, 3.9% up from its previous close.
Kumar said Tata Tea would consider acquiring a majority stake in its future acquisitions. He denied that the company sold out because it was under pressure to compete with Coca-Cola for a complete buyout of Glaceau.
When it acquired its stake in Glaceau, Tata Tea had said this would help strengthen its presence in the US and expand its business globally. “Glaceau is part of a very exciting, strong business and provides Tata Tea an opportunity to be present in the unfolding crossover space,” Krishna Kumar had said in a statement.
Tata Tea has spent $1.3 billion in the past six years to buy beverage makers abroad to widen its product range and enter new markets. It acquired UK’s Tetley for $407 million in 2000; Good Earth, a US maker of green and herbal teas in 2005; and US firm Eight O’Clock Coffee Co. for $220 million in 2006. Last October, it also bought a third of South African tea producer Joekels.
In an interview with Mint in March, Percy T. Siganporia, managing director, Tata Tea, had said the company was trying to learn from Glaceau’s successful positioning as a health and wellness beverage and “perk up our tea and beverage growth rates too.”
Kumar said that the acquisitions the company was now considering would fit “Tata Tea’s strategy, primarily in the health and wellness segment.”
Tata Tea will complete the sale of its stake in Glaceau by October and will then decide on the use of the proceeds. The capital gains will not reflect in Tata Tea’s books this quarter, said the company.
Coca-Cola’s deal to buy Glaceau, which was founded in 1996, is expected to close in the summer. It is subject to regulatory review. The boards of both companies have approved the transaction.
Mobis Philipose from Mint, Martinne Geller from Reuters and Debarati Roy from Bloomberg also contributed to this story.