Just the whiff of a proposed deal between Tata Tea Ltd and PepsiCo Inc. was enough to send the former’s share price up by 5% since Friday, when the announcement was made. The deal is yet to be signed and is expected to be formalized over the next few months, but investors seem to be assuming that as a minor detail.
Neither have the companies disclosed the products or even the geographical markets that this joint venture will target.
The joint venture will market non-carbonated ready-to-drink beverages in the health and enhanced wellness categories. Alternative beverages has emerged as a very large category, especially in developed markets, but one that is also gaining ground in developing markets.
The gains to Tata Tea from this transaction are seen as significant as it can contribute to product development while PepsiCo’s sales network will be essential for selling these products.
Tata Tea’s aim is to become a truly global beverages company, one that not only sells tea and coffee but one that caters to consumers’ changing tastes.
In 2006, it had made a very bold move, to acquire a significant stake in Glaceau, a company that made enhanced waters. But the Coca-Cola Co. acquired this company and Tata Tea exited that investment, with a handsome profit.
Tata Tea had made out a very convincing case for the Glaceau acquisition, stating that while the conventional tea and coffee beverage segments are showing stable growth, new segments in the beverage market are gaining ground.
The alternative beverages segment is a large and fast growing segment. In the US, the alternative beverages market had a market size of around $30 billion or Rs135,000 crore in 2009, according to the Beverage Marketing Corp. While Tata Tea lost Glaceau, it apparently still retains that desire to expand its portfolio.
But investors need to rein in their optimism on the transaction. While the market opportunity may be huge, the two companies are unlikely to rush into a massive project. They are likely to start with a limited portfolio of products, operate in a few geographies, allowing them to test both the market and their ability to work together as partners.
Once they have a workable model, they will then roll out in a much bigger form. The financial gains from this deal will not be visible in the near term.
Once the actual joint-venture agreements are signed, there will be more clarity on this issue.
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