Tata Tea and Tetley

By:Kiran A-05

Abhay Sakharkar A-10Aditi Lakhe A-20

Industry Profile India is world`s largest consumer and second largest producer of tea (26%) after

China and nearly 25 per cent of tea produced worldwide is consumed in India. The total turnover of the tea industry in India is likely to reach Rs. 33,000 crore by

2015 from the current level of about Rs. 19,500 crore. With nearly 6 lakh hectares under tea cultivation, the domestic tea industry is growing

at a compound annual growth rate (CAGR) of about 15 per cent. Around 35 lakh workers are employed in over 1,500 tea estates across India Tea production during the current year is likely to stay over 950 million kilograms

Source: http://profit.ndtv.com/news/commodities/article-tea-industry-s-turnover-likely-to-reach-rs-33-000-crore-by-2015-assocham-294343

Tata Global Beverages

The company derives nearly 70 per cent of its revenues from tea, 20 per cent from coffee and 5 per cent from water

Tata Tea1962

• Incorporated as Tata Finlay Limited, and commenced business in 1963 (JV)

1976

• Tata takes over marketing and production of James Finlay• Bought out entire stake

1983

• Tata Tea is born. Company renamed

1991

• Enters branded business

1993

• JV with Allied Lyons PLC

2000

• Tata Tea acquires Tetley Group Limited

2005

• Tata Tea merges wholly owned subsidiary, Tata Tetley with the company.

2010

• Tata Global Beverages corporate brand announced

Source: http://www.tataglobalbeverages.com/about-us/our-history

TATA TEA Brand PortfolioTata Tea is the largest packaged tea brand in the country with one in three Indian

households having consumed it over the course of last year

Tata Tea Premium Tata Tea GoldTata Tea Gold Darjeeling Tata Tea AgniTata Tea Life

Chakra GoldGeminiKanan Devan

Source: http://www.tataglobalbeverages.com/our-brands/brands-overview/brand-detail?brandid=d85b273d-23d7-421c-96e6-be56bae63cae

Tetley

In 1837, Edward and Joseph Tetley started to sell tea and became so famous that they set up as tea merchants.

In 1856, in partnership with Joseph Ackland, they set up “Joseph Tetley and Co., Wholesale Tea Dealers”

In 1989 the round tea bag was launched, latching on to the fashion to drink tea in a mug, rather than a cup. Next came the Drawstring ‘No drip, no mess’ tea bag.

On 10th March 2000, The Tetley Group was sold to Tata Tea Limited, one of the world’s largest integrated tea businesses.

Source: http://www.tataglobalbeverages.com/our-brands/brands-overview/brand-detail?brandid=fde0caaa-acb6-4094-ad53-0481902a6d19

TETLEY Brand Portfolio

An astonishing forty-five million cups of Tetley are drunk around the world every day and enjoyed in 70 countries

Tetley Black tea Tetley Flavoured Teas Tetley Green Tea Tetley Rooibos Tetley Fruit and Herbal Tetley Infusions Tetley Cold Tetley Chai Latte

Source: http://www.tataglobalbeverages.com/our-brands/brands-overview/brand-detail?brandid=fde0caaa-acb6-4094-ad53-0481902a6d19

Key players

Source: Euromonitor International Report, 2010

Why The merger (Tetley Story)

Rapidly Shrinking European market Changing customer preferences Increased competition from Brooke bond Tetley's profits fell to £4.98m in March 1999, compared with £35.7m

in the previous year Increasing debts

Why the Merger (Tata Tea Story)

Tea prices in India falling  Loose, unbranded tea is muscling out the branded players Stagnating tea consumption in India Low market Share ( 40% Unilever , 18% Tata , yr 2000) Strengthened competition from HLL post Lipton-Brooke bond merger Need for increase in Global Presence

Tetley Global Presence (Yr. 2000)

 In the UK and Canada, Tetley already leads the market with 29.4 per cent and 43.4 per cent shares, respectively

The fastest-growing tea brand In Australia 11.5 per cent of the black tea bag market In the US Strong distribution network in Middle East, Africa, and Russia. Recent Entrant into big tea-consuming markets like Pakistan and

Bangladesh

Rationale behind the Merger

MINDSHARE:Tata tea had no marketing expertise, whereas Tetley is the most easily recalled tea brand in the world, known for its innovation, whether in packaging or marketing the brand. 

NEW PRODUCTS Tetley would give Tata Tea access to speciality products such as: flavoured teas, herbal teas, organic teas, and decaffeinated teas.

NEW MARKETSTata Tea could help Tetley to launch the brand in India, to enter the premium segment, as well as in the Middle East and Russia, traditional bastions of Tata Tea. 

GLOBAL PRESENCE Tetley had the second largest branded tea portfolio in the world and a foothold in 35 countries

Synergies

One of Tata tea's strength is its many estates. Tata tea could help Tetley in his requirement of Indian teas. (More than 8,000,000 kg of Indian teas in a year)

Tetley also bought teas worldwide, blend and package them, which is a very special skill that Tetley possessed. It sourced teas from various countries and its expertise in this area was unrivalled.

Tetley gets access to Tata Tea’s gardens and production base and the latter gets Tetley’s premium brands and global distribution network

Tata gets access to Tetley ‘s Standardized management practices, quality performance norms and customer focus practices

Tetley could leverage Tata’s R&D and expertise in tea cultivation and manufacturing

Tata could benefit from Tetley’s extremely good logistics management skills

Challenges

Acquirer company in this case was smaller than the company it acquired

A cross border acquisition, it was bound to have its fair share of cultural problems

A heavily ring-fenced, leveraged acquisition, banks had a say in what was being done

Facts about the Acquisition The first ever leveraged buy-out (LBO),

largest cross-border acquisition by any Indian company

Tata Tea's strategy of pushing for aggressive growth and worldwide expansion

Tata Tea – $114(570 Cr) Million Company Tetley - $415(2250 Cr) Million Company

The acquisition of Tetley made Tata Tea the second biggest tea company in the world with the expected combined turnover worth Rs. 2,800 – 2,900 crore. (The first being Unilever, owner of Brooke Bond and Lipton)

Structure of the Deal

Leverage Buy-Out Acquisition of a company through a combination of equity and

debt Jerome Kohlberg, Jr. and Henry Kravis coined the term Formation of SPV Stock Purchase Format Asset Purchase Format Management Buyout Future Cash Flows or the Assets of the company as security Increased Debt Equity ratio

Disadvantages

 Financial distress – uncertainties

Increased fixed costs associated with debt financing can worn out the effect in case of downturn in business cycles

In Leveraged acquisition, banks have a say in what is being done

Advantages

Heavy Interest & principal forces management to improve performance & operating efficiencies such as

Cost improvisation – cost reduction Divesting non-core business Investing in technological upgrades Significant reduction in agency cost Tax shield

Before Merger

TATA TEA TETLEY

Turnover $114million(570 Cr) $415 million (2250 Cr)

operating profit $36 million(180 Cr) $42.6 million(213Cr)

Employees 59740 110

Tea Estates 54 0

Key Market India Britain, Canada, Australia, US

Merger Implications

Merger Implications Tata tea acquisition Tetley Pre acquisition Consolidated Post acquisition

Position in the value chain

40% of turnover came from packed tea bags

100% turnover came from packed tea bags

Company has moved up the value chain 84% of turnover came from packed tea bags

Increased outsourcing

produced 95% of its tea requirements in house

outsourced entire requirement from 35 different countries with an estimated procurement of 3 million kgs of tea every week

today 70% of TATA Tea requirement is outsources from 20 different countries thus reducing the risk associated with fluctuations in production arising out of various factors.

Predictable margins

Margins highly correlated with tea cycle

Margins inversely correlated to tea cycle Margins hedged

Global footprintDomestic operations

UK and USA account for bulk sales Global presence

Sales of Tata Tea

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

500

1000

1500

2000

2500

Sales of Tata Tea

Axis Title

PAT of Tata Tea

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

50

100

150

200

250

300

350

400

450

PAT of Tata Tea

Axis Title

Sales figure are in

Financials ( Tetley)

TETLEY FINANCIAL AFTER ACQUISITION

(Rs. Crore)

  FY2001 FY2002 FY2003

Debt equity ratio 03:01 1.7:1 1.3:1

EBIDT17981.445 236.712 344.494

Sales 16313.11 1793.74 2008.18

Profit after Tax -157.788 32.689 64.63

Stock Market Reaction Stock Market Reaction

Current Scenario – Peer Comparison

Post Merger Tata and Tetley formed several groups – tea procurement group,

geographic expansion group, R&D sharing Legal merger took time as Tetley D/E ratio was too high and it needed

to come down to 1:1 Initial Cultural differences As of FY12, Tetley brand contributes to 40% of Tata Global Beverages

revenue As of FY12, Tetley is the only brand under Tata Global Beverages

stable with presence across the globe

Post Merger

Acquired other brands like Good Earth, Jemca, Joekels Tea, Vitax, Grand and Eight O'Clock Coffees

Looking for Organic growth in India No buying of regional brands in India Focus on Mid and premium end of the tea category Luxury brand ‘ Tata Veda ‘ launched (7000/kg) in 2012 Plans of another acquisition of Global Tea brand in next two years Starbucks is also selling the Tata Tazo brand of tea, a brand created

by the Tata brand and the Tazo brand of Starbucks