Tata's Tetley - Brewing the Perfect Tea
Anjal Agrawal
M&A and Strategy at Virtusa || Ex-IB at Nomura (PPO) || IIM Shillong (17-19) || CA || Yes Bank FutureReady Scholar || Ex-JPM || Ex-Baker Tilly DHC || #ProudSINKWAD
"You are not safe at home unless you are globally competitive" – Anand Mahindra (Chairperson of Mahindra Group)
In the late 1990s, Tetley was the world's second-largest tea brand after Lipton. Tetley is an England-based company, a tea brand with a history of 100+ years. Before becoming the world's second-largest brand, Tetley’s ownership exchanged many hands. In 1973, it was acquired by J. Lyons and Co. to form Lyons-Tetley; and in 1995, Lyons, along with Tetley became part of Allied Domecq.
Lipton, on the other hand, was a Unilever brand. Unilever with very few gardens of their own, was buying their bulk tea in auctions and selling them in pouches at huge profits. Can you guess who was selling bulk tea to Unilever? Tata. Tata Tea was, and still is, the largest tea grower in the world.
Tata Tea realised that despite having over 50 tea gardens across India, they didn't have a brand. And what came next was the largest cross-border acquisition of an international brand by an Indian company; a first-of-its-kind acquisition as Tata acquired Tetley at 4x of its net worth.
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History of Tata Tea
In 1962, Tata Tea started as Tata Finlay, a JV between the Tata Sons and James Finlay. In 1983, James Finlay was bought out by Tata Sons, and the company was renamed “Tata Tea”. With 53 estates and over 26,000 hectares under cultivation, Tata Tea became the largest tea grower in the world.
In 1989, Tata Tea bought a 52% stake in Karnataka-based Consolidated Coffee Limited – the largest coffee plantation in Asia, to expand its coffee business. At the beginning of the 1990s, the company decided to focus on branded products instead of commodity sales. It was at this point that the need for strong branding, became critical to guard Tata Tea from any fluctuations in the commodity market and to ensure its sustained growth.
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Tata Tea <> Tetley – the JV
Tata Tea’s first association with the Tetley brand was in 1992 through a JV with Lyons Tetley. Tetley was impressed with the quality of tea it had purchased from Florida-based Tata Tea Inc., a fully-owned Tata subsidiary set up in 1984. Tata Tea was keen to agree to supply instant tea to Tetley’s operations in the US. The new company Tata Tetley based in Cochin (now Kochi), manufactured teabags for export to Eastern European and Middle Eastern markets.
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The Audacious Acquisition of a Global Shark by an Indian Minnow
When the owners of Tetley decided to sell their brands, Tatas immediately grabbed the opportunity as it fit in very well with their long-term strategy. The Tatas beat other bidders such as?Nestle?and paid an acquisition price for the worldwide Tetley Tea business of ￡271m in 2000. The acquisition of Tetley leapfrogged Tata Tea into a position where it could rub shoulders with global behemoths like Unilever and Lawrie. It made Tata Tea the second biggest tea company in the world.
Expected Synergies –
Building brands in developed countries was an enormously complex and cost-intensive exercise, especially for a company from the developing world. The acquisition gave Tata Tea ownership of an established international brand to compete with HUL in India.
First-of-its-kind Transaction: The largest cross-border acquisition of an international brand by India Inc. and the first instance of an Indian co. resorting to an LBO to acquire an entity much larger in size
How did Tata Tea acquire the company that was 4x of its net worth? Leveraged Buyout.
The SPV was capitalized at ￡70m, of which Tata Tea contributed ￡60m; this included ￡45m raised through a GDR issue. The US subsidiary of the company, Tata Tea Inc. had contributed the balance of ￡10m. This equity was leveraged to raise a debt of ￡235m (3.36x equity). The structure comprised 4 tranches (A, B, C and D) whose tenure varied from 7 years to 9.5 years, with a coupon rate of ~11% which was 424 basis points above LIBOR. The funds came from institutional investors (including the vendor institutions Mezzanine Finance, arranged by Intermediate Capital Group) and senior debt facilities arranged and underwritten by Rabobank International.
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The Rough Aftermath: There was an array of vertical integration synergies, but the leveraged buyout structure, cultural differences, and lack of planning meant the realisation of the synergies was delayed. To add fuel to the existing fire, the production of tea in India registered a decline of 3% over 2001 owing to adverse agro-climatic conditions and the increased competition from substitute products. In conclusion, the Tetley acquisition was perceived negatively by the market for the next three years.
However, Tata Tea carefully chose an approach to integrate the processes and explore synergies between the two companies with the absence of any time pressures, while maintaining operational independence. The emphasis throughout was on revenue growth and not on cost reduction.
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Against All Odds – Vision of Tata Tea
Ratan Tata's vision of Tata Tea as a global beverage company has been realised over the years. What used to be Tata Tea has now morphed into?Tata Consumer Products, one of India's most exciting consumption plays. Today the company with a global management structure encompasses all acquired companies and joint ventures with popular beverage brands, including Tetley, Tata Tea, Tata Coffee, Eight O'Clock Coffee, Himalaya, and many others.
In one of our previous case studies (read here), we looked at the JV between Tata Consumer Products and Starbucks, the largest coffeehouse company globally in 2012. Since then, the brand has grown from strength to strength.
Tata Consumer Products has become the most globalised company in the Tata Group with 70% of its revenues coming from international operations, and more people around the world drinking Tata Tea than using Tata vehicles, Tata steel, or even TCS software!
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Here's a look at how the company has performed on the stock market:
Summarising a few other beverages acquisitions that Tata Consumer Products made along the way –
Also, looking at some failed attempts for acquisition activity –
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This concludes the first case study in the series “Tata Group – The Globally Local M&A strategy.” Tetley is one of the biggest acquisitions done by Tata Tea to date. From the cast study above, it's clear that anyone who bet on Tata Tea's global ambitions did well. We will also look at the food acquisitions of Tata Consumer Products in a separate case study.
In the next case study, we will look at the distressed sale of Air India to the Tata Group, under the Tata Tourism and Travel division, which also houses Taj Hotels, Vivanta Hotels, Ginger Hotels, Vistara Airlines and AirAsia Airlines. Until then, thank you for your time. Please post your feedback and comments.
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Please find below all the information sources that have been instrumental to the above article, along with some additional reading materials. Gratitude to all the creators –
1.????? Mergermarkets
12.?? https://indianexpress.com/article/business/companies/tata-calls-off-plan-to-acquire-bisleri-8504053/
This was a really fun read! Very well researched, thank you Anjal Agrawal for sharing this