Tatas buy fancy watermaker for $677m

Abhineet Kumar & Rabin Ghosh

MUMBAI: In what is the largest Indian acquisition abroad so far, Tata Sons and Tata Tea have signed a definitive agreement to acquire a 30% stake in US-based enhanced water maker Glaceau, with an investment of $677 million.

The stake is being bought in Energy Brands Inc, which owns Glaceau, from US-based leading private equity firm TSG Consumer Partners.

Glaceau products fall in the health and wellness category and its brands include nutrient-enhanced Vitaminwater, electrolyte-enhanced Smartwater and flavour-enhanced Fruitwater.

Energy Brands sells five million bottles of Glaceau water products daily, and the investment brings the Tata group in direct competition with PepsiCo Inc, which is the US leader in non-soda sales, with 49% of the market. Arch rival Coca-Cola has a 25% share.

To finance the deal, Tata Tea and Tata Sons will provide $192 million and $58 million, respectively (totalling $250 million) for the stake acquisition to Tata Tea GB, the company’s UK arm. Tata Tea GB will, in turn, cobble up the rest by raising debt of roughly $477 million. So, effectively TataTea GB will be making the investment and the transaction will not be reflected in the consolidated revenues of Tata Tea. There could, however, be indirect synergies, since some of Glaceau’s beverages use tea as base.

“The acquisition provides Tata Tea an opportunity to be present in the unfolding crossover space in the beverages market. We believe that this acquisition will help us grow
our business in North America,” says RK Krishna Kumar, vice-chairman of Tata Tea and director of Tata Sons.

“Our fundamental business is beverages and we’re actually going for a share of the bladder,” said Krishna Kumar, rather colourfully, at an analyst conference late on Wednesday.

Energy Brands has been doubling revenues in the last two years.

It clocked  revenues of  $355 million dollars last year and is expected to report  revenues of  $700 million this year.

So why is the venture capital firm TSG Consumer Partners selling out?

“They are closing the fund which was formed at the inception of Energy Brands Inc and starting another - just like any other venture fund. This gave us the window of opportunity to move in,” said Krishna Kumar.

For its money, the Tata group gets to nominate a non-executive chairman of the company and also two board slots out of five.

So what’s in it for Tata Tea shareholders?

Krishna Kumar says there’s nothing directly for them in the immediate future. “In three years, revenues will start kicking in through dividends to Tata Tea GB, which will percolate down to Tata Tea here,” he said.

Krishna Kumar also said Energy Brands may go for an IPO after two years.

While the Tatas get 30% in Energy Brands, effective control remains with the promoters. Company founder J Darius Bikoff, his family, associates and distributors hold about 50%, while the balance 20% is held by venture capital funds.

“The transaction ensures that Glaceau continues to meet the explosive demand for its Vitaminwater brand, fuelled by America’s health and wellness revolution,” the Tata Group said.

Energy Brands scored a small win against Pepsi last May when the cola giant said it would change the label of its Lifewater nutrient drink. This ended a lawsuit by Energy Brands that had accused Pepsi of producing a “slavish knockoff’’ of Glaceau Vitaminwater.

The Tata acquisition seeks to take advantage of changing consumer trends. While US sales of soda fell for the first time in at least two decades last year, unit sales of non-carbonated drinks such as flavoured water and sports drinks rose 14% to $18 billion, according to industry journal Beverage Digest.

The global market for packaged black tea, where Tata Tea is mainly present, is nearing stagnation and is growing at a mere 3%.

This has prompted the company to bring down its dependence on its core products. The company has identified speciality tea and ready-to-drink categories as new growth drivers.

Having embraced the inorganic route to growth, Tata Tea has shortlisted 20 to 30 small and mid-sized companies for its global acquisition spree.

It has already made three acquisitions in the past one year.

It acquired Czech brewer Jemca two months ago and Good Earth USA last October with an estimated investment of Rs 126 crore. Besides, it also acquired Eight O’ Clock coffee for $ 109 million in the US.

The company’s cash from operations in the financial year 2006 is as high as Rs 302.5 crore.

In the three-year period 2005-08, its cash flows are estimated at a combined Rs 1,017.6 crore, according to SSKI research.

The Tata group had US revenues of more than $1.97 billion and global revenues of $22 billion in 2005-06.

As a part of its global strategy, Tata Tetley has been growing its North America business that includes Tetley Tea, Good Earth Teas and Eight O’Clock Coffee rapidly.