Tata Tea’s decision to sell its 25% stake in Energy Brands Inc USA to Coca-Cola Company Inc USA for $1 billion means a record return of 77% in just seven months.
MUMBAI: Tata Tea’s decision to sell its 25% stake in Energy Brands Inc USA to Coca-Cola Company Inc USA for $1 billion means a record return of 77% in just seven months. That’s considering it had acquired the stake in October 2006 for $677 million (price for 30% stake, including 5% bought by Tata Sons) through subsidiary Tata Tea (GB) Investments Ltd, UK. The cost of Tata Tea’s 25% stake in Energy Brands was $564.17 million, including debt of about $400 million raised by Tata Tea (GB). But, what does this deal with Coca Cola mean for Tata Tea shareholders?
On one hand, given that the enhanced water business of Energy Brands was growing rapidly, the value of the business was growing at a fast pace, too — this return on the deal itself is proof of the pudding with regards value creation.
Additionally, Energy Brands was also seen as providing Tata Tea a platform to increase it presence in USA. But, with this sale deal, these opportunities are seen as lost, at least for the time being.
On the other side, the sale will lead to an inflow of $1 billion (or about Rs 4,100 crore), which will come to Tata Tea by end-October 2007 - hence, the profit of $435 million may be treated as a long-term capital gain. But, the same also translates into Rs 663 per share, on fully diluted equity capital of Rs 61.84 crore (post-conversion of warrants allotted to Tata Sons). With this money, the company said it may pay off the entire debt of Tetley, UK, which currently stands at $666 million.
The debt payment assumes significance as The Tata Tea group had also acquired Eight O’Clock Coffee, Jemca, Joekels and Good Earth Tea in the last 24 months at a combined cost of over $150 million. All this had led to its total debt rising substantially and thus, impacting profitability. Its consolidated interest costs (only on borrowings for acquisition) for three months ended December 2006 increased to Rs 66.51 crore as compared to Rs 1.44 crore for the quarter ended December 2005.
For the nine months ended December 2006, the same stood at Rs 89.47 crore; another Rs 76.06 crore was interest pertaining to routine business; total interest costs at Rs 165.53 crore - or about Rs 36 per share on annualised basis. Understandably, paying off its debt would lead to a sizeable jump in earnings.
With the balance money, the company said it will also look at acquisitions as and when there is opportunity. Meanwhile, it also continues to maintain status quo with regards achieving Rs 7,000 crore in revenues by 2010, which translates into a compounded annual growth of about 22%.
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