Tata Tea announces $677 million US acquisition

Tata Tea to acquire 30% of America's Energy Brands for $677 million in the largest cross-border acquisition by an Indian private sector company to date.
IndiaÆs Tata Tea has announced it is acquiring 30% of Energy Brands Inc, USA for $677 million from private equity firm, TSG Consumer Partners. This is the largest cross-border acquisition by an Indian private sector company to date. Tata Tea will acquire the stake alongwith its promoter, Tata Sons. Of the $677 million Tata Tea will invest $192 million, Tata Sons $58 million and the balance will be raised as debt by Tata Tea GB (the investment vehicle for all overseas acquisitions of Tata Tea, including Tetley).

Energy Brands was formed in 1996 and introduced its main brand, the Glaceau brand of enhanced water beverages in 2000. Glaceau has 3 main product lines - Vitaminwater, Fruitwater and Smartwater (ôGlaceau). It was launched in New York, where Energy Brands is based, but distribution was quickly extended to LA, Miami, San Francisco and Chicago following a good response. It has registered 200% CAGR since launch. Currently it is available in 48 states. Earlier this year Pepsi had unsuccessfully tried to acquire the Glaceau brand. Pepsi's Propel fitness water has an estimated 35.7% market share making it the leader in the category while Glaceau at number two has a market share estimated at 16.8%. However, industry sources say Glaceau has been showing much higher growth.

For the purpose of the investment Energy Brands is valued at $2.2 billion. Tata Tea said Energy Brands would register revenues estimated at $350 million this fiscal year and $700 million in the next fiscal year. An Energy Brands spokesperson said it expects the companyÆs firm value to increase from $2.2 billion to $10.2 billion over the next 3-5 years.

The stake is being acquired from private equity fund, TSG Consumer Partners ("TSG"). TSG was founded in 1987 and formerly known as the Shansby Group. It has a focus on middle-market branded consumer companies. One of its well publicised recent divestitures was the sale of the Mauna Loa Macadamia Nut Corp to Hershey Foods for $130 million in December, 2004. TSG acquired the stake in Energy Brands in April 2003 for an undisclosed amount. Energy Brands said at the time the investment would be used to accelerate the growth of Glaceau.

It is fitting that Tata Tea, whose acquisition of Tetley for ú271 million ($431.3 million) in 1999 was the largest cross-border acquisition by an Indian company at the time, and that this should once again be the largest deal. The Tetley acquisition bore some similarity to this one as Tetley was also acquired from private equity investors. Tata TeaÆs earlier acquisitions have mostly been in its core areas of tea and coffee.

In an update on Tata Tea issued on August 24, ICICI Securities reiterated a buy on the company commenting ôthe investment by Tata Tea in Energy Brands has come as a pleasant surprise and clearly stands out as being different from its earlier acquisitions. We believe there are limited direct synergistic benefits and the investment appears to be more of private equity investment in nature and would have an adverse impact on Tata TeaÆs profits in the short term. Given the exponential growth of Energy Brands in the fast-growing enhanced water category in the US we believe there is potential for significant value to be generated by Energy Brands. The deal further enhances the attractiveness of Tata Tea.ö

Rabobank International was the exclusive financial advisor on the transaction.

Stock markets seem to be more concerned about the short term fallout as the share price reacted negatively moving down about 2% from a Rs850 ($18.47) opening to close at Rs832 on August 24.
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