INDIA BUSINESS WORLD - AUGUST 2006
THE MONTH THAT WAS...

TATAS ACQUIRE 30% IN EBI FOR $677 MILLION

TATA Tea, India 's second-largest tea maker, on Wednesday announced a bold move to expand its overseas operations with the largest foreign equity investment by a private Indian company.

The Kolkata-based maker of Tata Tea, Agni, Tetley and Gemini brands, said it will pay about $677 million to buy 30% of US-based Energy Brands Inc (EBI), which sells a range of nutrient-rich and flavoured water brands. The deal values EBI at $2.3 billion or 6.4 times its sales, and edges out Dr Reddy's $570-million buyout of Germany 's betapharm. Through this deal, Tata Tea, which bought another US brand Eight O' Clock Coffee some time ago, hopes to cash in on the fast growth of the health-based, noncarbonated beverage market in the US .

“We are looking at growth from the beverages market. The black tea market is not growing and we are looking at driving future growth through other options in the category. We are looking at a strong partnership with Glaceau initially, which will be developed further over a period of time,” said Krishna Kumar, vice-chairman of Tata Tea.

EBI, commonly known as Glaceau, markets brands such as Vitaminwater, Smartwater, Fruitwater etc. It had a turnover of $355 million in 2005, which is expected to doubled to $700 million this year. The Glaceau line of bottled waters, which are marketed as being enhanced with electrolytes and other nutrients, sell at around $1.5 for a 20-ounce bottle in health food stores in more than 40 states. Energy Brands is partially owned by president J Darius Bikoff, who founded the company in 1996. LV Capital, an investment arm of luxury goods maker LVMH, and the Shansby Group also owns stakes in the company.

The deal expands Tata Tea's foothold in the American market and is aimed at consolidating the company's position in the global beverage industry. The buyout of Tetley for £271 million in 2000 gave the company a major presence in the UK and US. This was followed by the June 2006 purchase of Eight O' Clock Coffee for about $220 million. Health-based water beverages are a fast growing category in the US as concerns over the impact of carbonated drinks such as Pepsi and Coca-Cola force consumers to look at alternatives. A look at Tata Tea's financials shows that the deal may not be a heavy burden. The firm's consolidated debt-equity ratio at the end of March 2006 was 1:1, and it generated Rs 300 crore net cash from operating activities. But top industry analysts sounded sceptical saying $677 million for a 30% stake makes it a very expensive deal. "Branded water segment is clearly a growing market globally. The question is can the company leverage the investment? Does the company have the option to buy out the rest of the stake in the long run? How much controlling rights would the management have with a 30% stake," said an analyst in a leading foreign brokerage firm. The promoters and associates of EBI hold 50%. Venture capitalists such as LV Capital have sold 30% to Tata Tea, but continue to hold about 20%. Tata Tea also has the right to appoint the chairman and two directors on EBI's board.

Commenting on the possibility of picking up further stake in EBI, top company officials said it may consider an IPO option in the next couple of years.