In a widely anticipated move, Tata Consumer Products Ltd (TCPL) has announced the reorganisation of its business, which involves the merger of Tata Coffee’s plantation business into Tata Consumer Products Foods and Beverages (a wholly owned subsidiary of TCPL) and the remaining extraction and branded coffee business into TCPL itself.
The merger has been given a thumbs up by analysts, who feel the merger will bring efficiencies in costs by creating a cleaner and simpler structure.
“The combined entity will house the entire bouquet of strong consumer brands, such as Tata Tea, Tetley, Eight O’clock, Tata Coffee, Tata Salt and Tata Sampann, etc., creating an operational synergy in terms of common customers and sales and supply chain opportunities through enhanced geographical reach,” analysts at Motilal Oswal Institutional Equities said in a note.
The company also plans to acquire a 10.5 percent stake in its UK subsidiary Tata Consumer Products UK Group by issuing 7.4 million equity shares (Rs 570 crore on a preferential basis at a price of Rs 765 per share.)
Both the transactions, however, are subject to regulatory approval and according to analysts the process will take at least a year.
The Tata Group in 2020 had merged Tata Global Beverages and Tata Chemicals’ consumer businesses to form TCPL, bringing its FMCG businesses under one umbrella and forming a consumer-focused company.
Why is TCPL merging Tata Coffee with itself?
According to the company, the merger of Tata Coffee’s various business with TCPL and its subsidiary Tata Consumer Products Foods and Beverages will enable efficient consolidation of ownership interests in the international branded business owned by TCPL and Tata Coffee, which will result in cost benefits, and higher operating and other efficiencies.
It will also create a dedicated plantation vertical with focused attention on the business, which will enable increased efficiencies and synergies and better resource allocation, resulting in higher shareholder value.
“The profile, operations, management risk and return associated with the plantation business is distinct from that of the remaining business and, therefore, the scheme would lead to sharper focus on both the businesses,” Yes Securities said in a note.
Overall, the consolidation will collapse the complex structure of about 45 legal entities to about 23 and help bring about tax efficiencies. Analysts expect the company to further reorganise its businesses as it has 45 global subsidiaries and some joint ventures and associate firms.
How will consolidation of Tata Consumer Products UK help?
The acquisition of the stake in TCP UK will give TCPL 100 percent ownership in all core businesses of the company and enable efficient reorganisation of the international businesses, Motilal Oswal said in its report.
Tata Consumer Products UK owns the international tea and coffee business of TCPL. The company is involved in processing, marketing and distributing tea and coffee and besides the UK, has operations in the US, Canada, Australia and Poland, as well as joint ventures in South Africa and Bangladesh.
According to Yes Securities, the company clocked revenues of 238 million pounds in FY19, 237 million pounds in FY20 and 227 million pounds in FY21.
What will the impact be on shareholders?
A note by ICICI Securities says the transactions, along with future reorganisation, will help unlock value for both TCPL and Tata Coffee shareholders who are expected to benefit from the resulting efficiencies and operational, administrative and financial synergies. The brokerage is also of view that a simplified corporate structure may allow the company to unlock some of its low-growth or low-profit subsidiaries.
Analysts believe the new structure should add 5-10 percent to overall company profits from FY25 onwards.
However, Tata Coffee shareholders stand to benefit more with the swap ratio implying a 14 percent premium to the current market price, said the Yes Securities note.
The shareholders of Tata Coffee will be allotted shares of TCPL and thereby benefit from being part of a larger branded consumer products business with multiple growth avenues and at the same time, will continue to participate in the plantation business.
TCPL shareholders, too, are set to gain out of the merger as analysts expect the earnings per share (EPS) to edge up even after the dilution. “Post both the transactions, the minority interest will be negligible and it will add to PAT (profit after tax) for the shareholders. We also note the number of shares will increase to 953 million after issuing shares to minority shareholders of Tata Coffee and to minority shareholders of Tata Consumer Products UK Group Ltd,” ICICI Securities said in its note.“Even after considering dilution (31.3 million additional shares, or 3.4 percent dilution), EPS may inch up by 5-10 percent,” it added.