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March 7, 2000

BUDGET 99-00

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The Rediff Business Special/Nikhil Faleiro

Tatas hurtle back into reckoning for Corporate India's leadership

The Tata LogoTetley logo Some call it another step toward ruling the world. For the House of Tatas, India's largest and oldest corporate conglomerate, the takeover of the Tetley Group, Britain's oldest tea making company, on February 27, 2000 will remain an historic event. Never before has an Indian company acquired a foreign company at what for Indian companies is an astronomical sum of Rs 4.87 billion.

The mega-deal was followed up with another major announcement within three days: the Tatas were forging an alliance with none other than the Birlas, rather the Birla AT & T of the A V Birla Group -- the other old-time mainstay of Corporate India. The idea is to form a consolidated company that would administer cellular services in Maharashtra, Goa and Gujarat.

And today comes the news that the Taj Group of Hotels run by the Tatas is going global and eyeing acquisitions abroad, including in Manhattan, New York. Recently, the Taj group was in the news for acquiring prime hospitality properties in Pune and Hyderabad in India.

For long, the industrial house has been perceived as a behemoth that has failed to keep pace with changing times and allowed upstarts to overtake it in corporate sweepstakes. However, within a span of one week, the Tata Group has re-emerged into reckoning for the unofficial title of the leader of Corporate India.

For the Tatas, the Tetley acquisition was a sweet success. The battle for Tetley, so to say, has been on for the last five years. The Tatas want a foothold in the international beverages market. They had been scouting around for plantations in Kenya in early 1998 when the word came through that Tetley was up for sale. Although they had tried earlier in 1995, Tatas had failed in their attempt because the price they had offered (pound sterling 180 million) was not to the Tetley management's liking.

This time they did not want to take any chances. Foreign competitors, such as Sara Lee of the US and Nestle SA of Switzerland, were zeroing on to Tetley and the Tatas also had to seek governmental approval which was a major hindrance. That was not all. The Tatas had to raise the necessary finance. Above all, Tetley had to agree to the Tatas' bid because this was not the first time that the Tatas had bid for the UK company.

However, after a year of negotiations, months of talks and due diligence exercises, Tata Tea finally achieved their objective: a mutual agreement was signed between the two, whereby Tata Tea would acquire a major stake in the UK-based company for a whopping pound sterling 270 million (Rs 18.90 billion). For the first time ever, an Indian company had staved off foreign competition to gain control of a foreign brand.

Ratan Tata, chairman of the Tata Group, said, ``In a world where brand strength is a crucial business success factor, the acquisition of the Tetley brand will provide Tata Tea with a valuable and worthwhile global opportunity.''

However, what was even more astonishing was that a David had attempted to take on a Goliath and had won. Tata Tea, with a turnover of Rs 8.847 billion and profit after tax of Rs 1.021 billion for 1998-99 was minuscule compared to Tetley UK's financials. A private company, Tetley's figures are hard to come by but analysts say Tetley clocked an annual turnover of Rs 22.40 billion and profits of about Rs 1.82 billion in 1998.

For Tata Tea, the advantages of acquiring this UK-based company are immense. For one, the combined assets base will swell to Rs 31.24 billion. For another, by acquiring an international brand, the Tatas house will catapult itself into the global arena and lock horns with Dutch-Anglo giant Unilever in the tea market.

As Krishna Kumar, vice-chairman, Tata Tea, said, ``By acquiring Tetley, we will be propelled into second position (in the world tea market), which we can leverage to our advantage.''

By selling tea in 44 countries, and even in India where Tetley has an export-oriented joint venture with Tata Tea, Tetley is the world's second largest tea brand after Lipton (a Unilever brand). It is also UK's top tea-bag brand with a market share of 22 per cent, top brand in Canada with a market-share of 38 per cent and second in Australia with 18 per cent. But it is these additional benefits that Tetley brings which will benefit Tata Tea in the long run.

  • Tetley buys over 2 million pounds of tea every week at the world's major auctions such as Calcutta, Chittagong, Colombo and Mombassa. These teas come from 35 countries and from 10,000 tea estates around the globe. For Tata Tea, such a major presence in the global market could augur well, giving a wide base to churn out a variety of products.
  • At its headquarters at Greenford, UK, a few miles from London, Tetley turns out a variety of tea-bags. With its good track record of innovation, Tata Tea would be able to increase its market-share through a variety of innovations in which Tetley is known for, such as the double chamber bag, and the long tea bag.
  • Tetley also produces flavoured teas, herbal teas and iced tea which will enhance Tata Tea's product range.

The Tetley acquisition will open several windows of opportunity as well as protect its flanks from any outside intrusion. According to Krishna Kumar, ``The Indian market will be open to imports in a few years and we have to be ready for that invasion.''

With rivals such as HLL gearing up to enter with a variety of international brands and flavours, Tata Tea had to do something fast to protect its market-share. And Tetley was the answer as Tata Tea can draw on Tetley's expertise and infrastructure in sourcing teas worldwide for the Indian market.

The other factor is that Indian tea companies have in recent years been slowly shifting from selling loose tea to branding and packaging teas. Virtually every tea major hawks branded products. With HLL doing it, Tata Tea's logic was that when the market will be opened to foreign competition, Tata Tea would need a global brand which Tetley has.

Atul Rastogi, former analyst with UTI Securities, says, ``Tata Tea's products are in the medium range. What it needed was a range of premium tea brands which it got with Tetley."

In addition, Tata Tea will be using the British firm as a vehicle to push its packet teas in the developing worlds, leaving Tetley to dominate the developed economies which have a market for its tea-bags. The added advantage is that India's Tata brand will be entering millions of households around the globe. Another possibility is that the Tatas would launch Tetley globally in the ready-to-drink or RTD market, which, according to industry sources, is a market waiting to explode.

The RTD market is estimated at over $ 3 billion in the USA, in which companies such as Pepsi, Coca-Cola, Nestle and Snapple have a presence. Tetley's acquisition will allow the Tatas to look at the RTD market without the headaches of distribution, promotion and product innovation.

Vasudeo Joshi, head of research, HSBC, says, ``The value addition is tremendous and so a whole new market awaits Tata Tea. Finally, the acquisition of Tetley means that Tata Tea would have to upgrade their quality of tea to international standards if it had to market its products under the Tetley brand.''

For Tata Tea, apart from getting a major foothold in the international arena, this is the first step for its proposed plans to become a major fast moving consumer goods major like HLL. And with Tata Tea looking at forays into marketing edible oils, flour and Tata salt, plans have been drawn up by the Tata Strategic Management Group to study the feasibility moves into this sector in a big way.

Admitting this, Krishna Kumar says, ``We want to emerge as a food FMCG major and Tetley is the beginning of the process.'' For Corporate India, the acquisition of Tetley by the Tatas is an indication that Indian companies do have the financial and marketing muscle to take over foreign companies. Accustomed to being at the receiving end of foreign MNCs coming in and using their financial muscle to buyout Indian companies, corporate chieftains see this move by the Tatas as an indication that Indian companies can straddle the globe.

All that is needed is a strong brand, a good corporate history and a clear perspective of the future to convince the foreign financial institutions that the Indian companies' intentions are clear. As a senior manager at a blue chip put it, ``They used to come and conquer us. Now we are showing them that we can conquer too. The world can soon be at our feet. The Tata deal is the sweetest cup that Corporate India will drink."

The Aditya Birla Group logoThe Tata LogoAT&T logo The Tetley deal was not all for the Tatas. Three days later, another major announcement promised a major shakeout in the cellular telephone industry. Tata Communications has operations in Andhra Pradesh. Birla AT&T Communications has operations in Gujarat, Goa and Maharashtra minus Bombay. Their properties will now be owned by a joint venture company held equally by the Tatas, the Aditya Birla group and AT&T. The new corporate entity with a subscriber base of 300,000, will cover 25 per cent of the cellular industry. Ratan Tata, chairman, the Tata Group, said, ``By this consolidation, we intend to be a major player.''

In an industry that is witnessing many closures and loss-making companies, the strategic alliance between the three is the first step to dictate terms in an industry that is still trying to grow. A senior official at a competitor to Tata-Birla-AT&T combine said, ``The merger of these three entities will have a considerable impact on the market. All three have a good brand image and a clean image. The market will tilt in their favour.''

Ratan Tata, chairman, the Tata group Kumar Mangalam Birla, chairman, the Aditya Birla Group, said, ``It will offer a platform for growth of the sector that is rapidly consolidating.'' But for the Tatas, especially Ratan Tata, the last week has been a sweet one. For long, the group has been at the receiving end of government's or media's rough treatment, be it in the private airline project involving Singapore Airlines, or the private airport project in Bangalore, or the Indica small car project. Suddenly, the new-found aggression triggered by the clutch of deals has erased the stains; the sun is shining again on the group. As an analyst said, ``Ratan Tata has been shaken but not stirred. Now he will stir the economy.''


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