A blessing in disguise
Tata Tea’s equity investment for acquiring US-based water company Energy Brands Inc is Rs 890 crore. But the funding structure it has announced will see its promoters, the Tata Group, cough up a large share of the amount.
By Johan Mundat and Ravi Ananthanarayanan, TNN |
Tata Tea’s equity investment for acquiring US-based water company Energy Brands Inc is Rs 890 crore. But the funding structure it has announced will see its promoters, the Tata Group, cough up a large share of the amount. Of the total equity requirement of Rs 1,160 crore, Tata Sons will be investing Rs 270 crore directly. Of the remaining Rs 890 crore, Tata Sons will again invest Rs 420-460 crore in Tata Tea through a preferential allotment. The rest will be raised by Tata Tea by selling its investments and through internal accruals. Now, Tata Tea’s cash generated from operating activities was Rs 421 crore during FY06.
Of its investment portfolio of Rs 1,106 crore, the portion that is quoted investments, and hence liquid, is Rs 392.2 crore, of which Rs 252 crore is in mutual funds. The total market value of its quoted investments is Rs 1,227 crore. While investments in mutual funds are liquid, most of the large investments are strategic in nature — in group companies like Tata Chemicals, Rallis and Tata Motors. These cannot be liquidated easily.
Thus, Tata Tea could have contributed more as its equity contribution, but it may have decided to conserve funds for other acquisitions. Moreover, like some other Tata group companies, the promoters’ stake in Tata Tea too is relatively low at 28.9%. The next largest groups of shareholders are FIIs and the Indian public. The fund requirement of Tata Tea thus came as a blessing in disguise. After the preferential allotment, the Tata Group holding in Tata Tea will increase to about 35-36% depending on the price. There will be warrants attached to these shares which will give them the option of further increasing their stake in future. And, an enabling approval of raising additional capital of 20% is being taken, which could let the Tata Group hike its stake up to 49%.
The preferential allotment does give Tata Tea flexibility for future acquisitions. At the same time, the equity dilution will affect earnings growth to some extent. Since Tata Tea has only 30% stake in Energy Brands Inc, its consolidated financials will reflect Energy Brands performance only to a limited extent, unlike the Tetley acquisition. When its stake in Energy Brands increases to a more significant level, the benefits will be more clearly evident to investors.
Of its investment portfolio of Rs 1,106 crore, the portion that is quoted investments, and hence liquid, is Rs 392.2 crore, of which Rs 252 crore is in mutual funds. The total market value of its quoted investments is Rs 1,227 crore. While investments in mutual funds are liquid, most of the large investments are strategic in nature — in group companies like Tata Chemicals, Rallis and Tata Motors. These cannot be liquidated easily.
Thus, Tata Tea could have contributed more as its equity contribution, but it may have decided to conserve funds for other acquisitions. Moreover, like some other Tata group companies, the promoters’ stake in Tata Tea too is relatively low at 28.9%. The next largest groups of shareholders are FIIs and the Indian public. The fund requirement of Tata Tea thus came as a blessing in disguise. After the preferential allotment, the Tata Group holding in Tata Tea will increase to about 35-36% depending on the price. There will be warrants attached to these shares which will give them the option of further increasing their stake in future. And, an enabling approval of raising additional capital of 20% is being taken, which could let the Tata Group hike its stake up to 49%.
The preferential allotment does give Tata Tea flexibility for future acquisitions. At the same time, the equity dilution will affect earnings growth to some extent. Since Tata Tea has only 30% stake in Energy Brands Inc, its consolidated financials will reflect Energy Brands performance only to a limited extent, unlike the Tetley acquisition. When its stake in Energy Brands increases to a more significant level, the benefits will be more clearly evident to investors.
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