Finalcuttatatetley Porters Model

7/27/2019 Finalcuttatatetley Porters Model

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TEA INDUSTRY

Tea plays a vital role in the lives of millions of Indians. They take it as a

refreshing drink as part of daily ritual. Tea offers livelihood to millions of people who are

associated with this industry. India produces some of the worlds finest quality and also

the largest variety of tea. Among the famous specialty flavors are Darjeeling tea, Assam

tea and Nilgiri tea, which are grown in the Bengal, Assam and Tamil Nadu. Tea is

normally classified based on the processing, leaf size and grade. Fermentation creates

two major classifications, black and green tea. Black tea is further classified into CTC

(cut, tear and curl) and orthodox tea.

Indian Tea Industry Features

India is one of the largest producer and consumer of tea in the world, accounting

for around 23% of world demand

Tea is currently the second biggest in beverage category after the carbonated

soft drink market

Total turnover of package tea was approximately Rs 10,000 crores in 2009-10

In the packaged tea category, the unorganized sector accounted for over Rs

1500 crore

The labor intensive tea industry directly employs over 1.1 million workers andgenerates income for another 10 million people approximately. Women constitute

50% of the workforce.

Special Features of India Tea Industry:

Production dependent of agro-climatic conditions

Same plant and same agro-practices give variations in quality in different

regions

Product Life is for limited period

Labor intensive

High Cost due to high input cost

No priority for Scientific Cost Management

Huge proportion old tea & Low Productivity


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Types of Tea

Herbal Tea Black Tea Green Tea

CTC Orthodox

Industry Size

Indian tea industry stood at 988 million kg as of 2011, with the share to global

supply accounting for 23 %. It is currently the second largest producer of tea in the

world. In 2009, the size of the Indian tea industry was estimated at Rs 140 billion. Total

tea exports were approximately around Rs 2842.07 crores in 2011.

TEA Production by various Countries in 2011 (Figures in Million Kgs)

(Source :http://www.teaboard.gov.in/inner2.asp?param_link_id=41008)

1623

988

378328

177 145 11959 47 54 32

345

0

200

400

600

800

1000

1200

1400

1600

1800
http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008


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Tea Production in India (Figures in Million Kgs)


Change in Production in Recent Years (Figures in Million Kgs)


986

980979

966

988

955

960

965

970

975

980

985

990

2007 2008 2009 2010 2011

Production in Domestic Region

4

-8

-1

-13

22

-15

-10

-5

0

5

10

15

20

25

2007 2008 2009 2010 2011

Change in Production
http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008


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Domestic Consumption of Tea in Recent Years (Figures in Million Kgs)


Area under Tea in India (Figures in Hectres)


673 693 714735

757 771786 802

819 837856

0

100

200

300

400

500

600

700

800

900

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Domestic Consumption

521403

555611

567020

578458 579353

490000

500000

510000

520000

530000

540000

550000

560000

570000

580000

590000

2004 2005 2006 2007 2008

Total Area
http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008http://www.teaboard.gov.in/inner2.asp?param_link_id=41008


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(Source:http://www.teaboard.gov.in/map-of-india.html?param_link_id=730&mem_link_name=Tea%20Map%20of%20India)

AN OVERVIEW OF TATA TEA LIMITED
http://www.teaboard.gov.in/map-of-india.html?param_link_id=730&mem_link_name=Tea%20Map%20of%20Indiahttp://www.teaboard.gov.in/map-of-india.html?param_link_id=730&mem_link_name=Tea%20Map%20of%20Indiahttp://www.teaboard.gov.in/map-of-india.html?param_link_id=730&mem_link_name=Tea%20Map%20of%20Indiahttp://www.teaboard.gov.in/map-of-india.html?param_link_id=730&mem_link_name=Tea%20Map%20of%20Indiahttp://www.teaboard.gov.in/map-of-india.html?param_link_id=730&mem_link_name=Tea%20Map%20of%20India


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TATA Tea was set up in 1964 as a joint venture with a UK based James Finlay and

Company to develop value added tea.

From a mere share of 3% in the mid 70's to become India's second largest tea producer,

Tata tea has come a long way. (www.Tatatea.com)

The operations of Tata tea and its subsidiaries focus on branded product offerings in tea

but with a significant presence in plantation activity in India and Sri Lanka. The Tata tea brand leads market share in terms of value and volume in India and has

been accorded the super brand' recognition in the country.

Tata tea also has 100% export oriented unit manufacturing instant tea in the state of

Kerela, which is the largest such facility outside the United States.

AN OVERVIEW OF TETLEY

In 1837, two brothers, Edwards and Joseph Tetley started to sell tea and became so

famous that they set up as tea merchants. In 1856, in partnership with Joseph Ackland, they set up Joseph Tetley and Co.,

wholesale tea dealers. Tea was rationed during World War II, it was not until 1953, just

after rationing finished, that Tetley launched the tea bag to the UK and it was an

immediate success. The rest, as they say, is history.

The tea bag had captured the publics imagination and desire for convenience. Within

10 years it revolutionized how Britons drank their tea and the old fashioned tea pot had

given way to making tea in a cup using a tea bag.

1974 Tetley Tea Company was bought by J Lyons who merged it with the Lyons tea

business to form Lyons Tetley. 1978 Allied Breweries acquired J Lyons Businesses then

as Allied Domecq sold them in the 1990s.

The Tetley Group was created in July 1995, when a group of investors bought what was

then the world-wide beverage business from Allied Domecq.

On 10th March 2000, The Tetley Group was sold to Tata Tea Limited, one of the worlds

largest integrated tea businesses.

After a long drawn out battle first with Schroder Ventures, followed by a bitter retreat in

1995, and then with Sara Lee, Tata tea finally tasted victory on March 10, 2000 when it

bought Tetley for a staggering INR2,135 crore ( 305 million sterling)


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Porters Five

Force Analysis

Threat of New Entrants

FDI Untapped Rural Markets

Bargaining power of

Suppliers

Large number ofproducers

Low switching cost

Rivalry among Existing Players

Approximately 700 TeaCompanies

Unorganized Players Industry growth at 2%

Threat from Substitutes

Coffee Pepsi Coke Energy Drinks

Bargaining power of Buyers

Large number of buyers Product differentiation Other Options available Large number of

consumers

Threat to New Entrants

High Cost of Investment High Labor Cost Unorganized Sector


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Industry Rivalry (High):

There are approximately700 tea companies in India hence there is intense rivalry

amongst them.

Market is dominated by a large number of unorganized players.

Industry growth is slow at 2%.

Bargaining Power of Buyers (High):

There are a large numbers of buyers purchasing the product.

The bargaining power of buyers is extremely high as the buyers have many

options available.

Bargaining Power of Suppliers (Low):

There are a large no of producers of tea in India.

Suppliers product creates low switching cost.

Threat of Substitutes (Moderate):

Substitutes available are coffee, juice, cold drinks.

Existing customers are loyal

Preference towards coffee can become a major threat because of increasing

caf culture.

Threat of new Entrants (High):

Large untapped rural market for branded tea segment in rural India

FDI 100% FDI in tea business.

Barriers to New Entrants (Moderate)

High cost of doing business because of the time it takes to grow and become

ready for sale.

High labor cost

Unorganized sector can be a barrier to certain extent by lowering the

attractiveness of he industry.


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PEST Analysis:

Pol i t ical factors Econom ical

factors

Socio Cultural

factors

Technological

factors

Government

Policy

Foreign Laws

Stability of the

Government

Interest

Rates

Lifestyle

Changes

Language

New Machinery

Advertising

through Internet

POLITICAL FACTORS

Government Policy

The political arena has a huge influence upon the regulation of businesses, and

the spending power of consumers and other businesses. Non-alcoholic beverages fall

within the food category under the FDA. Here the Government plays a role within the

operation of manufacturing these products in terms of regulations. There are potential

fines set by the government on companies if they do not meet a standard of laws.

Stability of the Government

Political conditions, especially in international markets, including civil

unrest, government changes and restrictions on the ability to transfer capital

across borders.

Foreign Laws

Companies ability to penetrate in developing and emerging markets, which

also depends on economic and political conditions, and how well they are able to

acquire or form strategic business alliances with local bottlers and make

necessary infrastructure enhancements to production facilities, distribution

networks, sales equipment and technology.


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ECONOMICAL FACTORS

Interest Rates

Marketers need to consider the state of a trading economy in the short and

long-terms. Rate of interest raises depressing business and causing redundancies

and lower spending levels. The company had challenging year due rising

commodity costs for tea and coffee and intense promotional competitors campaign

across key regions, but it did not affected companys profits. The Group reported a

year/on/ year sales growth al constant exchanges rates, because of strength of the

brands, improved performance by instant coffee and favorable impact of

acquisition. Profit from operations for the year was impacted by commodity cost

increases, investments behind the brands, product development, new market

launches. Tata l ea has reduction in consumer duty.

SOCIO-CULTURAL FACTORS

Healthier Lifestyle

The social and cultural influences on business vary from country to country.

Many people are practicing healthier lifestyles. This has affected the non -alcoholic

beverage industry in that many consumers are switching to herb drink and bottled

water instead of beer and other alcoholic beverages. The need for bottled water

and other more convenient and healthy products are in important in the average

day-to-day life. Consumers from the ages of 37 to 55 are also increasingly

concerned with nutrition. There is a large population of the age range known as

the baby boomers. Since many are reaching an older age in life they are becoming

more concerned with increasing their longevity.

LanguageLanguage is another element which often requires adaptation in different

markets. Consumers generally prefer labels and instructions in their own

language. Sometimes brands and logos are translated as the source language

confers a certain prestige and image.


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TECHNOLOGICAL FACTORS

Introduction of new Machinery

Technology is vital for competitive advantage, and is a major driver of

globalization. As the technology is getting advanced, there has been the

introduction of new machinery all the time. New technology help to develop new

products, for example comic vending machine launched in US recently to sell real

brew iced lea. Due to introduction of these new machineries the production of

Beverage Companys has increased tremendously than it was a few years ago.

The Company invested heavily in innovation and new packaging of the products.

Advertising through Internet

The effectiveness of company's advertising marketing and promotional

programs. The new technology of Internet and television use special effects for

advertising through media. They make some products look attractive. This helps in

the selling of the products. This advertising makes the product attractive. This

technology is being used in media to sell their products.


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IFAS of TATA TEA (Before Merger)

Strengths Weights Rating Weighted Score

Plantations0.16 4 0.64

Brand Name 0.15 2 0.30

Strong Management 0.15 3 0.45

Weakness Weights Rating Weighted Score

Weak DistributionChannel

0.18 3 0.54

Lack of Technologyavailable

0.16 3 0.48

Less or No Global

Presence

0.20 2 0.40

Total 1 2.81


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IFAS of TATA TEA (After Merger)

Strengths Weights Rating WeightedScore

Comments

MarketLeader

0.15 4 0.6 With a value share of 21.4%in 2010, Tata Tea is now themarket leader in theRs7,000-crore branded teamarket, having overtakenpeer Hindustan Unilever(HUL)

Resources &Capabilities

0.13 3 0.36 Tata Tea Limited ownsapproximately 51 tea estatesin the states of Assam, West

Bengal, and Kerala in India.Having plantations in variedagro-climatic zones enablesTata Tea to cultivate distincttealeaves. In addition, it alsohave a big R&Dinfrastructure

Brand Name 0.12 3 0.36 Tata tea Brand is ranked thesecond most trustedbeverage brand in brandequity. The company's best-

selling brand is Agni whichcaters to the mass segmentand other brands includeTata Tea Gold, Chakra,Gemini and KananDevan

Experience 0.11 3 0.33 Tata Tea has been one ofthe oldest companies in Indiaand has the advantage ofskill and experience on theirside

StrongManagement

0.14 3 0.42 Tata tea has the access tohighly efficient managementpool from Tata group

Presence inmore than 40

0.15 4 0.60 Present in every contient ofthe world.


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Weakness Weights

Rating

WeightedScore

Comments

No productdifferentiation

0.15 4 0.60 One of the major problemsTata Tea faces is the lack ofmuch product differentiationhence loyalty of consumersis a major area of concern

DistributionNetwork

0.05 3 0.15 The distribution network ofTata Tea comprises on 1.25lakh distributers this is notmuch when you compare toHUL who have the strongest

dealer network in the country

Total 1 3.42


15/35

Tata Tea

Tata Global Beverages (formerly known as Tata Tea) is an Indian Multinational

Non Alcoholic Beverage Company headquarter in Kolkata, West Bengal. Its a

subsidiary of Tata Group. It is the worlds second largest manufacturer and distributor of

Tea.

The merger was also important for Tata Tea, because its main competitor

in India, Hindustan Levers Limited (HLL), a Unilever subsidiary, was gaining market

share and also because overall growth of the tea market in India had slowed. Tata Tea

acquired the Tetley Group for 271 Tata Tea used a leveraged buyout structure to

acquire Tetley, with the hopes that the cash flows from Tetley would repay the leverage

over time.

History

1964 Tata Creates alliance with UK based giant James Finlay to form TATA

FINLAY

1983 Tata Tea is born, Finlay is bought out

1991 Tata Tea enters Brand business

2000 Tata Tea acquires The Tetley Group2001 Tata Tea acquires Good Earth, USA

2006 Tata Tea acquires Eight OClock Coffee, USA

Tetley acquires Jemea in Czech Republic

Tetley acquires 33% stake in Joekels Tea, South Africa

2007 Tetley acquires Polish Tea brand Vitax

2009 Tetley acquires Grand Coffee, Russia

2011 Tetley increases stake in Joekels Tea, it now a subsidiary business


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MAJOR TEA PLAYERS

TATA

TEA

OthersGoodricke

Group

Duncun

Group

HUL

Tata Tea

AgniTata Tetley

Chakra Gold

Wagh Bakri

TezJayshree Tea

Goodricke

ZabardastCastleton

Caddy

Sargam

DoubleDiamond

Shakti

Red Label

Taj MahalTaaza

Lipton Green


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Substitutes for Tea


18/35

Technology used in Tea Manufacturing

PLANTATIONS

PLUCKING & LEAF HANDLING

WITHERING

ROLLING

FERMENTATION

DRYING

SORTING
http://www.teauction.com/home/plantation.asphttp://www.teauction.com/home/plucking.asphttp://www.teauction.com/home/withering.asphttp://www.teauction.com/home/rolling.asphttp://www.teauction.com/home/fermentation.asphttp://www.teauction.com/home/drying.asphttp://www.teauction.com/home/sorting.asphttp://www.teauction.com/home/sorting.asphttp://www.teauction.com/home/drying.asphttp://www.teauction.com/home/fermentation.asphttp://www.teauction.com/home/rolling.asphttp://www.teauction.com/home/withering.asphttp://www.teauction.com/home/plucking.asphttp://www.teauction.com/home/plantation.asp


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Structure of Merger

60mn

215 mn

10 mn 10 mn

10 mn

271 mn 9 mn 25 mn

DEBT Repayment Structure

A B C D

Amount 150 Million 75 Million 30 Million 50 Million

Loan Type Long Term Long Term Long Term Revolving

Purpose FundingAcquisition

FundingAcquisition

CAPEX WCRequirements

Year of Maturity 2007 2007 2008 2007

Pay BackMethod

Semi AnnualInstallments

2 Installmentsin 07-08

2 Installmentsin 07-08

Cessation ofCredit

Interest rate 11% 11% 11% 11%

Equity 70mn Debt 235 mn

Tata Tea GB

SPV

Tata Tea Inc Tata Tea

Rabo bank

Prudential

Mezzanine

Capital

Schroder

Ventures

Tetley

Acquisition

Legal Services &

Bank Charges

Tetleys Working

Capital requirements


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THE CHALLENGES

Tata tea was half the size of Tetley in terms of revenue and number of upper

management and so it feared a domination of Tetley's corporate culture.

Rising competition from African nations such as Kenya and Malawi, where

production of tea is new and expanding, posed potential threats to tea exportersfrom India.

Dealing with diverse skill set, working Culture of employee and objectives of

both the organization.

Financial constraints such as legal and capital control in India that made the

listing of Tetley shares in India unattractive.

There is a great deal of concern of how British employees would react to Indian

manager as India was a part of former British Colony.

Adding to the woes was the fact that the Indian tea exports to Russia had been

continuously declining. In fact the exports to Russia fell drastically over the lastdecade. In 1999, the exports were around 87million Kg, which was almost half of

160 million Kg exported in 1989. The overall export also fell substantially. During the last fiscal itself, the exports

saw much volatility. The total exports fell of tea fell from 27,839 ton recorded in

August 1999 to 9,766 ton in February 2000.

The UK and the Ireland accounted for one-third of the worlds tea consumption in1955. However their share in tea consumption currently is around 5% only.

The tea prices have falling worldwide because of an oversupply in production.

While world market prices in real terms have declined the cost of production, on

the other hand, has increased steadily thereby putting pressure on the producers

margins.

Big buyers like Russia, Iran and Iraq have become inactive due to politicalreasons. Above all, the fact that Sri Lanka is selling tea to Russia at far lower

prices than India has also been causing major concerns. How to Integrate: Tata decided that the best way to integrate was not to integrate

initially but to maintain a joint venture type of arrangement. Furthermost the

integration process was not rushed in order to protect Tata tea from risk of

Tetleys debt. TATA tea did not want to change that Tata tea until debt level was

manageable. Size difference: Tata tea was half the size of tetley in terms of revenues and

number of upper management. Tata tea feared a domination of Tetleys

corporate culture.


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Tata Tea Market after Acquisition

The market of Tata tea suffered a lot after the acquisition as it experienced disasterfinancial performance. The company's overall sales was dropped by 8.3% and reached Rs

621.58 crore from Rs 677.86 crore.

Also operating profit was dropped down by 19.37% and reached Rs 121.43 crore

from Rs 150.60 crore. Market share price considerably dropped within a year.

Though the acquisition of Tetley was seen negatively by the market for the next 3

years, Tata tea cautiously chose the approach of integrating the processes and exploring

synergies between the two companies with absence of any time pressure, while maintaining

operational independence.

For this, the overall emphasis was on growth rather than cost reduction. Also astructure that supports joint working in several areas was adopted. A thoughtful process

was adopted for integrating the two companies with some of the highlight being:

Identification of common belief: An international consulting firm was

commissioned to identify the common belief between the two companies and

suggest ways to bring them closer.

Creation of structure: A strong culture was developed to create a group that

includes steering committee, their task forces and managers of both the

companies.

Refinement of structure: Tata Tea adopted the hierarchical structure andassigned responsibilities to every level from top to bottom.

Financial restructuring done by Tata Tea

Tata tea changed their orientation from producing tea company to selling tea

company as they realized that the level of profit can be increased by selling high quality

branded tea products rather than owning plantation.

To execute their restructuring process, Tata tea decreased its total wage payment by

12.5%, provident fund payment by 43% and welfare payment by 40%. Also Tata tea also

reduced its employee strength from 58,888 workers to 34,596 workers


22/35

Current Positioning of Tata Tea

After the financial collapse in the year 2000, Tata Tea is now moving forward toward

the growth. Currently share value of Tata tea has moved up to Rs 700 per share.

Tata tea has been ranked as the most trusted beverage brand in India (The

Economic Times, 2007) The company's marketing strategy of focusing on

continuous innovation in all direction of brand marketing and sales, has helped Tata

Tea to achieve excellent growth in recent years (Ms Sangeeta Talwar, Executive

Director-Marketing, Tata tea Limited).

TATA TETLEY

Merger implications:- Position in the value chain 305 mn GBP

Tata Teapre acquisition:-40% of turnover came from packet tea /tea bags

Tetley pre acquisition:- 100% of turnover came from tea / tea bags

Consolidated post acquisition:- Company has moved up the value chain-84% of

turnover came from packet tea/tea bags.

Merger Implications:- Increased Outsourcing

Tata Teapre acquisition: Produced 95% of its tea requirement inhouse

Tetley pre acquisition :Outsourced entire requirement from 35 different countries,

with an estimated Procurement of 3 million kilograms of tea every week Consolidatedpost acquisition: Today, 70% of Tata Teas tea requirement is

outsourced from 20 different countries, thus reducing the risk associated with

fluctuation in production arising out of various factors.

Merger Implications:- Predictable Margins

Tata Teapre acquisition:- Margins highly correlated with tea cycle

Tetley pre acquisition:- Margins inversely correlated to tea cycle

Consolidated post acquisition- Margins hedged

Merger Implications:-Global Footprint

Tata TeaPre acquisition :Predominantly domestic operations

Tetley pre acquisition: UK and USA account for bulk of sales.

Consolidated post acquisition :Global presence


23/35

Revenue by Geography;

Restructuring the debt (28th Feb 2003)

In order to reduce the burden, the interest payment burden promoters (Tata Tea and Tata

Sons) infused 30 m in June 2001 and retired 20 m of high-cost debt taken at 18%. This

increased the equity base of the company from 70-million to 100-million. It helped reduce

its debt equity ratio to 1.7:1.

31.11

25.57

29.84

13.48

Revenue %

India

UK

USA & Canada

Rest

Geography Sales Revenue (Rs. Lakhs)

India 150816.83

UK 123942.34

USA & Canada 144671.83

Rest 65356.48

Total 484787.48


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Details of the transaction (2003): -tier debt: The existing debt of 171m

(comprising 114m of senior debt, 49m of mezzanine debt and 8 million of secured loan

stock debt) has been repaid and, simultaneously, a fresh debt for a value of 174 million, all

of which is senior debt, has been raised.

Tranche 'A' is of 90m and is subject to bi-annual repayment over seven years.

Tranche 'B' and 'C' are of 42m each with bullet repayment between seven to nine

years.

350-bps reduction in interest cost: The weighted average interest cost will reduce to

6.7% from 10.2%, thereby saving approximately 6m per annum in future interest

costs.

Of the total debt, about 2/3rd has been switched to fix LIBOR while the balance is at

floating rate.

All debts continue to be ring-fenced with no recourse to Tata Tea, whereby the

banks will have rights only on the assets and cash flow of the Tetley Group.

Implications of debt restructuring: The debt restructuring has been possible owing to

an improvement in the financials and a fall in the interest rates, thereby leading to a

re-negotiation of better terms with lenders. There is no change in the debt: equity

ratio which is 1.7:1 (excluding quasi-equity) / 2.9:1(including quasi-equity).

The restructuring will have a two-fold benefit:

Interest saving of 6 m per annum

Re-negotiation of the covenant structure has eased pressure on the company. The

management now has relatively more freedom to plan its long-term investment and

growth strategy.

The refinancing of high-cost Tetley debt in favor of LIBOR-linked rates has resulted in a one

percent reduction in the cost of debt.


25/35

Sales of Tata Tea (Figures in Crores)

(Source:http://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TT)

PAT of Tata Tea (Figures in Crores)

(Source:http://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TT)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Sales 899 810 750 812 820 981 1058 1297 1415 1540 2090 1966 2222

0

500

1000

1500

2000

2500

AxisTitle

Sales of Tata Tea

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

PAT 124 100 72 70 91 129 187 306 312 159 391 180 302

0

50

100

150

200

250

300

350

400

450

AxisTitle

PAT of Tata Tea
http://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TThttp://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TThttp://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TThttp://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TThttp://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TThttp://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TThttp://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TThttp://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TT


26/35

FLAVOUR OF SYNERGIES

In the backdrop of the difficult domestic scenario and dwindling exports to Russia

is was not difficult to conclude what prompted Tata Tea to go for an acquisition, that too

at such INR1900 crore of sales, on the other hand, Tetley was supposed to benefit from

Tata Tea's competencies in managing plantations and processing units. Tata Tea

though didnt have expertise in blending and branding. It was here that the acquisition

was coming handy to Tata Tea, as Tetley had proven expertise in the area of product

innovation and in sourcing tea from auction houses and which also was a major

blending and packaging company and owns a host of well-known international brands

which the latter can leverage.

Tea is usually exported at a relatively early stage in the production chain and

blending and packing, the most lucrative part of the tea trade, is mostly done by the tea

companies in the buyer country. The large profits therefore dont accrue to the tea

producing countries. The big money is made abroad. In Europe, 30% to 50% of the

consumer price of tea goes to blending, packaging, materials and promotion. It was

there that the acquisition would help Tata Tea to take advantage of the existing scenario

by virtue of Tetleys proven skills an blending and branding, not to mention exotic

packaging, which too fetches higher premiums. Also, many producers try to sell

processed tea bags or repacked consumer units, but the export of ready-for-use tea is

often hampered by poor market information and the absence of funds for expensive

marketing strategies.

It could be rightly said then that the deal was supposed to bring together the two

companies, one of which was the largest integrated tea company (Tata Tea) in the

world, while the other world's largest brand (Tetley). Together they make a world-classintegrated outfit. But the rival Unilever was not far behind either. In fact, it became even

more aggressive after the Tata Tea- Tetley deal came through. The Unilever through its

Indian outfit HLL acquired Rossell Industry's tea gardens, and stepped up efforts to

vertically integrate its operation by acquiring some more tea garden in India and African


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nations like Kenya, Uganda and Mozambique.The deal was supposed to facilitate

downstream segment also.

Tata Tea has over 60 tea gardens in India and Sri Lanka, besides its own

blending and packaging units. Tetley on the other hand, buys tea from the major auction

markets of the world and processes them to be sold under its own brands like Earl

Grey, English Breakfast and Traditional Afternoon - in the US, Canada UK and

Australia. Both the companies were supposed to streamline their downstream

operations quite efficiently thereby cutting the costs. Tetley plans to give special thrust

to the US market, which has been fast emerging as a growing tea market, with

consumers shifting from coffee to tea due to health reasons. This is turn was thought to

help Tata Tea to push greater volumes in the instant tea segment, where it had so far

struggled to get a strong foothold.

In the domestic market, on the branding and packaging front, there has been a

major Strategic shift towards brand consolidation. In fact, with increase in the value

added segments over the years, the share of this segment has risen quite significantly.

The value additions, through changes in the product forms, branding, consumer

awareness and delivery systems, which has been part of the winning tool in the

international markets was bound to be replicated in the Indian markets too. And it was

there that the Tata Tea - Tetley combine's wider product portfolio downstream would

complement the upstream synergies. As while, Tata Tea catered primarily to the lower

end of the market segment, Tetley had presence in the premium segment. Apart from

that, adding to Tata Tea's brand strengths in developing packaged tea was Tetley's

well-entrenched presence across a wider range of categories such as decaffeinated,

herbal, lemon tea, and tea bags, etc.

As far as other major benefits from the deal were concerned, the domestic

company can benefit from the standardized management practices including quality

performance norms and consumer focus of Tetley, the world leader in tea bags. This

was supposed to be more so when new products are envisaged for the Indian markets.


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On the other hand, Tata Tea's strong R&D base and expertise in tea cultivation

and manufacturing was immensely helpful to Tetley. Post-acquisition, the decision was

that the two organizations work under a unified global strategy. The combine strengths

were thought to be helpful to create opportunities to expand sales in both the existing

and new markets and realize synergies. Apart from that, the two companies breadth of

experience and vertical integration was equipping them to compete anywhere in the

world and that assumed importance in the context of WTO, which would terminate tea

import curbs under its predetermined timeframe.

The joint buying power and commercially relevant use of tea produced by Tata

Tea was also supposed to facilitate cost control. Also among the other immediate

priorities was the strategy to increase tea bag sales in East Europe and to improve upon

the currently token presence of Tetley in the packet tea segment. On the product size,

Tetley proposed to promote the draw size string bags in a bigger way, because of the

higher margins and planned to replace all the round tea bags cartons with an innovative

soft-pack format then.

Another area that Tata Tea was eyeing was the private label tea business in the

UK. Tetley which holds sway over the market, with 6 out of every 10 retailers sourcing

tea from it to sell under their own brand names, was a perfect launch vehicle to push

greater volumes into that highly lucrative segment, more so when its exports to the

Russian markets had been had been on a continuous decline. The key reason why the

private label was lucrative was that there were no marketing costs attached to it. That

meant, by sourcing tea directly from its 26,000, hectares of gardens, or from the auction

markets, Tata Tea would be able to boost its margins.

The acquisition impact on Tata Tea's presence in the global tea trade aside,

Tata-Tetley ltd., the already existing joint venture between the two companies, was

seen aligned with the groups international operations. Equally significant was the

domestic company's plan to open an instant tea factory in South India, which was

improved for the instant tea shipments to the US, where Tetley had a major presence.


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Tata tea hoped to garner greater market share and stave off the competition,

riding on Tetley's strength. Acting swiftly, Tata Tea initiated a comprehensive operation

restructuring of the worlds second-largest tea company, in a bid to move a step closer

to unseating Unilever Plc. The restructuring took forms of the broader plan to venture

out into new market in East Europe, Russia, the CIS and West Asia through both the

joint venture and franchise route. The move was critical to increasing the UK based

transitional earnings potential as Tata Tea had leveraged the companys future cash

flows to fund the 271 million pound acquisition.

Comparison of HUL and TATA Tea Ltd.,

Profitability of Hindustan Lever LTD

YEAR Net Sales Net IncomeTotal

Assets ROA Total Equity ROE

(INRmillions)

(INRmillions)

(INRmillions)

% peryear

(INRmillions)

% peryear

2001 67441 14188 39563 36% 304369 5%

2002 71232 17358 40423 43% 365887 5%

2003 74103 24359 34198 71% 209270 12%

2004 77002 22483 36157 62% 213872 11%

2005 88632 23870 42118 57% 209270 11%2006 96820 24240 40300 60% 230562 11%

2007 105447 22050 48553 45% 272348 8%

ROA is calculated as net income/total assets.ROE is calculated as net income/total shareholders equity.


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Profitability Of TATA TEA LTD.

YEAR Net Sales Net IncomeTotal

Assets ROA Total Equity ROE

(INRmillions)

(INRmillions) (INR millions)

% peryear

(INRmillions)

% peryear

2001 67441 89116 146923 61% 89698 99%2002 71232 81606 15230 536% 96799 84%

2003 74103 80648 154024 52% 97863 82%

2004 77002 83845 142017 59% 97524 86%

2005 88632 95024 152908 62% 104897 91%

2006 96820 104017 169743 61% 116126 90%

2007 105447 114611 270461 42% 156555 73%

From the above chart one can clearly observe the significant increase in the sales, which

had grown gradually from INR 68772.00 millions in the financial year 1997-98 to INR.105447.00 million in the financial year 2006-07.Hence one can conclude that the acquisition

activity contributed an increase in sales volume.

Before Merger:

TATA TEA TETLEY

Turnover $207million $417 million

operating profit $36 million $42.6 million

Employees 59740 110

Tea Estates 54 0

Key Market IndiaBritain, Canada,Australia, US


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After Merger:

MergerImplications

Tata teaacquisition

Tetley Preacquisition Consolidated Post acquisition

Position inthe valuechain

40% of

turnover camefrom packedtea bags

100% turnovercame from packedtea bags

Company has moved up thevalue chain 84% of turnovercame from packed tea bags

Increasedoutsourcing

produced 95%of its tearequirements inhouse

outsourced entirerequirement from 35different countrieswith an estimatedprocurement of 3million kgs of teaevery week

today 70% of TATA Tearequirement is outsources from20 different countries thusreducing the risk associatedwith fluctuations in productionarising out of various factors.

Predictablemargins

Margins highly

correlated withtea cycle

Margins inversely

correlated to teacycle Margins hedged

Globalfootprint

Domesticoperations

UK and USAaccount for bulksales Global presence

The financial performance of Tata Tea improved though at a slow rate and both ROAand ROE had been positive so far.

CULTURE

Initially, culture was a huge issue and had to be handled very carefully. For

example, Tata executives would complain about being kept waiting when visiting

Tetleys UK head office reception centre, despite being the senior partners. Meanwhile,

Tetley people would complain about being run by Tata which knew only about India and

nothing about Western markets.

Management

The companies were different but were learning from each other. For instance,

Tetley is very process oriented while Tata Tea is quicker to respond and more action

oriented. Tata was quite aware that it needed to be sensitive to the potential cultural

challenges of combining the two groups.


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Objectives of companies:

Tata had dual emphasis on plantation and domestic marketing. Tetley focused

on global marketing.

Geographical spread:

Tata Tea is mainly present in Asian Sub continent and its business focus on bulk

tea. Whereas Tetley was into brand marketing with a sizable international presence.

Differences in skills:

Tata Tea is a plantation company whose major strengths were managing the

estates, dealing with a huge work force, and making teas. On the other hand, Tetley is

strong in

buying quality teas all over the world, in blending, in packaging innovation and combine

good logistics with management skills.

Branding:

Both companies had very strong brand names in their respective regions.

INTEGRATING:

A executive board fumed with 6 people from both companies to plan and devise

the integration plans. Simultaneously a board of non-executive members were formed

who were neutral with the objective of introducing Tetley in India.

Also as last and final measure individual committees were formed to look at scope for

integration in different areas like Commercial business, Supply chain, IT team etc.


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However, as planned the synergies of the companies were not so strong.

For most part it was quite impossible to fuse the working of Tata Tea and Tetley

together as they both had different structures

Tetley focused on producing tea the packaging and selling, whereas Tata

focused on producing tea in own plantations and then selling.

Tetley was a global brand and hence had more standardized product mix, which

focused on quality, whereas Tata was a Asian brand and as per customer

preference focused more on making product as per local taste.

Hence apart from exchange of R & D and technological know how, and help to

grow in each other market both the companies could not be integrated to achieve

better results. Hence the CEO of both the companies felt that allowing

independent operation for both the companies along with a kind of Co-integration

alliance.


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Mergers &Acquisitions

MergerOf

TATA & TetleySubmitted To: Prof. Tazeentaj Mahat


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Submitted By: (Group 3)

Laxmi. C

Bibi Asma

Hardeep S. H

Jervin.J

Shekher.G

Documents

Finalcuttatatetley Porters Model