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 and generates 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

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)

1800 1600 1400 1200 1000 800 600 400 200 0 378 328 177 145 119 59 47 54 32 345 988 1623

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

Tea Production in India (Figures in Million Kgs)

990 985 980 980 975 970 965 960 955 2007 2008 2009 Production in Domestic Region 2010 2011 966 979 986 988

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

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

25 20 15 10 5 0 2007 -5 -1 -10 -15 Change in Production -8 -13 2008 2009 2010 2011 4 22

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

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

900 800 700 600 500 400 300 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Domestic Consumption 673 693 714 735 757 771 786 802 819 837 856

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

Area under Tea in India (Figures in Hectres)

590000 580000 570000 560000 550000 540000 530000 520000 510000 500000 490000 2004 2005 2006 Total Area 2007 2008 521403 555611 567020 578458 579353

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

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

AN OVERVIEW OF TATA TEA LIMITED

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)

Porters Five Force Analysis

Threat of New Entrants FDI Untapped Rural Markets

Threat to New Entrants High Cost of Investment High Labor Cost Unorganized Sector

Bargaining power of Suppliers Large number of producers Low switching cost

Rivalry among Existing Players Approximately 700 Tea Companies 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

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.

PEST Analysis:
Political factors Economical Socio Cultural Technological factors Government Policy Foreign Laws Stability of the Government
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.

factors Lifestyle Changes Language

factors

Interest Rates

New Machinery Advertising through Internet

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.

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 commod ity 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.

Language
Language is another element which often requires adaptation in differe nt 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.

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.

IFAS of TATA TEA

Strengths Plantations Brand Name Weights
0.16 0.15 4 2

(Before Merger)

Rating

Weighted Score
0.64 0.30

Strong Management

0.15

0.45

Weakness Weak Distribution Channel Lack of Technology available Less or No Global Presence Total

Weights
0.18

Rating
3

Weighted Score
0.54

0.16

0.48

0.20

0.40

2.81

IFAS of TATA TEA (After Merger) Strengths Market Leader Weights Rating
0.15 4

Weighted Score
0.6

Comments
With a value share of 21.4% in 2010, Tata Tea is now the market leader in the Rs7,000-crore branded tea market, having overtaken peer Hindustan Unilever (HUL) Tata Tea Limited owns approximately 51 tea estates in the states of Assam, West Bengal, and Kerala in India. Having plantations in varied agro-climatic zones enables Tata Tea to cultivate distinct tealeaves. In addition, it also have a big R&D infrastructure Tata tea Brand is ranked the second most trusted beverage brand in brand equity. The company's bestselling brand is Agni which caters to the mass segment and other brands include Tata Tea Gold, Chakra, Gemini and KananDevan Tata Tea has been one of the oldest companies in India and has the advantage of skill and experience on their side Tata tea has the access to highly efficient management pool from Tata group Present in every contient of the world.

Resources & Capabilities

0.13

0.36

Brand Name

0.12

0.36

Experience

0.11

0.33

Strong Management

0.14

0.42

0.15 Presence in more than 40

0.60

Weakness No product differentiatio n

Weight s
0.15

Ratin g
4

Weighted Score
0.60

Comments
One of the major problems Tata Tea faces is the lack of much product differentiation hence loyalty of consumers is a major area of concern The distribution network of Tata Tea comprises on 1.25 lakh distributers this is not much when you compare to HUL who have the strongest dealer network in the country

Distribution Network

0.05

0.15

Total

3.42

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 1991 2000 2001 2006

Tata Tea is born, Finlay is bought out Tata Tea enters Brand business Tata Tea acquires The Tetley Group Tata Tea acquires Good Earth, USA Tata Tea acquires Eight OClock Coffee, USA Tetley acquires Jemea in Czech Republic Tetley acquires 33% stake in Joekels Tea, South Africa

2007 2009 2011

Tetley acquires Polish Tea brand Vitax Tetley acquires Grand Coffee, Russia Tetley increases stake in Joekels Tea, it now a subsidiary business

MAJOR TEA PLAYERS

TATA TEA

HUL

Duncun Group

Goodricke Group

Others

Tata Tea Agni Tata Tetley Chakra Gold

Red Label Taj Mahal Taaza Lipton Green

Sargam Double Diamond Shakti

Goodricke Zabardast Castleton Caddy

Wagh Bakri Tez Jayshree Tea

Substitutes for Tea

Technology used in Tea Manufacturing

PLANTATIONS

PLUCKING & LEAF HANDLING

WITHERING

ROLLING

FERMENTATION

DRYING

SORTING

Structure of Merger

Tata Tea Inc 60mn

Tata Tea Rabo bank Tata Tea GB SPV Prudential Mezzanine Capital 215 mn Equity 70mn Debt 235 mn 10 mn 10 mn

Schroder Ventures

10 mn

Tetley Acquisition 271 mn

Legal Services & Bank Charges 9 mn

Tetleys Working Capital requirements 25 mn

DEBT Repayment Structure Amount Loan Type Purpose Year of Maturity Pay Back Method Interest rate A 150 Million Long Term Funding Acquisition 2007 Semi Annual Installments 11% B 75 Million Long Term Funding Acquisition 2007 2 Installments in 07-08 11% C 30 Million Long Term CAPEX 2008 2 Installments in 07-08 11% D 50 Million Revolving WC Requirements 2007 Cessation of Credit 11%

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 exporters from 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. continuously declining. In fact the exports to Russia fell drastically over the last decade. 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. 1955. 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. reasons. 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.

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

The UK and the Ireland accounted for one-third of the worlds tea consumption in

Big buyers like Russia, Iran and Iraq have become inactive due to political

Tata Tea Market after Acquisition

The market of Tata tea suffered a lot after the acquisition as it experienced disaster financial 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 a structure 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 and assigned 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

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 Tea pre 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 Tea pre acquisition: Produced 95% of its tea requirement in- house Tetley pre acquisition :Outsourced entire requirement from 35 different countries, with an estimated Procurement of 3 million kilograms of tea every week Consolidated post 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 Tea pre 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 Tea Pre acquisition :Predominantly domestic operations Tetley pre acquisition: UK and USA account for bulk of sales. Consolidated post acquisition :Global presence

Revenue by Geography; Geography India UK USA & Canada Rest Total Sales Revenue (Rs. Lakhs) 150816.83 123942.34 144671.83 65356.48 484787.48

13.48 31.11 29.84 25.57

Revenue %
Restructuring the debt (28th Feb 2003)

India UK USA & Canada Rest

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.

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.

Sales of Tata Tea (Figures in Crores)

Sales of Tata Tea

2500 2000 Axis Title 1500 1000 500 0 Sales 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 899 810 750 812 820 981 1058 1297 1415 1540 2090 1966 2222

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

PAT of Tata Tea (Figures in Crores)

PAT of Tata Tea

450 400 350 300 Axis Title 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 100 72 70 91 129 187 306 312 159 391 180 302

PAT 124

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

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 accr ue 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-class integrated 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

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.

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.

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.,

YEAR

Profitability of Hindustan Lever LTD Total Net Sales Net Income Assets ROA (INR (INR (INR % per millions) millions) millions) year
67441 71232 74103 77002 88632 96820 105447 14188 17358 24359 22483 23870 24240 22050 39563 40423 34198 36157 42118 40300 48553 36% 43% 71% 62% 57% 60% 45%

Total Equity (INR millions)

304369 365887 209270 213872 209270 230562 272348

ROE % per year

5% 5% 12% 11% 11% 11% 8%

2001 2002 2003 2004 2005 2006 2007

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

Profitability Of TATA TEA LTD. YEAR Net Sales (INR millions)

67441 71232 74103 77002 88632 96820 105447

Net Income (INR millions)

89116 81606 80648 83845 95024 104017 114611

Total Assets (INR millions)

146923 15230 154024 142017 152908 169743 270461

ROA % per year

61% 536% 52% 59% 62% 61% 42%

Total Equity (INR millions)

89698 96799 97863 97524 104897 116126 156555

ROE % per year

99% 84% 82% 86% 91% 90% 73%

2001 2002 2003 2004 2005 2006 2007

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:
Turnover operating profit Employees Tea Estates Key Market TATA TEA $207million $36 million 59740 54 India TETLEY $417 million $42.6 million 110 0 Britain, Canada, Australia, US

After Merger:
Merger Implications Position in the value chain Tata tea acquisition 40% of turnover came from packed tea bags Tetley Pre acquisition Consolidated Post acquisition Company has moved up the value chain 84% of turnover came from packed tea bags today 70% of TATA Tea requirement is outsources from 20 different countries thus reducing the risk associated with fluctuations in production arising out of various factors.

Increased outsourcing Predictable margins Global footprint

100% turnover came from packed tea bags outsourced entire requirement from 35 different countries produced 95% with an estimated of its tea procurement of 3 requirements in million kgs of tea house every week Margins highly Margins inversely correlated with correlated to tea tea cycle cycle UK and USA Domestic account for bulk operations sales

Margins hedged

Global presence

The financial performance of Tata Tea improved though at a slow rate and both ROA and 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.

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.

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.

Mergers & Acquisitions Merger Of TATA & Tetley

Submitted To: Prof. Tazeentaj Mahat

Submitted By: (Group 3) Laxmi. C Bibi Asma Hardeep S. H Jervin.J Shekher.G