Tata Coffee to merge with Tata Consumer Products Limited; TCPL announces reorganization plans

On Tuesday 29^th March 2022, Tata Consumer Products Limited announces the reorganization of its India and Overseas business to simplify and synergize its businesses. The company has also announced the merger of Tata Coffee Limited into Tata Consumer Products Limited. What are the other updates of this reorganization of TCPL, let’s know this more in detail in this article.

Reorganization of India business and its Impact:

Source: TCPL’s Investor Presentation

• As part of the reorganization plan, Tata Consumer Products Limited (the company) announced combining Tata  Coffee’s business into Tata  Consumer Products and its wholly-owned subsidiary through a  composite scheme of demerger and merger.
• TCPL’s business is currently divided into 2 major heads: Branded and Unbranded businesses which account for the revenue of 90% and 10% respectively as of FY21. Under the branded business, there is further sub-division in 2 forms: Domestic and International business. The Unbranded business consists of Tea Extractions business, Tea Plantation business, and Coffee Plantation & Extraction business.
• The company wants to simplify this business structure and desires to align legal & management structures with a single listed entity capturing the full value of the TCPL group.
• Tata Coffee Limited (TCL) is a subsidiary of Tata Consumer Products Limited (TCPL) with 57.48% of TCL’s equity share capital held by TCPL. Tata Coffee holds the majority stake in the Eight O'Clock Coffee business, the 4th largest Roast & Ground coffee brand in the USA. Tata Coffee is one of the largest integrated coffee companies as well as one of the largest exporters of Instant Coffee in Asia.
• Both this reorganization will be done via a composite scheme arrangement, wherein firstly the demerger will take place, and then a merger of extraction and branded business will be done.
• The company expects that these decisions fall into its strategic priority and hence it will unlock synergies and efficiencies.
• This will enable the consolidation and 100% ownership of the branded,  extractions & plantations business of  TCL into TCPL and its wholly-owned subsidiary.
• On the effectiveness of  the  Scheme,  the shareholders  of  TCL  (other  than  TCPL)  as  on the record date will  receive an aggregate of 3 equity shares of  TCPL  for every 10 equity shares held by  them  in TCL,  through the issuance of:

• 1 equity share of  TCPL for every 22 equity shares of  TCL,  in consideration for the demerger  (as per the approved share entitlement ratio).
• 14 equity shares of  TCPL for every 55 equity shares of  TCL,  in consideration for the merger  (as per the approved share exchange ratio).

i) De-merger of Plantation business of Tata Coffee Limited (TCL):

• As per the plan, the company will be demerging the plantation business of Tata Coffee Limited (TCL) into a wholly-owned subsidiary of TCPL named TCPL Food & Beverages Limited (TBFL).
• The “Plantation Business” of TCL is related to the cultivation, curing, processing, manufacture, and sale of tea, coffee, pepper, and other plantation crops including other plantation allied businesses and the roast and ground coffee facility in Kushalnagar works.
• As of FY21, this business segment of TCL accounts for 51% of the revenue of the company in a standalone manner.
• This de-merger will create a dedicated plantation vertical with focused attention on the same i.e., plantation business. Further, it will also help the company in increased efficiencies and generate synergies among plantation businesses of TCPL.

ii) Merger of Extraction and Branded business of Tata Coffee Limited (TCL):

• Besides the demerger of the Plantation business from Tata Coffee Limited, TCPL announced the merger of the extraction and branded business of TCL with TCPL.
• The company expects that this decision to Integration of TCL and TCPL’s extraction business activities under a single entity will in focused management attention, operational efficiencies, revenue, and cost synergies including from commonality of customers, sales, and supply chain opportunities through enhanced geographical reach with a wider variety of product offerings which will help in gaining market share, optimization of capital, operational (including promotion) expenditure, leveraging sales and distribution network and simplification of overlapping infrastructure.

iii) Changes in Shareholding Pattern:

Source: TCPL’s Investor Presentation

• As of March 2022, the Promoter or the Promoter Group of TCPL holds a 34.68% stake in TCPL and the rest of the stake i.e., 65.22% is being owned by Domestic Institutional Investors (DIIs), Foreign Institutional Investors (FIIs), and Retail Investors. Further, TCPL owns a majority stake of 57.48% in Tata Coffee Limited (TCL).
• Post the implementation of this reorganization plan, the promoter group holding in TCPL will go down to 33.81% from the current stake of 34.68% on account of preferential allotment of equity shares to take a minority stake in UK’s subsidiary. Then, the public shareholding (including DIIs and FIIs) will account for 66.19% of TCPL. Here, TCPL will be having one wholly-owned subsidiary as well.

Reorganization of Overseas business:

Source: TCPL’s Investor Presentation

• Along with the restructuring of its India business, TCPL has also done some restructuring in its overseas business.
• Here, TCPL proposes to purchase the minority interest in its  UK  subsidiary,  Tata Consumer  Products  UK Limited (“TCP  UK”) by way of a share swap, through a preferential issue of its equity shares.
• The Board of  Directors of  TCPL has also approved the purchase of a 10.15% minority interest in its  UK  subsidiary,  TCP  UK,  from Tata Enterprise (Overseas) AG,  Switzerland (TEO).
• As consideration,  TCPL will issue 74,59,935 equity shares i.e. 0.80%  stake (computed on post preferential issue basis) to  TEO, by way of the preferential issue by the applicable regulations.
• The above transactions will result in TCPL having 100%  ownership of the business of TCL and of TCP  UK, which will be an enabler for efficient reorganization initiatives of its international business.

What’s Ahead:

• This act of reorganization by TCPL is based on the following purpose:

i) For the operational efficiencies of the management, legal, and administrative costs.

ii) For faster decision making and execution as this decision will lead to consolidation of an Indian business and simplification of International Business.

iii) Via demerger of Plantation business and merger of branded and extraction business of TCPL will create focused business verticals.

iv) To unlock potential synergies and bring efficiency and effectiveness into the business.

• The Scheme is subject to the necessary statutory and regulatory approvals including approvals of the respective benches of  NCLT,  the stock exchanges,  SEBI, and the respective shareholders of each of the companies.

What Should Investors Do?

The decision to de-merger and merge of businesses of Tata Coffee Limited with TCPL looks quite beneficial for TCL’s investors from a longer time-period perspective. From a shorter period perspective, there could be some positives in terms of monetary gains for TCL investors, but over the longer period, the investors of TCPL, as well as TCL, can enjoy the alignment and simplification of the businesses which might unlock potential synergies and strengthen efficiency & effectiveness of the company. Also, this consolidation will help the company to take a step forward in its aspiration of becoming a pure FMCG company in the long run.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.

Originally Published On: https://blog.investyadnya.in/tata-coffee-to-merge-with-tata-consumer-products-limited/