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Simplifying the corporate structure to create synergy

Tata Consumer Products Ltd (TCPL) announced the reorganization of its India and overseas businesses to simplify the corporate structure, as well as align and synergize its business. The company came out with two announcements focusing on creating a single consumer product entity by consolidating the branded coffee business of TCL (excluding the coffee plantation segment) with TCPL and also buying out the minority stake in the TCP UK business.

Overall –– TCPL will issue three equity shares for every ten equity shares held by them in TCL

TCPL will acquire balance 10.15% ordinary shares of its existing overseas subsidiary TCP UK from TEO for a total purchase consideration of INR5,708m. The consideration payable shall be discharged by way of issue and allotment of 74,59,935 equity shares of TCPL on a preferential basis

Factoring in the increase in outstanding shares by 3.4% in FY24E due to restructuring and minority income adjustment, we raise our EPS estimate by ~3% for FY24E.

Details of both the proposed schemes

Scheme I: Demerger of Plantation Business into TBFL and Merger of residual brand business of TCL with TCPL

The coffee plantation business is being carved out from Tata Coffee Ltd (TCL) into a new wholly owned subsidiary TCPL Beverages and Foods Limited (TBFL) creating a dedicated plantation vertical. TCPL will issue one equity share for every 22 equity shares of TCL (to TCL’s public shareholders). TBFL will be a privately held company

The next step is amalgamation of the residual TCL business into TCPL and cancellation of TCPL’s investment into TCL to form a consolidated consumer business. TCPL will issue 14 equity shares for every 55 equity shares of TCL (to TCL’s public shareholders). Post the arrangement, TCL will cease to exist

Overall – including both demerger and merger – TCPL will issue three equity shares for every ten equity shares held by them in TCL. The deal value for Tata Coffee is at 13.6% premium to current price

Implementation of the scheme is expected to take around ~12-14 months subject to receipt of the requisite approvals

Scheme II: Acquisition of the Remaining Shares of TCP UK Ltd (Housing the global brand – Tetley

TCPL will acquire the balance 10.15% ordinary shares of its existing overseas subsidiary i.e. Tata Consumer Products UK Group Limited (TCP UK) from Tata Enterprises (Overseas) AG, Zug, Switzerland (TEO) for a total purchase consideration of INR5,708m valuing the business at INR56,237m.

The consideration payable shall be discharged by way of issue and allotment of 74,59,935 equity shares of TCPL at a price of INR765.16 per equity share on a preferential basis

Post the acquisition, TCP UK Ltd will become a wholly owned subsidiary of TCPL.

The transaction is expected to be completed in 1QFY23 subject to requisite approvals

Rationale of the proposed schemes

The merger is focused on simplifying and creating synergy in the consumer business in the following ways:

The merger will result in focused management attention, operational efficiencies, revenue and cost synergies including from commonality of customers, sales and supply chain opportunities through enhanced geographical reach, optimization of capital, operational (including promotion) expenditure, leveraging sales and distribution network and simplification of overlapping infrastructure

The merger will result in synergy of operations and benefits of scale and additionally, the legal and regulatory compliances of both the listed entities will be unified and streamlined.

The merger will enable efficient consolidation of ownership interests in the international branded business owned by TCPL and TCL that will result in cost benefits as well as higher operating and other efficiencies.

The acquisition of minority stake in TCP UK will give TCPL 100% ownership in all core businesses of the company along with enabling efficient reorganization of the international businesses

Valuation & View

The combined entity will house the entire bouquet of strong consumer brands, such as Tata Tea, Tetley, Eight O’clock, Tata Coffee, Tata Salt and Tata Sampann etc., creating an operational synergy in terms of common customers and sales & supply chain opportunities through enhanced geographical reach.

According to the management, with the consolidation of ownership interests in the international branded business, cost benefits as well as higher operating and other efficiencies are expected to kick in and generate an incremental EPS of ~5- 10% going forward.

We expect a sales/EBITDA/PAT CAGR of 9%/17%/23% over FY21-24E, respectively. Factoring in the increase in outstanding share by 3.4% in FY24E due to restructuring and minority income adjustment; we increase our EPS estimate by ~3% for FY24. We maintain our BUY rating on the stock with an SOTP-based target price of INR900.

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