A case of Sale and Acquisition with the right synergy

The Tatas had acquired 30% of Energy Brands for $677 million in August last year. On Friday, they sold this stake to Coca Cola for $1.2 billion. Tata tea’ shares closed nearly 4% higher on the Bombay Stock Exchange.

The Coca-Cola Company is acquiring Energy Brands Inc, known as Glaceau, and its full range of fast-growing, enhanced water brands including vitamin water for $4.1 billion.

The deal is expected to close within a few months this year 2007. Tata tea which had bought a 30% stake in Glaceau for $677 million a year ago is selling its stake in the company to Coca-Cola for $1.2 billion getting nearly double its original investment.

There are two views to Tata Tea’s decision to sell its stake, the first one is that the Tatas made a high finance earning strategy and the other, more skeptical view is that when the group bought into Glaceau last year its intentions were to make headway in the rapidly growing health beverages category. To that extent, the group had made a strategic investment not a financial one. This sale may therefore, delay the group’s plan to grow in this business. It also means that Tata Tea will now have to actively look at new opportunities.

Tata Tea, clarified they will pursue other acquisition opportunities for this market. Commenting on the sale one of their directors at the helm said that though there was no pressure to sell, the Tatas were not entirely comfortable as minority shareholders. They did not want to stand in the way as the other shareholders had already agreed to the sale and If they had a 100% stake their response would have been different.

This deal has taught the group an important lesson that it will no longer look at minority stakes in companies it acquires globally. In recent times, Tata group has sealed significant acquisitions including Corus, where it has complete control.

The $523 million profit that the Tatas have netted from the sale is likely to be diverted to fresh acquisitions or used to settle debts in Tata Tea’s UK arm which stands at $600 million.

Coca Cola is concerned they are happy with the strategy of acquiring vitamin-water and they are confident of managing this opportunity in a way that delivers attractive returns for their shareowners and also appropriately benefits their system.

Meanwhile, Coca-Cola India will study the options of introducing enhanced water in India. At present there are no brands in the country which sell vitamin or enhanced water.