Shares of both Tata Chemicals and Tata Global Beverages today surged after the Street gave a thumbs-up to their deal announcement. Under the deal, announced on Wednesday, Tata Global Beverages Ltd is acquiring all the branded food businesses from Tata Chemicals Ltd in an all-stock transaction. As part of the deal, shareholders of Tata Chemicals will get 1.14 new shares of Tata Global for every share held. Shares of Tata Global surged as much as 10% to ₹220 while Tata Chemicals jumped 8% to ₹604 on BSE, both outperforming the flat broader markets.
The Tata Chemicals-Tata Global Beverages transaction is subject to shareholder and regulatory approvals. The carving out of the food business of Tata Chemicals is part of Tata Sons Ltd chairman N. Chandrasekaran’s strategy to simplify group structures with a sharper business focus. The new business created by the merger of the consumer businesses will be known as Tata Consumer Products Ltd.
At present, a sizeable chunk of Tata group’s fast-moving consumer goods business that includes Tetley Tea, Eight O’Clock Coffee and Starbucks India franchise are housed under Tata Global, while Tata Chemicals owns food brands such as Tata Sampann, which sells packaged pulses and spices. The consumer business of Tata Chemicals consists of Tata Salt, which has a dominant share in the domestic market.
Tata Group group expects a pretax synergy of 2-3% of combined India branded business revenue, which will be realized over the next 12-18 months.
India branded revenue between the two businesses is 60% of the combined revenue, which is over ₹9,000 crore.
Tata Chemicals will transfer the salt and other food products business under the deal but the salt manufacturing facility, basic chemistry products and specialty products businesses will remain with the company.
Domestic brokerage Motilal Oswal has a “buy” rating on Tata Chemicals shares with target price of ₹700.
“Tata Chemicals would lose its high-margin, high-RoCE consumer business, although the existing shareholders have been appropriately compensated. Further, the salt manufacturing business remains within Tata Chemicals, with both the companies entering into a non-exclusive supply contract for 25 years with a take-or-pay arrangement for the current and planned capacity. As part of the deal, there is no transfer of fixed assets or debt from Tata Chemicals to Tata Global,” the brokerage said.
“Post the demerger scheme, Tata Chemicals 80% of revenue will be dominated by the basic chemistry products and the balance by specialty products. Management targets to focus on the specialty products business and increase its contribution to 50% in the long run,” it added.
The company expects the transaction to close by 4QFY20/1QFY21. For Tata Global, the deal has a “good deal of potential”, says Kotak Institutional Equities. “Our math suggests meaningful (3-6%) EPS accretion for Tata Global in the second and third years post consummation even without assuming any synergy gains. Most importantly, Tata Global becomes the vehicle to execute Tata Group’s aggressive aspirations in the B2C FMCG business (including home care and personal care at some point),” says the brokerage, which has a “add” rating on the stock.