In the biggest ever deal in Indian corporate history, Tata Tea Limited bought out the Tetley Group of UK with its brands for 271 million pounds sterling.

Christabelle Noronha spoke to R K Krishna Kumar about this historic deal and what it means to the company, the group and the Indian tea industry.

tata.com: The acquisition of Tetley was not only a historic moment for the Tata Group but for the country as well. Would you like to share with us when and how it all began?

Krishna Kumar: The acquisition of Tetley by Tata Tea was born out of a vision. The genesis of the acquisition was not something that happened over the last few years. It was embedded in the journey that Tata Tea began way back in 1983. Tata Tea was then a totally commodity-driven business, it sold all its produce in bulk and had no direct contact with the consumer. It therefore suffered from all the disadvantages of such an operation -- prices would rise and fall often due to global supply and demand, quite independent of the consumer.

We found that the price behaviour of tea was a lot more stable at the consumer-end than when auctioned. Since Tata Tea has the size and geographical spread, we decided to go directly to the consumer. This move brought about a major change in the strategic architecture of the tea industry. It was a daring leap that was never before taken by a commodity manufacturer. We began packaging the teas that were produced at our estates, branded them, built up a distribution and dealer network and delivered garden fresh teas directly to the consumer. We were the first company to launch poly bags in south India and thereafter in the rest of the country.

There was another dimension to this move. In an attempt to grab market-share we had to deal with a multiplicity of competitors, both Indian and multinationals. We were faced with competition from the world’s largest and most powerful consumer products company, Unilever. At that time they had a market share of 70 per cent of the packet tea market. We had around two per cent market-share. We needed to bring about a transformation, to increase our market-share; so, with innovative packaging, we positioned our products in India as ‘garden fresh’. This strategy brought about a perceptible difference in the quality of teas received by the consumer. We delivered a value product and today enjoy a market-share of 26 per cent of a much larger market.

We also envisioned that in the early 1990s, the face of the global tea industry would undergo a change. It was only a matter of time before tea was going to be imported from India, re-blended and exported. We also saw the need for a production base outside India, so we formed a joint venture in Sri Lanka where our plantations produce 11,000 million kg of very fine quality tea. We plan to buy plantations in Africa as teas are imported from these geographies – India, Sri Lanka and Africa. All this is part of our global strategy.

We also recognised that we would need to build or buy a brand which had global appeal. We had two options before us – one was to build the Tata name as a global brand, the other was to acquire a global brand. We made some tentative efforts in the direction of the former, but realised that it was a very expensive and risky proposition which required very large outlays of funds. Building brands overseas is no easy task, so it became clear to us that the most effective option was to acquire a brand.

Now global brands are very difficult to acquire. In 1995, Tetley was up for sale. There are only two or three global brands – one is certainly Tetley, so we became interested in acquiring Tetley, as it was a perfect fit with our overall global strategic plan.

In 1995, we made a bid, which we lost. It was acquired by a venture capital company, but was up for sale again last year. We put together a financial package that secured and protected Tata Tea in India from any possible risk. The point I am making is that the acquisition of Tetley is an extension of Tata Tea’s global journey.

tata.com: What was the amount that Tata Tea paid to acquire Tetley?

KK: We paid a total of 271 million pounds. There is a lot of misunderstanding that the cost is 400 million pounds, and that it could be a liability for Tata Tea. The liability part of the acquisition is totally limited to Tata Tea’s equity contribution. The lenders have no recourse at all to Tata Tea in India. Its dilutive impact on Tata Tea’s earnings is not substantial and we have taken care of it.

tata.com: What impact will this acquisition have on the Indian consumer? Will Tetley products be available here?

KK: Tetley has four strengths. It is the most easily recalled teabrand in the world, a blue-blood British Tea Company, known for its innovation, whether in packaging or managing the brand. The second strength is its ability to buy teas worldwide, blend and package them, which is a very special skill that Tetley possesses. It sources teas from all over Argentina, Turkey, India, Sri Lanka, Africa, etc. Its expertise in this area is unrivaled and is an important asset that we have inherited.

Tetley’s third strength is extremely good innovation in packaging. They are the first company in the world to introduce tea bags. They have an extremely fine track record for innovative packaging; they created, among others, the round tea bags and the drawstring tea bags.

And finally, they have extremely good logistics management skills, which we have acquired. Therefore, what it means to the Indian consumer is that we will be able to leverage all this in the Indian market place.

tata.com: And when would this happen?

KK: In the not too distant future, probably in the next 18 months.

tata.com: Would Tetley consider the possibility of acquiring tea plantations overseas?

KK: We would certainly like to acquire some more tea estates overseas, especially in Africa, to complete our portfolio. World tea is a blend and it makes sense for us to acquire more tea estates overseas now that we have a global brand.

tata.com: How was the acquisition of Tetley received in European corporate circles?

KK: The takeover of Tetley was very widely reported by newspapers all over the world. The British media carried the news very prominently. It changed their perception of India; they realised Indian companies have the daring and courage to acquire an international company bigger than themselves -- Tetley is three times the size of Tata Tea. It was received with some degree of consternation but with a great deal of respect.

In fact, we were invited by UNCTAD (United Nations Conference for Trade and Development) to participate at an international business relations conference in Geneva. There were 40 government representatives and participants from all over the world at this conference. We took part in this through a videoconference.

I think it was a great move for the Tata Group because it demonstrated the continuing leadership of the House of Tatas. There are many other leaders in the group – Tata Engineering, Tata Steel, Tata Consultancy Services. The financial structuring of the deal by Mr Soonawala (now vice chairman, Tata Sons) attracted a great deal of attention in the corporate world, financial institutions and others, both in India and abroad.

tata.com: What does this mean to the investor?

KK: The investors of Tata Tea were initially overwhelmed by the size of this deal and apprehensive that it may dilute their earnings per share. We explained to them that as the integration of Tetley with Tata Tea begins to happen, it would have significant benefit to Tata Tea’s bottomline as it will now be possible for Tata Tea to penetrate new global markets under the Tetley brand and thereby generate new business that does not exist today. In that process it will generate higher growth, both in terms of revenue and profitability.

It will take around three years to fully realise the benefits of this acquisition. We have created two major taskforces to identify specific areas where integration will result in benefits to Tata Tea. I expect that by the year 2001-2002 the results of the integration will be reflected in the Tata Tea balance sheet.

In the next five to six years, you might see no boundary at all between Tata Tea and Tetley. It will be a fully seamless integrated organisation in many ways, which will take away traditional costs from the tea business.

tata.com: Will they continue to operate as two independent companies, or do you plan to merge the two operations?

KK: At this point in time they are two different companies. At some stage it will be nice to visualise them as a fully integrated operation, that will certainly be a global giant.

tata.com: Will Tetley market products from Tata Tea plantations in all 44 countries it operates?

KK: Like all major companies, we will have a stable of brands. The existing brands of Tata Tea will continue in the domestic market. We may supplement them with Tetley brands, but that will be totally market-driven. I do not visualise large-scale entry of Tata Tea brands overseas, because that calls for allocating financial resources which is quite unnecessary.

The logic for acquiring Tetley is that it is a well-known brand that has been advertised and promoted. We may introduce some Tata Tea brands in the Middle East and CIS countries. In bigger and more advanced markets we would promote the Tetley brand.

tata.com: How will the global fluctuation of tea prices affect the cost of the product in India?

KK: The fluctuation of tea prices will affect the selling prices in the auctions. By branding and adding value to our products we will partly and significantly be spared from world trade fluctuations.

As of now, Tetley only has tea bags. But, in the world market, tea is sold in the form of iced tea in packets, and so on. We can add these to our portfolio and reach out to more markets.

tata.com: How supportive was the Tea Board of this move?

KK: We had very strong support from the government of India, the Reserve Bank of India, t he Tea Board and from the industry. They were very happy that an Indian company was for the first time making a bid for a truly global brand.