When Tata Tea acquired the Tetley group in February 2000, it was hailed as a landmark deal, the coming together of two companies, one strong in tea production and the other with substantial marketing muscle and global reach. A year later, the question being asked is: what’s next? The answer: the integration of the two companies, a formal process driven with external professional assistance.

Tata Tea has appointed the Boston Consulting Group to help integrate Tetley’s operations with Tata Tea’s, be it the purchase of loose teas, blending, marketing or other operational areas. The idea is to forge a process whereby the two companies will come together and finally operate as a single entity, a solid whole.

Homi Khusrokhan, the managing director of Tata Tea, spent 29 years with the Glaxo Group in India and was involved in three integrations before joining the Tata family in February 2001. In this interview with Christabelle Noronha, he stirs the brew Tata Tea is heating up for the future.

tata.com: It’s getting close to two years since Tata Tea acquired Tetley. What has happened since and what are Tata Tea’s plans to scale up this global operation?

A leveraged buy-out has perforce certain limitations attached to it, in terms of what you can and can’t do as long as the high leverage continues. Therefore, in the early days following the acquisition, Tata Tea restricted its role to an advisory one: monitoring, guiding and watching over Tetley’s operations. A few months ago, having seen an encouraging performance by Tetley, we decided to put in some more money from Tata Tea and Tata Sons into the acquisition by way of ‘quasi-equity’, which brought down some of the very high-cost debt incurred on the acquisition and simultaneously enhanced our ownership stake.

This has really been the trigger for ramping up the pace and embarking on a formal integration process in which we will try to create a virtual organisation (without legally merging the two entities). This will be a two-phase process, with the first phase starting before the end of this calendar year and being completed by March 2002. The end points will be the development of a common vision, goals and strategies for both companies, as also the creation of a road map for capturing synergies and taking the process further.

The second phase will be devoted to actually working together to capture these synergies. So far, the only areas where Tata Tea and Tetley have worked closely together are in the areas of tea buying and blending. Tetley buys about 8,000,000 kg of Indian teas in a year. In order for us to be useful to them in sourcing or supplying their requirements of Indian teas, we need to have our people trained to know exactly what Tetley is looking for, in terms of the quality and prices of the teas required for their blends. The entire Tata Tea buying and blending team has now been trained in Tetley methods and the two companies operate together seamlessly in this area. We are now able to either make teas meeting their requirements at our own plantations, or represent them at auctions and buy the teas they require.

tata.com: Has there been any integration between the two companies in terms of branding, marketing, and distribution, as well as manpower?
HK: As I said, one of the early steps of an integration process is to develop a common vision between both companies and thereby identify areas where we can work together to either grow the business better (capture revenue synergies), or reduce cost between the two companies and thereby capture cost synergies. An example of an area of revenue synergy is utilising the complimentary strengths of both organisations in marketing. Tata Tea has been successful in the marketing of packet teas, Tetley is strong in tea bags.

Markets where one or the other company has so far worked singly can now be developed jointly, leveraging the Tetley brand name, which is internationally well known. In fact, the process will start with India, where we will bring in a Tetley brand at the premium end of the market, and then be extended to jointly developing markets in the Middle East and Russia. The Tetley connection will also give us specialty products already available in the Tetley stable: flavoured teas, herbal teas, organic teas and decaffeinated teas. These introductions could be useful additions at the top end of the Indian market.

In terms of cost synergies, we can look for the best locations in the world to manufacture many of our teas, both packets and bags. We can utilise a global supply chain approach and common platforms for the infotech and finance functions, including MIS. Because of the geographic spread of operations around the world, it may not be possible to move people around as freely as one would like in an integration process. However, there are certain areas where virtual teams can, by using the power of information technology, work without physically moving across country boundaries.

tata.com: When can we expect to see a legal merger take place?
HK: That’s some time away, I’m afraid. After capturing phase II synergies, the third and ultimate step could be a legal merger. However, in order to do this we would have to first substantially bring down the debt in Tetley, then perhaps re-finance the acquisition so that the interest burden comes down. Only when the balance sheets of the two companies look right can a legal merger be concluded.

tata.com: You spoke about launching Tetley brands in the Middle East and Russia. What are your plans for the Indian market?
HK: After introducing the Tetley name in India for the first time, we will follow up with line extensions and build the brand into a mega product. Initially, we will launch products in the form of packets and regular tea bags, but, perhaps later, we will also launch some of the Tetley packaging innovations, like modern draw-string tea bags and a whole host of other products in their range. In India, it should all happen over the next 12 months. The first product, a premium Tetley leaf-tea, should be launched before the end of this financial year.

tata.com: How effectively is information technology being used across your establishments and plantations?
HK: We have some way to go in infotech; we are not as advanced as we should be. One of our problems is connectivity, especially at some of our more remote plantations in the North East. We have a much better network in south India. However, we haven’t as yet adopted an enterprise resource planning (ERP) system. I see that happening at some stage, especially if we have to work with Tetley on a global supply chain. Tetley already has an ERP system in place employing SAP software.

tata.com: Coming back to the integration, what are some of the challenges you face on this front?
HK: Well, the first challenge is that the acquirer company in this case is smaller than the company it acquired. The second challenge is that since this was a cross border acquisition, it is bound to have its fair share of cultural problems. Getting people in two companies in the same country to come together can be a problem; cross-border integrations are even tougher. The third difficulty is that, because this is a heavily ring-fenced, leveraged acquisition, banks can have a say in what is being done. We will have to carry the banks with us for anything that could be construed to be a structural change to Tetley’s operations.

tata.com: All of this must also involve a lot of attitudinal and mindset change among employees.
HK: Yes, that is very much a part of any integration process. I call it the “learning-to-think-for-two” phase, where each organisation has to begin to appreciate that there are two ways of looking at every issue and appreciating each other’s point of view. It is something like the adjustment phase in a marriage, which starts immediately after the honeymoon.

tata.com: Finally, has the Tetley acquisition helped increase Tata Tea’s export business?
HK: Not so far, because it’s only been a couple of months since we put in the extra funding and moved into a closer working mode. The results should be visible in 2002-03.