Chairman at Tata Coffee, R Krishnakumar says that Tata Coffee's ultimate intention is to move into branded operations, much like what Tata Tea did.
He says that the company will move from plantation, to becoming a branded player with the Eight O'clock Coffee, EOC, buy. He adds that EOC revenues are at $120 million and EBITDA is at $35 million.
He further adds that Tata Cofee will retain EOC management and EOC is capable of taking $150-170 million debt on its books. He states that soluble coffee has been boosting margins and the company will look at integrating all the beverage businesses.
Tata Coffee is a strong player in India and it has a large number of coffee plantations.
Excerpts from CNBC-TV18's exclusive interview with R Krishnakumar:
If you could explain the whole rationale for this deal and what it means for Tata Coffee because it is a company which is bigger than yours, which you have bought up?
I just want to explain the rationale behind this. Tata Coffee is a strong player in India and it has a large number of coffee plantations. It's ultimate intention is to move into branded operations much like Tata Tea did. So even Tata Coffee looked at a vacant place in the United States, which is a dominant coffee country. In that area we found Eight O' Clock Coffee as a potential target, we tracked it and finally secured it last week.
It gives Tata Coffee a big platform to convert all its instant soluble coffee and its new upcoming freeze-dried coffee products into the Eight O' Clock Coffee brand and penetrate other countries like Russia and Ukraine.
Across that entire area; it should be possible, over a period of two-three years to convert the entire production of soluble coffee and this new freeze-dried coffee capacity, which should come into operations next year, into branded operations.
This will give a great stability to its profit margins and an increasing presence in the key markets where coffee remains a significant beverage.
So that was the intention of transforming Tata Coffee, from being just a commodity player, into becoming a significant branded player in the key market. In the beverage area between Tata Tea and Tata Coffee, the US is a market of great interest for us because that is the high beverage market.
There are new forms of tea and coffee products that are coming in, which are ready to drink and that should be an interesting area for us to jointly examine. So we will move towards being a significant beverage player in the United States.
Take us through the financials of this deal as well. What is the financial performance of Eight O' Clock? How much you are paying and what is the combination of equity and debts?
It is a total consideration of $220 million of which, about $50 million will be by way of equity from the group Tata Coffee and its associates and the balance is the debt arranged by Rabo Bank.
That is the nature of financing and we have seen a turnover of about $120 million and it has got an EBITDA margin of about $35 million as it stands today. Eight O' Clock Coffee is poised to move into a new distribution outlet.
So we expect that their volumes and reach should increase over the next year for which they have drawn fairly interesting plans. It has got a management team that is robust in competence, led by a Lady Barbara Roth. We are retaining the management and we will of course infuse some of the Tata Coffee talent into that as well.
Could you tell us a little bit more about the balance sheet of Eight O' clock Coffee? What kind of debt it has on its books and what the balance sheet of Tata Coffee would look like right now, once it assumes the debt to buy that company and whether it takes on some of the debt that Eight O' clock has on its books?
The Eight O' clock Coffee acquisition debt is entirely on the books of Eight O' clock Coffee. It is currently debt free. We can easily take the debt of about $150-170 million. It is capable of doing that and that is how the structure is.
It does not feature in the balance sheet of Tata Coffee except to the extent that we will consolidate the results of Eight O' Clock Coffee into that of Tata Coffee, which ultimately gets reflected in the accounts of Tata Tea, which is the majority holder of Tata Coffee itself.
So it is an interesting linkage between Tata Tea through Tata Coffee into Eight O' Clock Coffee.
Are the margins of the two companies comparable and what might be the blended margins now?
The EBITDA margin is around $35 million for Eight O' Clock Coffee and it should improve significantly the margins of Tata Coffee. If one sees the performance over the last three years, there has been a significant improvement in its margins, primarily driven by its investments in soluble coffee so far.
We acquired Asian Coffee a few years ago and Asian Coffee has expanded significantly. Two years ago we acquired a company in Tamil Nadu and that also produces soluble coffee. The soluble coffee margins add to the stability of Tata Coffee's performance in terms of its profitability. Now it is making an investment in a pure freeze-dried project and the cost of that investment is about Rs 70 crore (Rs 700 million).
By the end of this financial year how much do you see the US market contributing to your total sales even in terms of percentage size?
I would expect that this year, it should be only in the second half. I would expect the top line to go up by about Rs 300 crore (Rs 3 billion) for Tata Coffee. The margins should improve. I do not want to forecast what the margins will be, but I would expect to see some interesting trend.
You would not have any plans of creating one large beverage company, now that Tata Tea and Tata Coffee have both made very significant global moves? Tata Tea already owns 51% of Tata Coffee. Is there any sense in creating a one large global beverage company, combining both tea and coffee?
Yes, I guess it is a very interesting possibility. Maybe we would look at it when some more acquisitions are done in the beverage space.
So you are considering other acquisitions for Tata Coffee?
Yes, but not only for Tata Coffee, we are looking at Tata Tea as well. We will never come to an end on the acquisition path. It is an inorganic growth that would drive the company's destiny, so we would continue to look at more acquisitions.
Tata Tea made two acquisitions last year. It has acquired Good Earth, which is a specialty tea company on the west coast of United States. Two months back, Tetley acquired Jemca, which is a market leader in Czechoslovakia, to get a strong base in Central Europe including Poland. I think that mission will continue- to acquire and scale up.
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