Tatas debt-free cuppa

Written by The Financial Express | Updated: Jan 30 2008, 04:12am hrs
Is tea had everywhere in the world Even if the answer is only potentially affirmative, it stands to reason that a modern tea company must necessarily have global market reach. To observers who went out on a limb with this logic when Tata Tea bought a UK-based company several times its own size called Tetley for $425 million in 2000, the companys third-quarter results for 2007-08 may sound especially refreshing. While Tata Teas standalone net profit has dropped 37.5% over the same period of 2006-07, its Q3 consolidated profitwhich includes Tetleys operationshas recorded an over tenfold increase to Rs 1,307 crore, up from Rs 117 crore last fiscal. Whats more, the company claims it will be debt-free by the end of the financial year. For a company that seemed to have taken on an outsized loan burden in 2000 to execute what sceptics at the time saw as a vanity purchase, this sounds like a major cause for celebration, one that may even vindicate the enthusiasm for leveraged buyouts (LBOs) in an M&A arena said to be getting tougher by the day.

Not so fast. The tenfold leap is actually a Coca-Cola bounce, with sufficient fizz only for the quarter in question. For, it can be traced directly to Tata Teas sale of its Glaceau stake to The Coca-Cola Co for $1.2 billion, a one-off. The company had acquired the stake in Glaceau for $677 million. Also, it has not been easy going for the firm either. The company has fought a stiff battle with interest costs, visible in floundering performance for several years after the Tetley acquisition, though it did not wreck the balance sheet as sceptics had feared. Credit its market success. The flow of earnings from operations has been strong enough, and the company has already retired $325 million of debt. According to analysts, the surprisingly good debt-to-equity ratio can become even better if the firm rids itself of more debt by cashing in on some of its Tata group holdings, though such financial decisions depend on several factors. All in all, the company has come good on its Tetley purchase, and is financially well placed to make further overseas acquisitions. The overall lesson for investors, clearly, is that they must exercise independent judgment on LBOs by the logic relevant to the case at hand, rather than fall for sweeping scepticism.