Tata Consumer announced reorganization to simplify its Corporate Structure

Tata Consumer on Tuesday evening announced a reorganisation plan in line with its strategic priority of unlocking synergies and efficiencies. Let us look at the details and how the shareholding for investors is going to change post it.

Tata Consumer proposed Merger:

• Tata Consumer Products Ltd. (TCPL) has announced the merger of all businesses of Tata Coffee Limited (TCL) with itself in line with its strategic priority of unlocking synergies and efficiencies.
• The plantation business of TCL will be demerged into TCPL's wholly-owned arm TCPL Beverages and Foods Ltd (TBFL). 
• The remaining business of TCL which consists of the extraction and branded coffee business will be merged with TCPL.
• The demerger will happen first, followed by a merger through a composite scheme of arrangement.
• The Board of Directors of TCPL has also approved the purchase of a 10.15% minority interest in its UK subsidiary, TCP UK, from Tata Enterprise (Overseas) AG, Switzerland (TEO). 
• TCPL will issue 74,59,935 equity shares or 0.80% stake to TEO, by way of a preferential issue in accordance with the applicable regulations.
• These transactions will result in TCPL having 100% ownership of the business of TCL and of TCP UK. It will enable the company to efficiently reorganise initiatives of its international business.

Changes for shareholders:

• Tata Coffee shareholders will receive an aggregate of 3 equity shares of TCPL for every 10 equity shares held by them in Tata Coffee Limited.
•  It will be done through the issuance of 1 equity share of TCPL for every 22 equity shares of TCL.
• For the merger, 14 equity shares of TCPL will be issued for every 55 equity shares of TCL.

Tata Consumer Business Reorganization Rationale: 

• According to Motilal Oswal report, the combined entity will house the entire bouquet of strong consumer brands such as Tata Tea, Tetley, Eight O’clock, Tata Coffee, Tata Salt and Tata Sampann among others.
• This will create an operational synergy in terms of common customers and sales & supply chain opportunities through enhanced geographical reach. 
• The acquisition of a minority stake in TCP UK will give 100% ownership in all core businesses of the Company along with enabling efficient reorganisation of international businesses.
• As per company management, with the consolidation of ownership interests in the international branded business, cost benefits, higher operating and other efficiencies is expected to kick in generating an incremental EPS of 5-10% going forward.

Brokerage Radar:

Morgan Stanley: The brokerage firm MS has maintained an ‘Overweight’ rating with the target price of Rs 886. MS likes Tata Consumers' focus on consolidation & simplification of business structure.

Motilal Oswal - The brokerage firm has given a BUY rating with a target price of Rs 900. It expects sales, EBITDA, PAT CAGR of 9%, 17%, 23% over FY21-24E, respectively. Factoring the increase in outstanding share by 3.4% in FY24 due to restructuring and minority income adjustment, the firm has increased its EPS estimate by 3%.

Tata Coffee shares ended 8.5% higher at Rs 213 per share while Tata Consumer share price ended 3% higher at Rs 765.5 per share.