Merger of Tata Chemicals & Tata Global Beverages to help Tata Group focus on consumer business
The salt trade of Tata Chemicals has been rising in low single digit for the past several years.
The merger of the partnership between Tata Chemicals consumer business, which primarily includes the salt segment, with Tata Global Beverages, will help the Tata group to concentrate on the consumer vertical, where its presence as a group has been limited.
However, given the long term view of synergies of the merger, the agreement does not offer any quick trigger for a rerating of the shares. While there would be 2-3% cost synergies across the next 18 to 24 months according to the management, the linked consumer entity has been struggling to grow over business categories.
For instance, Tata Global Beverage’s income for the past five years has declined due to the divestment of its less lucrative businesses. Tata Global Beverages largely includes tea and coffee businesses.
The salt market of Tata Chemicals has been growing in a low single-digit for the past numerous years. The company’s packaged spices and pulses market is relatively new and is yet to record significant growth momentum. The only crucial factor about the salt business is its big margin results.
The Earnings before interest tax (EBIT) margin of Tata Chemical’s consumer market was 17% in FY19 as contrasted to 9.1% margin of Tata Global Beverages. The merged entity, which will be called Tata Consumer Products, will have a mixed margin of 10.7%. A high margin would lead to better cash flows, which over some time may help the company to look at inorganic growth through acquisition.
On the valuation front, Tata Chemical’s investors may be dissatisfied. The swap ratio means that they will receive 114 shares of Tata Global Beverages for every 100 shares owned, thus valuing the consumer business at USD 2.98 per share.
On 18 March 2020, Tata Global Beverages stock ended at USD 2.61, and Tata Chemical’s stock closed at USD 7.31. While the valuation for the consumer business seems fair, that the residual activity of Tata Chemicals is a mere commodity chemical market, hence, it does not justify the remaining value of USD 4.33 after taking out the salt segment.
