Glacéau Revisited

Examining Tata’s investment in Energy Brands, which seems to have paid off handsomely.

ByAdam Ismail

The October 2006 “Word from Wall Street” column featured an analysis of the Tata Group’s investment in New York-based Energy Brands, maker of Glacéau functional beverages like Vitaminwater and Smartwater. The Tata Group is a leading Indian conglomerate that owns key tea brands like Tetley, and it has plenty of experience in the beverage market. Its $677 million investment for a 30% stake in Energy Brands looked like a major move into the healthy beverage space. However, those plans may be delayed a bit, but for very good reason.

In May, Coca-Cola (Atlanta, GA) made a move to acquire ALL of Energy Brands for $4.2 billion. That means Tata’s stake in Energy Brands, valued at just under $1.3 billion, netted them a cool $583 million profit. Even more incredible is that the company made that profit in just about nine months.
Tata’s investment earned 86% in nine months, which amounts to an annualized profit of 129%. To put this in perspective, the stock market traditionally returns 11%, and most companies in this industry would jump at a chance to get a 20% return on capital. If you were in Tata’s shoes, it would be hard to imagine getting a better return on this investment.

While taking a bigger piece of the healthy beverage space may be part of its strategy, Tata is probably better served getting its capital back with such an attractive return. Besides, this gives it the chance to re-deploy nearly twice as much capital into healthy beverages in the future. Already, several investment banks and Indian media outlets are reporting that Tata is looking for attractive water brands, and is even considering an acquisition of Green Mountain Coffee, an upscale organic coffee company. Tata itself has also said it is looking for large acquisitions in the U.S. to grow its North American business.

Acquisitions are only one way of getting into the healthy beverage space, though. Tata’s vice chairman has publicly stated that the company will invest in and launch its own line of “enhanced waters” soon, but differently than companies that have already brought these products to market. Indeed, the company claims to have learned a lot about the water business from its Energy Brands investment, and is likely to use that “knowledge” when it re-enters the space.

It is hard to say what exactly this magical knowledge is, but Energy Brands was very successful at building a highly profitable business without a lot of assets in the ground. It had struck a deal with Cadbury’s beverage division to bottle and distribute Glacéau products, basically leaving it to focus on marketing and development activities. That is far from the traditional business model for large beverage brands, but nonetheless extremely profitable.

Coca-Cola paid 10 times revenue for Energy Brands, which is a higher revenue multiple than any large brand has ever been acquired for in the nutraceuticals industry. Amazingly, Coke may not have overpaid for the company because it was so wildly profitable. The Financial Times reported that the deal price equated to 20 times EBITDA, a cash flow measure that is essentially the operating cash flow from the business. Twenty times EBITDA may seem like a high valuation, but for a high growth business it is actually not that unreasonable.

If Tata can implement what it learned out of the Energy Brands deal, it might have decades of high return investments from the healthy beverage space ahead. Regardless, if what it has stated is true, Tata will soon become a much better known multibillion dollar company in the nutra-ceuticals space. NW