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HomeNewsTata Consumer Products leads acquisition race for Capital Foods, valuing company at...

Tata Consumer Products leads acquisition race for Capital Foods, valuing company at INR 5,500 Crore

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Tata Consumer Products Ltd (TCPL) has taken the lead in the race to acquire Capital Foods Pvt Ltd, the company known for producing condiments, food products, and ingredients under the Ching’s Secret and Smith & Jones brands. This development marks the conclusion of weeks of lengthy negotiations, according to individuals familiar with the situation.

TCPL plans to initially purchase a 65-70% stake in the company from its three investors, with an option to acquire the remaining stake gradually. This transaction values the company at INR 5,500 crore. Other competitors in this bid include Nestle SA, the largest food company globally, and The Kraft Heinz Co.

Read More: Nestle, Kraft Heinz and Tatas among leading FMCG players vying for Capital Foods buyout

Throughout its history, Capital Foods has introduced a range of products infused with authentic “desi” flavors. These offerings encompass Ching’s Secret instant noodles, soups, condiments, curry pastes, and frozen entrees, as well as the Smith & Jones lineup, which includes ginger-garlic paste, specialized sauces, and baked beans.

The legal documentation and final negotiation rounds are currently in progress to determine whether the existing shareholders will retain a portion of their stake or choose to exit the investment entirely.

Kotak Mahindra is providing advisory services to TCPL.

Last year, Capital Foods’ major shareholders opted to initiate the sale of the company. These shareholders comprise Invus Group, a European family office and investment entity, holding a 40% stake; the US private equity firm General Atlantic, with a 35% ownership; and Ajay Gupta, the founder chairman of Capital Foods and a former advertising executive turned food entrepreneur, who holds a 25% stake.

The possible acquisition will set TCPL in competition with Nestle’s Maggi, the leader in the INR 5,000 crore branded instant noodles market, commanding a 60% share. The Maggi brand falls under Nestle’s prepared dishes and cooking aids business. Additional contenders in this category encompass Top Ramen, Wai Wai, and Patanjali.

“Tata Consumer Products does not comment on market speculation,” the company said in an email. Gupta, GA and Invus remained unavailable for comment.

The individuals mentioned earlier have indicated that Gupta is expected to remain with the company for the time being, although his specific role or capacity remains uncertain.

The sale process had garnered attention from various multinational corporations and domestic consumer companies, including ITC, Hindustan Unilever, Orkla, Nissin Foods, and McCormick. Initially, the asking price had been significantly higher, nearly at $1.5 billion (INR 12.45 crore).

While Capital Foods has not yet submitted its FY23 financial figures to the Registrar of Companies (RoC), insiders familiar with the company anticipate that sales will reach approximately INR 900 crore, accompanied by a 25% EBITDA margin. These sources also note that the company’s core business has consistently experienced a compounded annual growth rate (CAGR) of 30%, outpacing competitors who are experiencing single-digit expansion.

“A potential deal such as this and other recent acquisitions show a rebound of valuations in the FMCG market,” said Rajat Wahi, partner at Deloitte India. “While sales for most brands have now exceeded the pre-Covid values and volumes, the weaker rural sales over the last six quarters have impacted overall growth.”

He mentioned that the commencement of the festive season, enhancements in supply chain and sourcing, the decrease in raw material costs, potential interest rate reductions in the upcoming months, enhanced liquidity, and the anticipation of elections would likely lead to a substantial upsurge in the sales of fast-moving consumer goods (FMCG) products, both in rural and urban areas.

Nonetheless, a senior executive from a competing food company, who had assessed the opportunity but did not secure it, emphasized the challenge of maintaining the growth that companies like Capital Foods experienced during the pandemic. This growth, fueled by increased consumer demand for packaged foods, could be sustained effectively only if a national player with substantial distribution, advertising, and marketing capabilities takes control. Even amidst the COVID-19 pandemic, Capital Foods faced challenges in its sales of noodles, sauces, and condiments within the crucial hotels, restaurants, and caterers (HoReCa) channel due to reduced mobility and the widespread adoption of remote work arrangements (WFH).

As per analysts closely monitoring TCPL, the company has embarked on a multi-year transformation journey, evolving from a primarily tea-and-salt-focused entity into a more comprehensive food and beverage enterprise. This transformation occurred as a result of the Tata Group’s strategic portfolio rationalization and consolidation efforts, including an impending merger with Tata Coffee anticipated to conclude by the end of FY24. Over the past six months, the company’s stock has gained a notable 24%. With the foundational elements of distribution and portfolio expansion in place, the stock market anticipates that TCPL is poised to achieve robust growth over the medium term. Despite tea and salt still contributing to approximately 85% of the revenue, emerging growth segments within beverages and food (such as NourishCo, Sampann, Soulfull, etc.) are displaying impressive growth rates, exceeding 40% CAGR.

The company has been actively engaged in acquisitions, notably acquiring Soulfull in 2021, a company specializing in breakfast cereals and millet-based snacks. This move led to a remarkable 50% surge in revenue through brand extensions and the introduction of new products, all achieved at minimal additional costs. Furthermore, in May 2020, the company acquired PepsiCo’s 50% stake in NourishCo Beverages Ltd, a joint venture equally owned by both companies, housing brands such as Himalaya packaged water and GlucoPlus. However, despite extensive discussions spanning nearly two years, the highly-publicized takeover attempt of Bisleri did not come to fruition. The proposed deal for India’s largest bottled water brand was valued at approximately INR 7,000 crore.

“M&A remains high on agenda but strategic fit and right price are a must,” said Vivek Maheshwari, analyst with Jefferies.

The company has placed significant emphasis on enhancing its distribution strategy, which is built upon three key pillars. Firstly, it aims to extend its overall reach to 4 million outlets by the end of this calendar year, and as of the end of June, it had already achieved a figure of 3.9 million. Secondly, the company has introduced segmented routes for its salesmen in cities with a population of over one million, while also simultaneously investing in direct distribution efforts in smaller towns. The majority of analysts anticipate that these strategic initiatives will contribute to increased revenue growth rates and market share in FY24-25.

“Scale-up of the India growth businesses would support the growth trajectory. Strong FCF, improving return ratios, attractive long-term potential for Starbucks and the opportunity to leverage Tata Group assets (e.g., BigBasket) are other potential positive drivers,” said Latika Chopra, analyst with JP Morgan.

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