Deals Brewing Over A Cuppa In Africa

When the diversified RPG Group — better known for its power, tyre and retail interests — announced last week that it is eyeing gardens in Africa to expand its tea business, it may not have raised many eyebrows among tea barons. The only question could have been that why did it take the business-savvy Goenkas, who own the conglomerate, so long to join the African party.

For an industry where acquisitions in the past decade were few and far between and limited within the country, the last nine months have witnessed a dramatic change. Indian tea companies — flush with cash following a demand-supply mismatch and fired by a new love for Africa — are furiously chasing deals in countries such as Uganda, Rwanda and the like to emerge as bigger and stronger players.

If McLeod Russel — a Williamson Magor Group company and the world's largest tea producer — set the ball rolling with its acquisition of a controlling interest in a tea factory in Rwanda in August 2009, followed by its takeover of six estates in Uganda in January this year, B K Birla-group firm Jayshree Tea & Industries has not been far behind in the deal-making game, snapping up one company in Uganda and two in Rwanda last month.

While the African buys, undertaken through wholly owned subsidiary Borelli Tea Holdings, added 16.7 million kg to McLeod's existing tea capacity raising it to about 100 million kg, Jayshree Tea gained slightly over 5 million kg through its overseas foray. Jayshree Tea produced just over 23 million kg last year through its gardens in India. Both McLeod and Jayshree, however, say that their Africa adventures have only just begun and competition is going to get stiffer from now on.

"There were eight companies vying for the Ugandan firm (Kijura Tea Company) we bought, which just goes to show the level of interest there is in Africa at the moment," Jayshree Tea managing director D P Maheshwari said.

"Uganda, particularly, may see a lot more action going forward." On his part, McLeod Russel MD & Indian Tea Association (ITA) chairman Aditya Khaitan pointed out that just about any market in Africa is up for grabs. "Opportunities are there everywhere — be it in Kenya, Malawi or even Mozambique. It is up to the entrepreneurs to decide where they want to go," he added.

So what is it about Africa that is driving the interest of Indian tea giants? Analysts say it is a combination of climate and costs. As in north India, the weather patterns in different African countries enable them to grow tea of the CTC variety, unlike India's principal rival in south Asia, Sri Lanka, which grows orthodox tea.

African teas also blend nicely with north Indian teas. More importantly, tea companies can be assured of large landholdings in Africa, "getting which is something next to impossible in India at the moment", Khaitan said. "If you consider that the bulk of the costs in a plantation is accounted for by labour, the savings accruing on this front in Africa is quite considerable," Maheshwari explained.

Dhunseri Group chairman and former ITA chief C K Dhanuka, who is also examining the viability of having a presence in Africa, said the other big attraction of that continent is that it is still possible to get gardens at "reasonable prices".

McLeod Russel, for instance, only had to shell out $25 million (excluding the debt takeover) for its acquisition of Rwenzori Tea Investments in Uganda that gave the Indian company access to 15 million kg of tea capacity in Uganda.

For the deal in Rwanda, that added 1.7 million kg to its capacity, McLeod arm Borelli Tea Holdings had to pay $2.75 million.

So is Africa going to be the potential game changer for Indian tea? Khaitan has no doubt in his mind that the continent can only spell good news for his industry even in the short-to-medium term. "The stigma about Africa is no longer there. Africa is now the place to be," he said.

Source: Times of India