Two decades after it bought Parle’s beverage brands, including Thums Up, and returned to India, Coca-Cola is poised for its second big acquisition here. The world’s largest beverage company has emerged as the frontrunner to buy the consumer brand portfolio of Kraft Heinz — which includes children’s milk drink Complan, Nycil talcum powder, Sampriti Ghee and energy drink powder Glucon D — for around Rs 4,000-5,000 crore, after a tax googly by the seller stumped other contenders, said multiple sources aware of the matter.
ET reported September 6 that Coke and the Zydus Cadila Group were the two in the running for the sale but a private consortium of Apax and Arpwood Partners made a strong play and emerged as a surprise bidder in the final round till Kraft Heinz tweaked the final deal contours, the people added.
The seller unexpectedly decided to sell the European holding company that houses the India operations and wants the buyer to absorb the tax losses of that entity, registered in Italy, as against the original plan of just selling the Indian operations along with the brands. The Italian company in turn is held through another entity registered in the Netherlands, which is an arm of the US parent.
Kraft Heinz has communicated to bidders that it will demerge the operations of the European entity and carve out all non-India businesses and convert it into a shell company that will hold the India investments and the tax losses relating to the European business to the tune of Rs 500-600 crore. Fearing regulatory uncertainty over capital gains tax and round tripping, Indian bidders are likely to submit conditional offers or will opt out altogether. Buying an offshore entity that derives substantially all of its value from operations in India requires RBI approval.
Coca-Cola India, Arpwood and Apax Partners declined to comment. There was no response to mails sent to Zydus Cadila and Kraft Heinz.
Analysts feel that the tweak puts Coke, a global company with significant operations in Europe, in a favourable position to beat competition and acquire the Kraft Heinz portfolio as it can both acquire the European entity and absorb the tax losses. A sprawling portfolio, uncertain growth prospects and high valuation are said to have led most potential bidders like Danone, Tata Group, Nestle, Wipro Consumer, Dabur, Emami and ITC to opt out of the race or wait for future carve-out opportunities.
Sources said the process was kickstarted after an offer came from Apax-Arpwood at the beginning of the year. JP Morgan was appointed by Kraft Heinz to drum up strategic interest. Arpwood and Apax were taken straight to the final round of negotiations, having spent the maximum time on plans to turn around the business. “Arpwood-Apax had catalysed the deal and held bilateral negotiations long before the others and the formal sale process was an exercise to discover and benchmark valuations,” said another executive on condition of anonymity.
Kraft Heinz has been seeking about $1 billion for the assets but potential bidders have balked at the valuation as they feel shifting consumer tastes and preferences may not be kind to the brands.
The bids are mostly expected to be in the $550-600 million range, they said.
Coke is believed to have already submitted a bid to buy out the European entity last week while Arpwood-Apax is believed to have made a conditional offer. Pankaj Patel-led Zydus Wellness, the listed consumer business subsidiary of Cadila Healthcare, has sought an extension. Cadila was keen to expand its existing portfolio of personal and skincare products, sugar substitutes and health foods and has been working with investment bank Avendus.
COKE’S BET AGAINST GATORADE
The Atlanta-headquartered cola giant, having acquired the Costa Coffee chain from UK leisure group Whitbread a fortnight back in a $5-billion deal to take on Starbucks, Nestlé and JAB Holdings, has also been in pursuit of GlaxoSmithKline Plc’s consumer nutrition business, which owns malted milk brand Horlicks, which is up for grabs for an estimated $4 billion. With the core soft drink sales business sluggish, its strategy has been to acquire established or high-potential brands in the non-soda beverage space and to take a share in the fast-emerging areas of health-based hydration. Picking up Glucon D will help combat Pepsico’s Gatorade.
Entry into products such as glucose, its key target, and milk-based drinks will give Coca-Cola bandwidth in new distributor channels in pharmacies as well.
