A Tough Brew -- Tata Tea
But the Tetley Group, which has been acquired by Tata Tea, had a negative net worth of GBP 92.12 million as at March 4, 2000, in terms of its balance sheet as on that date.
Most of that negative net worth is due to goodwill written off. Accountants explain that in the event of an acquisition where the value paid is more than the book value of the assets, the difference is charged to the reserves of the company. Hence the negative net worth.
As Tetley's annual report explains, the goodwill arising on the acquisition of subsidiaries is the difference between the fair value of the consideration given and the fair value of the net assets acquired.
This was written off against assets until March 7 1998. From that date, purchased goodwill is capitalised and amortised.
The interesting thing is how Tata Tea has accounted for the purchase of a group which has a negative net worth of such a huge amount.
Unfortunately, the investment of GBP 60 million by Tata Tea in Tata Tea (GB) Ltd, the special purpose vehicle which owns the Tetley Group, has been shown as an advance in the Tata Tea balance sheet, "pending certain legal and accounting clarifications."
Since then, the amount has been reclassified as investments. So we'll have to wait till next year to find out how the auditors will treat the investment in a negative net worth company.
Of course, the debit balances in the Tetley group's P&L accounts are more the result of accounting treatment of acquisitions, and it can be argued that they don't truly reflect the strengths of the brands or the group's potential.
The Tetley group has improved its performance during 1999-2000, posting
a net profit of GBP 5.555 million compared to a net loss of GBP 623,000 in 1998-99.
Without taking exceptional profits or losses into account, operating profits were GBP 29.158 million on a turnover of GBP 292.360 million, which means an operating profit margin of 9.9 per cent. That's less than half Tata Tea's operating margins.
While the Tetley group's turnover is more than double Tata Tea's, its profits have been far lower than that of its Indian acquirer. The break-up of turnover and profit information on the group's continuing businesses shows that the bulk of the Tetley group's turnover as well as profits came from the UK operations. 55 per cent of the group's turnover and 98 per cent of the profits came from the UK operations.
The US operations, accounting for 25 per cent of turnover, were unprofitable, while the Asian operations showed only marginal profitability.
All ordinary shares as well as preference shares are eligible for a fixed cumulative dividend of 10 per cent. But the directors' report points out that this dividend is subject to covenants signed on repayment of senior debt, and has consequently been accrued for the year.
Having said that, there's no doubting the possibilities inherent in the acquisition. In the UK, Tetley has brand leadership in tea bags. In Canada, it has 38 per cent of the market. In France, it is the fastest growing tea brand, and in Australia, a downtrend has been reversed.
While there's no disputing the potential benefit to Tata Tea of the acquisition, at the same time profitability will have to be enhanced. In short, Tata Tea has seized the opportunity, and it is up to them to make use of it.
Siemens Ltd
The acquisition of a 26 per cent stake in VXL Landis & Gyr by Siemens India is part of the ongoing process of focusing on its core products.
The Calcutta-based Landis & Gyr already had 74 per cent of its equity owned by Siemens AG, and the 26 per cent acquisition by the Indian arm will result in the Siemens group holding the entire equity in the company.
The acquisition will help Siemens India increase its range of complementary products by including the electrical meters manufactured by Landis & Gyr in its product portfolio. Expanding the product range helps the company realise additional value out of an order.
At the same time, Siemens India is divesting its 26 per cent stake in Siemens Nixdorf Information System a company which markets a full range of PCs including notebooks, desktops and servers and services them, besides providing solutions in banking, manufacturing, management systems and telecommunications.
Siemens Nixdorf's product profile doesn't really tie in with Siemens Ltd's other businesses, and the company will benefit from the divestment.
Siemens Ltd turned around last year and has posted a 715 per cent increase in its net profits in the quarter to June 30,2000, although most of that is due to one-off "other income".
Nevertheless, the company has now achieved almost zero-debt status, while its savings in inventory and receivables has been considerable. For instance, for the nine-months to June 2000, raw material costs as a percentage of sales fell to 18.5 per cent from 22.6 per cent in the corresponding period last year, on account of reduction in the number of vendors and strategic sourcing.
Interest costs in the quarter to June fell by 85 per cent. The VRS programme has trimmed wage costs. To put it in a nutshell, Siemens has used the last few years to review its businesses, shed flab, cut costs and re-focus the organisation.
The trouble so far has been a tepid sales growth of around 8.7 per cent, which is in line with chairman Fredie Mehta's forecast of a demand gap continuing to exist for some time. All that is now needed is a few big orders to boost the topline, and the company's higher operational gearing should see a quantum improvement in earnings.