Tata Coffee-Tata Consumer merger gives traders a shot at arbitrage

4% spread on offer; analysts bullish on long-term prospect of merged entity

The impending merger between Tata Coffee (TCL) and Tata Consumer Products (TCPL) has presented an exciting arbitrage opportunity for traders. Considering the current prices of the two stocks and swap ratios, investors can pocket a spread of up to 4 per cent, observes a note by IIFL Securities.
 
To streamline business operations, Tata Group in March 2022 announced a merger between TCL and TCPL. Following the effectiveness of the scheme, the shareholders of TCL (other than TCPL) as on record date will receive three equity shares of TCPL for every 10 equity shares held in TCL. This will be done following the issuance of one equity share of TCPL for every 22 equity shares of Tata Coffee, in consideration for the demerger and 14 equity shares of TCPL for every 55 equity shares of Tata Coffee.
 
Shares of TCL are currently hovering over Rs 216 per share, while those of TCPL are at Rs 750. In other words, one can get exposure to TCPL (Rs 750 multiplied by 3 equals Rs 2,250) at a discount by buying shares of TCL (Rs 216 multiplied by 10 equals Rs 2,160).
 
The National Company Law Tribunal’s (NCLT’s) go-ahead for the merger is expected soon, following which analysts believe the spread could shrink.
 
Besides arbitrage opportunities, fundamental analysts are bullish on the long-term prospects of TCPL as they believe the merger could boost the earnings per share (EPS) of the fast-moving consumer goods major.
 
Currently, the consensus 12-month price target for TCPL is Rs 856 — a 14 per cent upside from the current levels.
 
The reorganisation plan includes the demerger of the plantation business of TCL into TCPL Beverages & Foods (TBFL), a wholly-owned subsidiary of TCPL. The merger of the residual business of TCL, comprising its extraction and branded coffee business, with TCPL.
 

Charts

 
The demerger will be the first step. The merger will take place as an immediate second step. The proposed scheme also involves the purchase of minority interest in Tata Consumer Products UK by TCPL.
 
“Structural simplification of the India business is underway. International restructuring of Eight O’Clock Coffee will be carried out after the TCL merger (NCLT approval is awaited). Cost-saving and tax benefits are expected to be EPS-accretive by 3-4 per cent,” JPMorgan said in a note last year.
 
“After the integration of TCPL’s consumer business with TBFL, the India business is expected to become a key revenue driver for the company. Rising per capita income, increasing brand awareness, increased in-house consumption, and consumption through modern channels, such as large retail stores/e-commerce, would act as key revenue drivers for branded pulses and spice business in India, in addition to the consistently growing tea business. Along with margin expansion, innovation, and diversification, the merger will help TCPL expand its distribution network. An enhanced product portfolio and expanded distribution reach would help the India business revenue grow in double digits in the next two-three years, against a 5 per cent compound annual growth rate over 2015-16 through 2019-20,” said another note by Sharekhan.