Tata Takes a Swig of Vitaminwater

The Indian conglomerate has broadened its beverage offerings by taking a 30% stake in parent company Glaceau for a cool $677 million

The Vitaminwater franchise got a big infusion of capital on Aug. 23, fueling plans for expansion of the wildly popular beverage. Indian industrial conglomerate Tata Group said it would acquire a 30% stake in Vitaminwater maker Glaceau for $677 million. The deal values the 10-year-old New York-based company at $2.2 billion.

Tata is acquiring its stake from investor TSG Partners. With the deal, TSG is selling all of its shares in Glaceau. Tata, a $22-billion conglomerate based in Bombay, has its hand in nearly 100 businesses from mining to communications (see BusinessWeek.com, 10/24/05, "Tata: Industrial Oomph with IT Smarts").The group is investing $250 million of its own cash and funding the remainder of the purchase through debt. (Tata has a publishing joint venture in India with McGraw-Hill [MHP], publisher of BusinessWeek.com.)


  For Tata, the deal is one of a series of bets on the North American beverage business. It already owns Tetley Tea, Good Earth Teas, and Eight O'Clock Coffee. With the Glaceau deal, it's tapping into the growing health and wellness market in the U.S., where good nutrition and exercise have emerged as powerful countertrends to fast-food culture.

Glaceau has been a pioneer of the health and wellness market. Founded by a young marketing whiz named J. Darius Bikoff, the company is gaining on Snapple (CSG) and Gatorade (PEP) in popularity. "This is the iconic brand of the health and wellness revolution. We think it will be the brand of the generation," Bikoff said during a conference call. The company has had a compounded annual growth rate of 200%. While that will slow as the company becomes larger, Bikoff says it can maintain a compounded annual growth rate of 50% to 100% over the next five or so years, achieving a valuation of $10 billion.

Glaceau makes a range of beverages including vitamin-enhanced Vitaminwater, electrolyte-enhanced Smartwater, and flavor-enhanced Fruitwater. Each brand comes in a variety of flavors and nutritional boosters (see BusinessWeek.com, 4/20/01, "Handbags, Cognac—and Water").


  It remains to be seen whether even a marketing sensation like Glaceau can achieve a $10 billion valuation. The company has several things going for it, though. Its most important asset may be the health and wellness market, which generates $22 billion in sales in the U.S., according to Richard Perkal, a senior managing director who specializes in retail deals at Bear Stearns Merchant Banking (BSC) (see BusinessWeek.com, 7/5/06, "Private Equity Takes a Shine to Retail").While growth in the sector has dipped from the middle to the low single digits in recent years, the growth rate has picked up again. Perkal has invested in the sector himself, arranging the buyout of The Vitamin Shoppe retail franchise.

The Vitamin Shoppe doesn't stock Vitaminwater, though. That points to several challenges for Glaceau. It must deal with competition from rivals such as The Vitamin Shoppe's house brand and Amino Vital. "Vitaminwater is a good product," Vitamin Shoppe Chief Executive Tom Tolworthy says. "But our customers prefer a more specialized product with fewer calories and natural ingredients." He said that Vitaminwater is well positioned in the mainstream market as it competes with rival drinks such as Gatorade that have more calories (see BusinessWeek.com, 4/11/05, "Foods with a Health Boost").


  Bikoff is confident that he can achieve his growth goals. He said the biggest challenge is simply to get more shelf space in retail outlets, where stocks of Vitaminwater are often sold out before demand can be satisfied. He said a $10 billion valuation over the next five years is possible based on domestic growth alone.

A global investor such as Tata can help expansion into international markets, though. It also can provide the capital necessary for more marketing and product development, which could be crucial in helping Glaceau stay in the race. But if the company can continue anything close to its current momentum, the next stop could be an IPO, a possibility that Bikoff won't rule out.

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