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. “Indian buyers may find it tough to get all regulatory approvals to buy an offshore entity that has most of its assets in India. Additionally, they would not want to be on the wrong side of the tax department especially after the Vodafone tax matter,” said an executive.
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.