BackCafé Coffee Day owner in talks to raise funds to fuel growth
Coffee Day Holdings is in talks to raise `500-700 crore in debt and equity
Premium(Pradeep Gaur/Mint)
Mumbai: In 1996, when V.G. Siddhartha established the first Café Coffee Day (CCD) outlet on Bangalore’s Brigade Road, it was a cyber café, offering customers access to Internet along with a cup of coffee. Growing slowly, the café chain opened 14 outlets over the next four years. And, then it shifted gears. It opened 1,000 stores over the next decade, becoming the country’s largest coffee-shop chain.
Circa 2013, it seems to be in no hurry to slow down. Earlier this year, the firm chalked out yet another aggressive expansion plan to maintain its dominance in the country over the likes of rivals like Barista Lavazza and Costa Coffee and new entrant Starbucks. By 2014, it will have 2,000 outlets, from nearly 1,500 currently.
As the café chain goes ahead with its expansion plans, Siddhartha is busy working out ways to fund this growth. Coffee Day Holdings Co. Pvt. Ltd is in talks to raise ₹ 500-700 crore in debt and equity, and has already got a letter of intent from a private equity (PE) firm to invest in it, according to people familiar with the development.
“At least half a dozen global, deep-pocketed PE firms met him (Siddhartha) and one has offered a term sheet (letter of intent) for equity transaction of ₹ 500 crore to ₹ 600 crore," said one of the persons, who has direct knowledge of the matter. He refused to give details on the stake to be diluted or the name of the PE fund.
All the people Mint spoke to for this report declined to be identified, citing confidentiality reasons.
A term sheet provided by a PE firm is a pre-funding agreement offering a framework of proposed transaction terms as well as an indication of the valuation. Valuation given in the term sheet for a company typically does not change much at the time a transaction is done.
The investment banking arm of Mumbai-based Edelweiss Financial Services Ltd is running the mandate for Coffee Day.
For the debt funding, Siddhartha is talking with non-banking financial companies. “The plan is to refinance debt at the holding company level, which has loans outstanding of about 600 crore," said the Mumbai-based head of a non-banking finance company that’s considering lending to Coffee Day Holdings.
The firm plans to use the money to expand the Café Coffee Day chain, strengthen its other businesses and reduce debt, said a third person aware of the plans.
Expansion
The CCD chain contributes nearly a third of the group’s combined revenue of nearly ₹ 2,000 crore. With Tata Coffee Ltd, part of the Tata group conglomerate, bringing in Starbucks Corp., and existing chains like The Coffee Bean & Tea Leaf, Costa Coffee, Barista Lavazza and Café Mocha, there is enough competition in the small organized coffee market of the country. That’s probably why CCD is seeking expansion to fend off competition.
The organized coffee market in India—which reflects consumption mainly through cafés—accounts for about $140 million of the country’s total domestic consumption of $667 million.
Experts say the mantra for success for coffee chains in the Indian market lies in having more outlets, which increases reach to customers and thereby enables them to offer convenient locations and prices that appeal to customers at large.
Cafés are no longer simply about coffee, they are about convenience of small bites (like finger foods or snacks, not necessarily complete meals), says Gaurav Marya, chairman, Franchise India Holdings Ltd, which helps entrepreneurs in selecting franchise business opportunities.
Marya says CCD could be to India what the convenience store chain 7-Eleven Inc. is to the US. Founded in 1927, 7-Eleven operates, franchises and licenses approximately 8,600 stores in the US and Canada. These are essentially neighbourhood stores offering juices, burgers, salads, rolls, coffee, ice-cream and cakes in the price range of $1 to $5.
“Over the last five to six years, CCD has locked in strategic real estate in cities like Bangalore, Delhi and Mumbai. They are creating very strong clusters in cities like Bangalore. To that extent, CCD already has an edge," said Marya, adding that 60% of CCD’s outlets are profit making. “Of course, they are bothered about competition and that’s why they are evolving. They have expanded their food menu in response to Starbucks’ entry," he says.
According to him, the key for success for CCD lies in being relevant to the young—its target customers.
For CCD, keeping costs under control is not too difficult. The café chain sources coffee from its own plantations and even makes its own coffee machines.
Meanwhile, Coffee Day Hotels and Resorts also plans to have 10 ‘The Serai’ resorts across India over the next five years. Currently, it operates three hotels in Chikmagalur, Kabini and Bandipur, in the state of Karnataka.
Stake buyback
Siddhartha is also considering buying back the stakes of at least two investors in Coffee Day Resorts with the latest fund raising, said a person close to the money raising process.
Existing investors include global PE firms KKR and Co. LP, New Silk Route Partners LLC and Standard Chartered Private Equity. In 2010, the three firms picked up a 25% stake in the holding company for around $200 million.
Darby Overseas Investments Ltd—the private equity arm of Franklin Templeton Investments, International Finance Corporation and Deutsche Bank Group hold stakes in Amalgamated Bean Coffee Trading Co. Ltd (ABCTL), which owns the coffee-shop chain, according to past media reports.
Last year, Siddhartha bought back the entire stake that venture capital investor Sequoia Capital had held in ABCTL. Sequoia had invested $20 million in 2006 for an undisclosed stake in the company.
“In the stake buyback, he (Siddhartha) typically offers 16% to 20% internal rate of return (IRR) to his investors," said another person. PE firms typically expect returns of 2-3 times, with an IRR of over 16% on their Indian investments.
An executive with one of the existing investors in Coffee Day Resorts said his firm may consider selling its stake in the company. “We would be okay with an exit if offered to us. A new investor will come in, in all likelihood. The existing investors are not investing again," he said, requesting anonymity.
An email sent to Siddhartha on 20 July did not elicit any response.
Fund raising
Though PE investors typically prefer to invest in so-called pure play operating companies that have only one core business, they would not let go of an investment opportunity in a holding company if the entrepreneur or group has a strong track record, each business is successful in its own right, and there is good potential for selling the stake through an initial public offering (IPO) or other options, said Siddharth Bafna, partner and head of the corporate finance and transaction services practice at Lodha & Co., a financial consultant.
“Investors prefer to directly invest in operating companies as valuations in the case of pure play companies are discernible and a holding company typically trades at a discount to the price of its subsidiary. Having said that, investors would not shy away from investing in a holding company if it belongs to a strong group and an IPO is a possibility even at the holding company level" he said.
In 2010, Siddhartha clubbed all his businesses (except agriculture) under Coffee Day Resorts Holdings. The diversified group’s businesses include Café Coffee Day, vending machines and kiosks, financial services business Way2Wealth Securities, hospitality service ‘The Serai’, logistics firm Sical Logistics Ltd, plantations (over 10,000 acres), waste management and a furniture business called Daffco Furniture. With Daffco, Siddhartha intends to be the Ikea of India and is setting up a factory.
No information is available on the financials of the group’s firms with the Registrar of Companies.
According to a July report by credit rating company Brickwork Ratings in July, Amalgamated Bean Coffee Trading’s net worth is around ₹ 729 crore against total borrowings of ₹ 535.38 crore in FY13 (provisional).
Operating revenue was ₹ 1,112.05 crore with earnings before interest, tax, depreciation and amortization (Ebitda), an indicator of operating profitability, at ₹ 144.29 crore in FY13.
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