Global soft drinks maker Coca-Cola is reportedly in talks to buy a significant stake in coffee chain Cafe Coffee Day (CCD). News reports suggest CCD will be valued at Rs8,000-10,000 crore for the proposed deal.

Interestingly, Coffee Day Enterprises Ltd (CDEL), which owns about 90% of CCD, alongside some other businesses, has a market capitalisation of around Rs4,800 crore.

CDEL’s coffee business includes the Coffee Day café outlets and a vertically integrated coffee business which ranges from procuring, processing and roasting of coffee beans, to retailing of coffee products. Analysts have assigned much lesser value to the coffee business. For instance, Maybank Kim Eng Securities India Pvt. Ltd has assigned a value of Rs5,260 crore for CDEL’s 90% stake in the coffee business, according to a report on 25 February. As such, the entire business was valued at Rs5,800 crore, or around 17.5 times FY19 earnings before interest, tax, depreciation and amortisation (Ebitda) of the coffee business.

(Vipul Sharma/Mint)


If CCD manages to fetch a valuation of Rs10,000 crore, the implied valuation is nearly double at 33 times FY19 Ebitda. A valuation of Rs8,000-10,000 crore implies 4.4-5.5 times FY19 revenues of the coffee business. At Rs5,260 crore, it translates into 3.2 times FY19 revenues.

Sure, Coca-Cola paid a huge premium last year when it had acquired Costa Ltd from UK’s Whitbread Plc. According to broker Credit Suisse’s estimates at the time, the deal was done at about double the prevailing valuations of the Costa business. As such, there may be an expectation that there would be a repeat on the valuation front if Coca-Cola ends up buying CCD as well.

The vast potential of Indian retail beverages outlets is definitely attractive. In that sense, it may not be entirely surprising if Coca-Cola does go on to strike a deal at a higher price. CCD’s growth has been stunted lately.

For the coffee business, FY19, wasn’t particularly impressive. Consolidated revenues increased at a paltry 2% over the same period last year. Ebitda increased at a slightly faster pace of 5%, as input costs grew at a relatively slower pace. The encouraging bit remained same-store sales growth for the coffee retail business, where the measure stood at 9.55% for FY19 compared to 7.23% in FY18.

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