There’s a whiff of an interesting M&A in the air. And as we track this emerging deal, we believe it could unlock juicy valuations for investors, if the deal materializes.
It appears that after inking a deal with the global chain Costa Coffee, the carbonated drinks giant—Coca Cola is eyeing a major stake in Coffee Day Global Limited (CDGL) as a part of its business diversifications strategy.
Coffee Day Enterprises Limited (CDEL)—a VG Siddhartha founded company—is one of the most prominent players in the organised cafes business. Under the brand name, Café Coffee Day, CDGL--a subsidiary of CDEL, runs 1,750 outlets. CDEL also has a presence in the logistics business through a 52% listed subsidiary – Sical Logistics Ltd while the real estate/rental business of CDEL is managed through a 100% subsidiary – Tanglin Developments Ltd.
An acquisition of this size may help Coca Cola beef up its presence in India. It’s also perfectly aligned with its strategy to move in a big way into retailing/ quick service restaurants.
On the other hand, if this deal goes through, CDEL would receive much-needed funds to pare its debt. As per its books for FY19, CDEL has the net debt to EBITDA ratio of 7.09. Usually, any reading of net debt to EBITDA above 4 is considered as a red flag.
It’s noteworthy that owing to high debt and intense competition, CDEL has been struggling to expand its Cafes network over the last few years. If Coca-Cola acquires a significant stake in CDGL, the latter could resume its growth path.
A successful deal would translate into a re-rating of the stock.
For now, Coca Cola has declined to comment on the potential acquisition of CDEL, which means, the media reports are still speculative in nature. In fact, there’s a potential downside of 10% from the current levels if the deal doesn’t go through.
But as they say, there’s no smoke without fire.
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