Coffee Day Enterprises: A Piping Hot M&A Deal In The Pipeline?

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.

Will it be a win-win deal for Coffee Day Enterprises and Coca-Cola?

Looks like!

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.

Coffee Day Enterprises: ready for re-rating?

What valuation might CDEL expect?

• Coca-Cola acquired the global chain Costa Coffee for USD 5.1 billion about 10 months ago at a valuation of 15.7  times FY19 estimated EV/EBITDA multiple. If we assume that this would serve as the lowest possible valuation Coca-Cola might bid for the cafes business of CDEL, at Rs 233, there’s an upside potential of 36% in CDEL.
• However, if the promoter group of CDEL manages to negotiate well for its stake and can demand 21 times FY20 EV/EBITDA multiple, on par with that of the most expensive listed peer—Jubilant Foodworks, the upside potential could be a whopping 74%.

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.

Also Read: 15 stocks to buy in this volatile market

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company.

We do not individually or collectively hold 1% or more of the securities of the company.

We do not have any other material conflict of interest in the company.

We do not act as a market maker in securities of the company.

We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company.

We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships.

We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.