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A whiff of a public offer at Coffee Day

Investors have valued the coffee conglomerate at Rs 4,775 crore, but Chairman V G Siddhartha has Rs 7,160 crore in mind

Raghuvir Badrinath  |  Bangalore 

V G Siddhartha

V G Siddhartha, the founder and chairman of Coffee Day Group, is a man who has shied away from public functions in his close to two decades of presiding over India's largest coffee business. High-profile conference organisers and industry bodies have approached him to address seminars and workshops, but to little avail. He has always held to his view that "there are many experts who can talk about these subjects at the seminars. I would prefer to give a guest lecture at a college in a Tier-II or Tier-III city where expert guest lectures are difficult to come by."

This reticence about discussing his company, the group's complex holding structure and its plans may have to change, however, now that financial consultants - right from Morgan Stanley to top bankers - are holding key meetings with Siddhartha to push for a public offer of the Coffee Day conglomerate.

COUNTING THE BEANS
  • Rs 1,500 crore revenues of Cafe Coffee Day with EBIDTA of Rs 200 crore
  • Rs 900 crore revenues of Sical Logistics (Multimodal Logistics) with EBIDTA of Rs 46 crore
  • Rs 600 crore in revenues from (wealth management)/The Serai (Hospitality)/Investments in other technology businesses with EBIDTA of Rs 100 crore
  • Rs 500 crore approximate EBIDTA of Coffee Day Group
  • Rs 1,600 crore total holdings in MindTree

The Rs 4,000-crore Coffee Day Group, which has diverse businesses from wealth management and hospitality to logistics and coffee retailing, is also being nudged by blue-chip global investors - KKR, and New Silk Route Private Equity - to take the public route which they anticipate will get them good liquidity.

"We have been discussing a public offer with Siddhartha for the past few months and there are discussions at various levels.

As of now, there is no clarity," a senior investment professional from among the private equity investors says.

Siddhartha, as is his wont, has preferred to play his cards close to his chest. However, Business Standard's discussions with a range of investors and his close associates indicate that he is watching the markets closely and will move fast if he decides to take the plunge. "Broadly, as much Rs 1,000 crore worth of shares will be on offer through multiple routes. Prior to the public round, if at all, Siddhartha is actively discussing with a host of global private equity investors a $100-million infusion," a senior banker who is aware of discussions in says. According to information available, a top-notch sovereign fund is in advanced discussions for the first infusion of $100 million, a significant portion of which will be used to settle a part of the company's Rs 600 crore debt.

Better value
For the moment, however, Siddhartha, who had his financial markets training under Mahendra Kampani, is holding out on the investors and pushing for a Rs 7,160 crore valuation for his holding company against the Rs 4,775 crore assessment of some investors. "He has the stamina and financial depth to hold out, and with the markets on steroids, it is a matter of choice on how he finalises the transactions," says another key investment banker.

Siddhartha had raised the debt predominantly to increase his stake in Bangalore-based software services exporter MindTree, which he helped incubate more than a decade ago. That investment in the past close to two years has grown threefold and Siddhartha is currently the single largest shareholder in with around 19 per cent of the stake. "This is a bet that Siddhartha is keenly looking to swing because he missed the bus on Infosys," says a close associate of Siddhartha. The Coffee Day chairman was among the first few institutional investors to subscribe to the public offer of Infosys, but had to offload his holding early - at a profit, even though he missed out on an entire stream of wealth that Infosys later delivered.

An active and intense person, Siddhartha directly gets involved in the fund raising that his group engage in. He has been instrumental in his businesses shedding costs. A host of backward integration actions has only helped this cause. The coffee beans for the 1,700 outlets of the Cafe Coffee Day chain come from his 14,000 acres of coffee estates. The wood for the elegant and stylish furniture at the cafes too comes from the silver oak trees that are traditionally used as shade for coffee plants.

Holding company woes
Industry analysts are, however, pessimistic about a public offer of a holding company as the Indian markets have traditionally not placed good value on such a structure. "Be it Pilani Investments of the Birlas or Tata Sons or for that matter UB Holdings, the markets have been at a loss when giving a proper valuation at that level," explains a senior investment banker. This could equally hold true for and investors could find it hard to assign value to a holding company that has businesses as diverse as logistics, coffee retailing, wealth management and hospitality.

Then, how can the group provide an exit route for investors who pumped in $200 million at a valuation of $600 million in 2010? "As I see it, Siddhartha can migrate the investors to the Cafe Coffee Day level and then take the flagship cafe business public. The investors can see clear value in that," says an investment banker. "But with Siddhartha driving negotiations across various tracks, it will be some time before we get clarity."

Sequoia Capital, Deutsche Group, IFC and Darby Private Equity (which is a part of Franklin Templeton) were among the other key investors at the Cafe Coffee Day level and the majority of them have got handsome returns on their investments. While this matrix will soon be hammered out in the event of a public offering, Siddhartha is also understood to be drawing out a masterplan on how the group can become a $5-billion conglomerate.

Readying for battle
While these issues may be actively on Siddhartha's table, he is simultaneously scrambling resources to brace up to the challenge from American chain Starbucks. While technically, his team maintains that there are enough opportunities for many players in the coffee retailing business in India, there is an aggressive strategy being rolled out by Siddhartha to corner all possible share of the market by expanding the range of offerings from Cafe Coffee Day.

There are other pain points for Coffee Day Group, mainly the rising cost of real estate and the ever challenging issue of recruiting and retaining the expansive workforce across 1,700 outlets. With attrition as high as 30 per cent and with Cafe Coffee Day fully believing in the owned cafe model instead of franchises, the human resource managers at Coffee Day have their hands full. The changing tastes of the Indian consumer and Starbucks positioning itself as an aspirational rival will leave Siddhartha and his men with a task in their hand.

First Published: Wed, July 02 2014. 23:40 IST
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