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Tata Consumer Products Limited and its subsidiary are in talks to buy the struggling Coffee Day Group's vending machine busin

According to sources with knowledge, the Tata group aims to buy Coffee Day Group’s beverage vending machine business that has hit a stumbling block with two loan sharks of the struggling coffee chain, barring the deal until their debts are cleared in the matter (1).

The Yes Bank and Rabobank, lenders of CGDL, Coffee Day Global Ltd (2), have supplicated the repayment of their entire outstanding payments for granting a NOC, no-objection certificate to the proposed deal. Notably, Coffee Day Global Ltd, a public firm Coffee Day Enterprises Ltd unit, runs the CCD, Cafe Coffee Day outlets.

As per the sources, the deal needs NOC from 14 lenders of the company. Most of them have in-principle complied to grant the certificate, except for Yes Bank and Rabobank. Sources add that these two are the largest lenders of the firm. Their coffee vending business and a few other assets of CDGL were collateralized for the loan, which is worth more than 300 crore INR.

Tata Consumer Products Ltd, which owns brands like Tetley Tea and Tata Salt, has proposed to overtake the coffee vending machine business from Coffee Day Global Ltd for at least 1,000 crore INR.

The Proposal

There are no comments from Yes Bank regarding the same. A Tata Consumer spokesperson stated that the company evaluates different opportunities on an ongoing basis, but there was no comment on the development.

“We respect the confidentiality that Rabobank clients are counting on and normally do not comment on an existing or non-existing business link with specific companies, and will not elaborate nor specify proceedings or possible deals concerning individual clients.”

– Rabobank spokesperson from Utrecht, Netherlands (3).

The Coffee Day Global Ltd needs to repay the dues worth more than 100 crores INR to Yes Bank and 200 Crore INR to Rabobank. It is worth highlighting that Karnatak Bank is the largest Indian lender of CDGL with 175 crore INR credit (4).

As per the sources, the loan of Yes Bank was a conventional term loan, whereas the Rabobank loan was in ECB, external commercial borrowing. However, since these banks have the coffee vending business as collateral, they could dictate over 12 lenders on NOC for the deal.

According to Tata’s proposal, submitted to Coffee Day, the group has agreed to pump 600 crore INR into Coffee Day Global Ltd. Subsequently; it would pay 400 crore INR or more after certain months. The second investment would come after Tata assesses the cash flows’ revival in Coffee Day Global Ltd’s coffee vending business after the buyout.

The sources also added that Rabobank and Yes Bank are reluctant to Tata’s plan and have not agreed with it. They have also demanded more than other banks or full payment of their loans.

Experts tell that the lenders need to understand that if the deal for selling the coffee vending business does not happen or gets delayed, they may have to take a more massive haircut or a complete loss in the loan. However, if a company like Tata purchases the business, the chances of revival are more significant. Ultimately, it would also help lenders to recover their loans.

Notably, the Tata group also operates the Starbucks cafe chain in India. And now, the largest conglomerate of India is eying Coffee Day’s vending machine business for synergies.

Coffee Day Global Ltd offers its coffee-grinding-cum-vending machines, coffee beans, and fresh milk to over 60,000 loyal clients across multiple marketplaces such as offices, malls, schools, colleges, and other public places.

It also has a considerable number of corporate customers and hence, generate steady revenue.

The promoters of Coffee Day Group are in the urgent requirement of funds to repay their debts after V. G. Siddhartha’s death (5).

According to the investigation after the alleged suicide of V. G. Siddhartha, the promoter of the Coffee Day Group, the entrepreneur’s firms had siphoned off over 3,535 crore INR from the company.

Why is Tata Group Eyeing Cafe Coffee Day?

The reports of Tata Group looking to partner and hold a strategic stake in retail outlets of Cafe Coffee Day came during mid-October in 2019 (6). The primary reason for the partnership is that it offers synergy with Tata Consumer’s branded tea and coffee businesses including Tata Starbucks.

A single hitch is preventing Tata from acquiring the vending business is the legal complexities that arose from the former CCD promoter’s debts and deals after his untimely demise.

According to the market analysts, a possible partnership with Cafe Coffee Day would give Tata Starbucks access to both the mass and premium coffee and tea retailing platform. Notably, Tata Starbucks is a joint venture between the Tata Consumer and Starbucks corporation. It has reported a 21% growth in the fiscal year 2020. As of now, it has more than 185 stores in 11 cities across India (7).

A senior official with direct knowledge stated that Coffee Day is also considering strategic and financial partnerships for its coffee retailing stores under the Cafe Coffee Day business on its part of an overall restructuring exercise and the vending machine business. Now, Coffee Day Enterprise Ltd is scalping its debt of 7200 crore INR by selling assets. It has brought down its debt burden below 3,200 crore INR, and it would lower it further.

It is also worth mentioning that under Sunil D’Souza (8), head of the new management team, Tata Consumer is looking at reinventing itself as an FMCG company. According to its official publication, its portfolio requires strong brands and scale to power itself into a competitive market. It added that for growth, the inorganic route is the best way forward.

The Initial Negotiation

Preliminarily, Tata Coffee was in talks to acquire 12,000 hectares of coffee plantations belonging to Cafe Coffee Day founder V. G. Siddhartha for about 1200 to 1500 crore INR (9).

Currently, Siddhartha’s wife, Malavika Hedge (10), is handling Coffee Day’s operations, including his assets and coffee plantation after he died by suicide in August last year. There are allegations that he was harassed by tax officials and faced pressure from private equity firms and lenders.

The development came after the TCP; Tata Consumer Products approved an acquisition exploration of Cafe Coffee Day’s vending machine business. According to a Bloomberg report (11), Cafe Coffee Day is looking for a valuation of more than 2000 crore INR for the same.

There are speculations that Siddhartha had availed loans worth 2,000 INR from banks like HSBC, Rabobank, Lakshmivilash Bank, RBl, and Induslnd Bank. Some of the lenders have already initiated a recovery process against the plantation assets since last November.

Sources suggest that the discussions between Hedge and tata Coffee were already in place in February but were put on hold because of the ongoing COVID-19 pandemic. The reports of the resuming of their talks came in September 2020, though the deal was still in the preliminary stage (12).

Apart from the coffee plantations, Siddhartha also owned silver oak and timber plantations at a valuation of about 2,000 crore INR. His assets also included a luxury hospitality resort, The Serai Resorts (13).

Denial of Coffee Day and Tata Consumer

When the reports of a possible deal between Coffee Day and Tata Group surfaced, Debt-ridden Coffee Day Enterprise Ltd. stated it continues to explore and evaluate different opportunities. However, in a regulatory filing, the company stated no such negotiation or events with Tata Consumer Private Limited to sell its vending machine business.

Coffee Day Enterprise Ltd., on its part, stated that as a part of an ongoing restructuring exercise, any company’s proposal is a subject matter of feasibility studies, and there is a requirement for necessary acquiescences.

“To this end, there are several ongoing discussions. None of these conversations have reached any conclusive stage, and it would be factually incorrect to speculate anything to the contrary,”

– Coffee Day Enterprise Ltd. Spokesperson (14).

As previously mentioned, Coffee Day Enterprise Ltd. is facing pressure to repay debts after the founding chairman, V G Siddhartha, passed away in 2019. Hence, it would be a breather for the company if any deal is finalized.

On account of the possibility of an increase in expenses in the future and profitability issues, the coffee chain Cafe Coffee Day had closed down more than 280 outlets in the first quarters of the financial year 2020. As of June 30, 2020, it has reduced its number of outlets to 1,480.

Notably, last year, Cafe Coffee Day operated more than 1,742 outlets in the April June quarter and 1,752 in the January-March quarter.

In early March 2020, Coffee Day Enterprise Ltd. had announced to repay 1,644 crore INR to its 13 moneylenders after closing a deal with Blackstone Group to sell its technology busines park.

In September 2019, Coffee Day Enterprise Ltd. had announced the sale of its Global Village Tech Park located in Bengaluru to Blackstone, a global investment firm, and Salarpuria Sattva, a realty firm, at an enterprising value of 2800 crore INR (15).

Earlier, it had also sold its stake in Mindtree, an IT firm, to L&T Infotech (16).

ITC and Coca-Cola, Potential Buyers

After the Cafe Coffee Day founder’s untimely demise, the debt-ridden Cafe Coffee Day received tremendous pressure from lenders and started to look for ways to pare it. During the same period, Tata Starbucks, the rival of Cafe Coffee Day, had stated that it is not eying to acquire Cafe Coffee Day for its expansion (17). It added that they have plans to increase their footsteps in India. They would go accordingly, says Rakesh Sony, Global Head of Strategy, and Mergers & Acquisitions at Tata Global Beverages (18).

Notably, Cafe Coffee Day has ten times more outlets than Starbucks. Various owners hold it include KKR & Co. (19), a private equity firm holding 5.7%, and Infosys co-founder Nandan Nilekani (20) with a 2.69% stake.

In early 2019, the global beverage company Coco-Cola had shown an interest in buying a stake in Cafe Coffee Day. Months after that, ITC Ltd, an Indian tobacco major, also entered a fight for a stake in Coffee Day Enterprise Ltd. Notably, in Asia’s most valuable cigarette market, ITC is looking to diversify from tobacco, its main selling point. It has started reviewing Coffee Day’s assets and finances to contemplate stake picking.

ITC will reduce its dependence on the cigarette business if it goes ahead with the deal. The development came when India formed stringent laws to reduce smoking in public places and raised tobacco taxes.

At that time, an ITC spokesman had told Bloomberg that

“Deliberations are at an introductory stage and may not see an official offer.”

However, no development has been made as of now.

According to the reports, Coco-Cola was also in exclusive talks to scoop up a significant stake in the Coffee Day Enterprise Ltd. If the deal had been thorough, the global soft-drink company would have leveraged the rapidly growing space. It would also help it hedge risks with the carbonated drink business.

However, the speculations were ended when Coffee Day Enterprise Ltd. stated that the news regarding ITC purchasing a stake in the company is incorrect, and the firm is unaware of the news.

According to reports in November 2019 (21), Coffee Day had signed NDAs, Non-Disclosure Agreements with more than 30 players, including Oyo, Coca-Cola, ITC, TPG, and KKR. However, no talks have progressed so far.

The Revenue Drop

According to the company’s regulatory filing in November 2020, Coffee Day Global, the coffee business subsidiary of Coffee Day Enterprise Ltd., posted a retail revenue of 1,270 crore INR for the fiscal ending in March 2020. It has reported a 12% year-on-year decline.

Coffee Day Global’s net retail revenue stood at 272 crore INR in the last quarter, down by 22% and a net loss of 80 crore INR. The previous fiscal also observed the number of its cafe outlets reducing to 1,192 from 1,752 in a year. However, it’s coffee vending machines have increased from 56,797 to 58,697 from the last year (22).

In October, Coffee Day had also received a notice by SEBI, Securities and Exchange Board of India, regarding the company’s funds, misappropriation, and shareholders’ losses (23). Regulators had asked for details of the funds raised under its late founder V. G. Siddhartha.

SEBI had asked whether the firm had tried to recover the amount delivered to fund other transactions. It is focusing on any fraudulent transactions that have caused losses to the company’s public shareholders.

On August 30, 2019, the Coffee Day board had appointed a committee with a former Deputy Inspector General of CBI, Ashok Kumar Malhotra, to investigate the events mentioned in Siddhartha’s statements’ letter and scrutinize its account books.

The investigation revealed that MACEL, Mysore Amalgamated Coffee Estates Limited, a private coffee trading firm of Siddhartha and his father, owes 3,535 crore INR to the subsidiaries of Coffee Day Enterprise Ltd. as of July 31, 2019. However, the Consolidated Audited Financial Statements of the firm indicated that Mysore Amalgamated Coffee Estates Limited owed only 842 core INR to subsidiaries as of March 31, 2019. It has revealed a gap of 2,693 crore INR, which needs to be addressed.

From the investigation, it can be assessed that Siddhartha routed the company’s amount before his death. He had made Cafe Coffee Day’s subsidiaries to pay advances to a firm controlled by his family so he could purchase back shares held by private equity investors. He also intended to repay loans and pay interest, according to the company after the investigation.

The company also stated that his team and the senior management were aware of the transactions. It has also been corroborated in his note.

The company also added that they have no documentary evidence to show the harassment of Income-tax officials that played a part in Siddhartha’s suicide. The company is seeking to recover the debt fundings from his assets, including those of his family (24).

Why Was Coffee Day Struggling Despite the Popularity?

V G Siddhartha, the founder of Cafe Coffee Day, pioneered an upscale coffee culture in India and Amit Judge of Barista. However, even after two decades of expanding, the franchise had called himself a failed entrepreneur in a letter (25). Cafe Coffee Day did develop steadily and smartly over the year, but then what went wrong?

Notably, Cafe Coffee Day rivals such as Costa Coffee, Tea Leaf, The Coffee Bean, among other franchises, tried hard to have a foothold in the market. They never grew large enough to threaten the pre-eminence of Coffee Day. It means that Sidhartha had a dozen years to establish a pan-India presence before others and Starbucks.

However, its annual results spoke for itself, a net loss of 155 crore INR in 2015 and 80 crore INR in 2016. It received a negligible net profit of eight crore INR in 2017 with a sale of more than 3,000 crore INR. In the year 2018 and 2019, it reported a net profit of 49 crore INR and 60 crore INR, respectively. However, both gains were bolstered by a large gain in exceptional production.

Notably, in 2019, the company had received 98 crore INR from the sale of its subsidiary, Global Edge Software. It is one of more than 50 firms that feed into its consolidated results. Without such exceptional deals, the firm would have noted only a tiny profit despite the sales totaling more than 4,200 crore INR.

Indian Business Infrastructure

While Cafe Coffee Day is struggling, it is not as if other coffee chains are thriving. Barista is cutting locations, and Costa Coffee is on the edge of disappearance.

Despite the terrible food Starbucks offers, the chain is doing better than the rest. However, it has not yielded any significant profit as of now. Yet, if you visit any of the outlets of these chains at any given time, you would find it occupied by a reasonable number of customers.

It is true that Indians still far away from being considered as the most lucrative cafe’s clients. The western culture of taking coffees while on our way to the office to wake ourselves up barely exits here. It is another reason why cafes in India are rarely open at dawn, and they are mostly busy during the evening and night (26).

Now coming back to the initial query, if a cafe is serving expensive snacks and beverages and is well occupied during most of its operational hours, why is it not making a comfortable profit. The most plausible reason can be, in the absence of fraud, is India’s dreadful business Infrastructure. Rents in India, including power and fuel, are ridiculously high India. Productive employees are also challenging to find and even more challenging to retain.

How Can Tatas Serve Justice to CCD?

Earlier, Coffee Day had sought s price of 3,000 crore INR for its vending machine business. However, it had lowered the valuation considering that corporates and businesses are hit due to the ongoing coronavirus pandemic.

The group would first demerge the vending machine business from Coffee Day Global before selling it to a potential acquirer since it also houses other retail businesses.

The potential deal comes as Tata Consumer is planning to scale up its food and beverages portfolio. The packaged products, a unit of sister Tata chemicals, was recently acquired, and it also operates a coffee chain in collaboration with Starbucks.

Because of their plantations, the Tatas also have their plantation, supply chain, and raw material already in place for the coffee sector. Meanwhile, they have also gained significant retail business experience because of their association with Starbucks. Tatas can do it justice because of their experience and financial muscle, as there is also an opportunity for the business worldwide.