How the Starbucks China Stake Sale Reshapes Specialty Coffee

Carlyle Group and Boyu Capital have emerged as preferred bidders for a majority stake in Starbucks' China business, according to the Financial Times. The deal could value the unit near $4 billion, or above $10 billion when retained equity and future franchise revenue are counted. Five binding offers were submitted, with a final decision expected by the end of the month.

Starbucks may retain as much as 49 percent of the China business, up from an earlier reported 30 percent, leaving it the largest shareholder. The nearly year-long process drew interest from investors including Sequoia China, Primavera Capital and FountainVest Partners, and the outcome will affect competition across China's specialty coffee and coffee culture landscape.

A key moment has arrived in the sale of Starbucks' China business. According to the Financial Times, Carlyle Group and Boyu Capital have become the preferred bidders to acquire a majority stake in Starbucks' China business, with the deal valued at possibly close to $4 billion, and if retained equity and franchise revenue are included, the total value could exceed $10 billion. Starbucks' final retained stake has also been adjusted from the previously rumored 30% to as much as 49%, meaning that even with the introduction of outside capital, Starbucks will most likely remain the largest shareholder in its China business. Five bidders have now submitted binding offers, with a final decision expected by the end of the month. This equity change, nearly a year in the making, will profoundly affect the landscape of China's coffee market.

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Over the past year, Starbucks has been seeking a local strategic partner for the Chinese market in hopes of reigniting its growth engine. Yesterday, this closely watched stake sale plan finally saw substantive progress.

According to the Financial Times, U.S. private equity giant Carlyle Group and China-based Boyu Capital have risen to become the frontrunners bidding for a majority stake in Starbucks' China business, and the two firms are currently seen as Starbucks' most favored partners.

Three people familiar with the matter said the deal could value Starbucks' China business at close to $4 billion (excluding franchise fees). If Starbucks' retained equity and the franchise revenue it will continue to generate in the future are included, the overall value could exceed $10 billion.

The report also said that five private equity firms submitted binding bids last week. In addition to Carlyle and Boyu, well-known investment institutions such as Sequoia China (now renamed HongShan) and Primavera Capital as well as FountainVest Partners have also shown interest in bidding, and the final buyer may emerge in the form of a consortium.

It is worth noting that in early July, media reports said Starbucks might retain a 30% stake after selling its China business, but that figure has now changed — Starbucks may ultimately retain as much as 49% of its China business. In other words, even with outside capital joining, Starbucks will most likely remain the largest shareholder in its China business.

As for who will ultimately win Starbucks' China business, outside views differ. Industry analysts believe that Carlyle has extensive investment experience in the Chinese market and participated in the 2017 spin-off of McDonald's China business, so it may stand out on the strength of its track record. However, given that Starbucks is closely evaluating bidders' ability to transform the Chinese market supply chain and maintain local partnership relationships, Chinese domestic private equity groups may hold an advantageous position in the competition thanks to their local ties.

In response to this stake sale, Starbucks has remained cautiously optimistic, saying: "We have received strong interest from multiple high-quality partners, all of whom are confident in Starbucks' long-term growth potential in China. Recently, five bidders submitted bids, and we are evaluating these bidders' offers. They all see the tremendous value of the Starbucks brand, our business momentum and our outstanding team."

Its CEO Niccol also said publicly that the company's current focus is to find partners who align with its "mission and values," adding, "This is about how we ensure the Starbucks brand is in a better position in the future, because I believe there will be thousands more Starbucks in China."

Nearly a year has passed since news emerged last November that Starbucks was considering selling its China business, and attention to the matter at home and abroad has remained high. In the latest Financial Times report, people familiar with the matter said that although the specific timing has not yet been finalized, the sale of Starbucks' China business may have entered its final stage, and Starbucks executives are expected to make a decision by the end of this month.

Image source: Internet

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