Sweet, no froth
Starbucks Corp. has served up a grande Japanese buyout without any froth. The U.S. coffee chain is buying the 60.5 percent of its listed local unit that it doesn’t already own for around $913 million – a discount to its market value. Expiring franchise license agreements give Starbucks Corp. a rare chance to take full control of its business in the world’s third-largest economy on the cheap – as long as minority shareholders don’t put up a fight.
The deal has two parts. In the first step, Starbucks Corp.’s local partner, clothes-to-food brand operator Sazaby League, has agreed to hand over its 39.5 percent stake in the Japanese unit for 965 yen per share – a 31 percent discount to the closing price on Sept. 22. Public shareholders that own the remaining 21 percent of the shares will be given an opportunity to sell at 1465 yen per share – a skinny 4.7 percent premium. If both steps are completed, Starbucks Corp. will be able to delist Starbucks Coffee Japan.
Why is Starbucks Corp. able to call the shots? The key is licence agreements between the Seattle-based group and its local unit. The Japanese arm is only allowed to use the Starbucks name until 2021, with no option to renew. If no deal had been struck, Starbucks Corp. would have eventually had the right to buy back the Japanese stores at their fair market value, probably leaving shareholders worse off. Shares in Starbucks Coffee Japan rose to 1461 yen by mid-day Tokyo time on Sept. 24, suggesting there’s unlikely to be much resistance from public shareholders.
A bargain will also help Starbucks Corp. to justify the buyout to its own shareholders. If the deal goes ahead, Japan will become the company’s second-largest market by revenue. But the business also has a less attractive financial profile: growth in same-store sales and operating profit margins in Japan are around half the level of the U.S. listed parent. For Starbucks Corp. this no-froth deal looks like just the right brew.