Coffee junkie Jollibee tries to perk up stunned market

Homegrown fast-food retailing giant Jollibee Foods Corp. (JFC) may turn around loss-making specialty coffee chain Coffee Bean & Tea Leaf (CBTL) in 12 to 18 months, the company’s chair and founder, Tony Tan Caktiong, said on Thursday.

For a price tag of $350 million, JFC is betting on CBTL to be its vehicle as a major global player in the coffee retailing business. It is coming in as a white knight even when it’s still digesting another large overseas acquisition, American burger chain Smashburger, prompting many investors to dump its shares to factor in a possible earnings drag.

“Our strategic intent for the acquisition is to be big in coffee, a segment which is expected to continue to significantly grow globally,” Tan Caktiong told the Inquirer on Thursday.

Tan Caktiong noted Highlands Coffee was now the group’s fastest growing business, and the one providing the highest returns. The tycoon is optimistic that CBTL—with its good branding and footprint of 1,189 stores across 27 countries—would be another crown jewel.

CBTL will be its second biggest brand next to flagship Jollibee.

“We will get CBTL on the path to growth within the next 12-18 months, and with Highlands Coffee, will comprise the coffee platform in our portfolio,” Tan Caktiong said.

Still, by injecting the shock news, its stocks have taken a beating. In 2018, CBTL incurred a net loss of $21 million out of $313 million in total revenues while total cash flow as measured by earnings before interest, taxes, depreciation and amortization amounted to $23.7 million.

Yesterday, JFC’s share price slid by another 5.98 percent to close at P236 per share.  It has declined by 13.5 percent in the last two days since the deal was announced, wiping out P40.7 billion worth of market capitalization.

“Wait-and-see attitude prevails, waiting for JFC to prove they can turn the company around,” said veteran stockbroker Joseph Roxas, president of local stock brokerage Eagle Equities.

Stock brokerage Papa Securities said the acquisition would be “negative for JFC as consolidation of the business would put second half 2019’s earnings recovery at risk.”  “JFC is still posting losses for Smashburger (P380 million) in first quarter 2019, which would only be compounded by CBTL’s own losses,” it added.

Despite the expected earnings drag in the next year or two, JFC may be getting CBTL at a bargain.  One analyst at a fund management firm estimated that at an enterprise value of 13 times EBITDA or cash flow, this was a big discount relative to Starbucks’ multiple of 24 times cash flow or even Jollibee’s own multiple of 20 times.

As such, the analyst said JFC was indeed a white knight of CBTL, which had some debt due last week and did not have enough cash on hand.  If JFC could turn around CBTL, it will be good for the company moving forward.

Based on previous offshore deals, it would take at least a year or two for Jollibee to stabilize the operations of new acquisitions.

Founded in 1963, CBTL’s biggest markets are the US and South Korea, where it has 284 and 292 outlets, respectively.  The Philippines is the third biggest market with 139 stores. In the whole of Southeast Asia, CBTL has 447 outlets, including 101 in Indonesia, 99 in Malaysia and 61 in Singapore. It has 36 stores in Kuwait, 28 in Qatar 28 and 27 in India.

Philippine Competition Commission chair Arsenio Balisacan said JFC’s acquisition of CBTL was a “testament of the appetite for mergers on a global scale, enabled by a vibrant local economy.”

“Companies all over the world comply with different competition laws, and with Jollibee being a homegrown firm, it is expected to comply with the Philippine Competition Act,” he said.

CBTL, which is based in Los Angeles, California, will be consolidated into JFC’s financial statements immediately upon acquisition, which will still require regulatory approvals.—DORIS DUMLAO-ABADILLA

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