Starbucks avoids froth in $913 million Japan buyout

September 24, 2014 06:51 pm | Updated 06:51 pm IST - HONG KONG

If the deal goes ahead, Japan will become Starbucks' second-largest market by revenue. File photo: Bijoy Ghosh

If the deal goes ahead, Japan will become Starbucks' second-largest market by revenue. File photo: Bijoy Ghosh

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.

=> Starbucks Corp. announced on Sept. 23 an agreement to buy the remaining 60.5 percent of its Japanese venture that it doesn't already own in a two-step process worth 99.3 billion yen ($913 million).

=> The U.S. coffee chain will pay 965 yen per share to buy the 57 million shares or 39.5 percent stake held in Starbucks Coffee Japan by its local joint venture partner Sazaby League for a total cost of $506 million.

=> Public shareholders holding the remaining 30.2 million shares or 21 percent of Starbucks Coffee Japan will then be given the option to tender their shares for 1465 yen per share - a total cost of around $407 million.

=> The offer to Sazaby is at a 31 percent discount to Starbucks Coffee Japan's closing price on Sept. 22. The offer to public shareholders is at a 4.7 percent premium.

=> Starbucks said in a statement that Sazaby expressed a desire to exit the business in advance of the expiration of Starbucks Coffee Japan's retail franchise rights in 2021.

=> All the steps in the two-stage deal have been unanimously approved by the boards of Starbucks Corp., Sazaby, and Starbucks Coffee Japan. Starbucks Coffee Japan was formed as a joint venture partnership in 1995.

=> Shares in Starbucks Coffee Japan rose 4.5 percent to 1462 yen each by mid-day Tokyo time.

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