The promoters of the Coffee Day Group plan to restart talks with Coca-Cola for selling a chunk of their stake in the Café Coffee Day (CCD) chain in a bid to cut the group’s debt further, said people with knowledge of the matter. Group company Sical logistics is also seeking to divest assets, they said. The late VG Siddhartha, the founder of Coffee Day Group, had been in talks with the beverage giant as of June last week. ET had reported on June 27 that Coca-Cola was in exclusive talks with CCD. The negotiations stalled as Coca-Cola was keen on buying a controlling stake in the firm that runs 1,750 CCD outlets in the country while Siddhartha was looking at divesting only a minority stake and wanted to retain control, said the people.

Seeking Foothold

The late entrepreneur was seeking a valuation of between Rs 8,000 crore and Rs 10,000 crore, they said. Coca-Cola is trying to get a significant foothold in the fast-growing cafe space as its core carbonated drinks segment is seeing a slump in consumption as consumers cut down on sugared drinks.

A spokesperson for Coca-Cola refused to comment on what he termed “speculative news”. Coffee Day Enterprises Ltd (CDEL) didn’t respond to queries from ET. If successful, a transaction with Coca-Cola will be incrementally value-accretive to the Coffee Day Group, dubbed India’s answer to Starbucks, but currently under financial stress.

The latest move follows CDEL signing an agreement with the world’s largest alternative asset manager Black stone Group to sell software technology park Global Village Tech Park in Bengaluru for about Rs 3,000 crore. Separately, CDEL subsidiary Sical Logistics is also working on the divestment of certain assets, the proceeds of which will pare debt.

CDEL’s debt is expected to drop to about Rs 1,000 crore on conclusion of the sale of Global Village, the company had said on Friday. “The company is expected to have a comfortable position to service the reduced debt obligations,” it had said.

A person privy to negotiations between Coca-Cola and Coffee Day in June had told ET at the time that CDEL’s promoters were seeking a valuation four-five times that of sales in the coffee business on the basis of valuation trends in the industry.

The group’s coffee business is expected to close the year ended March 2020 with sales of about Rs 2,250 crore, a senior executive has said. The business, which includes some coffee bean exports, had recorded revenue of Rs 1,777 crore and Rs 1,814 crore in FY18 and FY19, respectively, regulatory filings said.

Apart from 1,750 stores across India, Café Coffee Day has 60,000 vending machines. It has outlets in Vienna, the Czech Republic, Malaysia, Nepal and Egypt as well. Industry experts believe the deal, if it goes ahead, will fit in with the strategy of Coca-Cola to diversify into other products considering that there is growing awareness about sugared and carbonated drinks. Coca-Cola announced last year that it was buying the Costa Coffee café chain for about $5 billion.ET- 19th Aug 2019.

1. To which type of market completion does this industry belong? Discuss the chief characteristics of this market competition. 

2. What is the shape of the demand curve of this market competition and what does that indicate? Do you think this to be a right move to bring out the company from its situation of debt trap? 

3. If the company is able to recover its MC in the short run, do you think it should continue business?

Answer rating: 100% (QA)

1 In economics a complete market aka ArrowDebreu market or a complete system of markets is a market with two conditions Negligible transaction costs and therefore also perfect information there is a p... View the full answer