Texas Pacific Group (TPG), a private equity firm, is buying 25% of Strauss' coffee subsidiary for $288 million. The deal values Strauss' global coffee enterprise at $1 billion.
The announcement of the initial, but binding, agreement was made yesterday by Ofra Strauss, the chairperson of the Strauss Group, and CEO Erez Vigodman. TPG was also granted a two-year option to acquire a further 10% of the coffee company's shares at the same company value of the present transaction, plus 6% interest per year.
Strauss owns the coffee firm through a wholly-owned Dutch subsidiary, and therefore is expected to have only a small tax obligation on its about $85 million capital gain on the sale. UBS was Strauss' investment banking advisor on the deal.
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Strauss chose Texas Pacific as a financial partner after a process that included three other competitors. In the end it was TPG against Blackstone, the world's largest private equity firm. TPG is number four, with over $50 billion of assets under management.
Ofra Strauss said: "We chose to introduce a financial investor with leading global competencies to our coffee company, who, together with us, will accelerate the realization of our coffee company's global expansion strategy. The board of directors and I believe that introducing TPG as a partner in the coffee company will maximize the company's value as it executes the moves it has planned in the next few years, and in creating a world leading global coffee company."
Strauss Coffee started its international activities seven and a half years ago, when it bought Brazilian firm 3Coracoes for $41 million in 2000. At the same time it stopped producing coffee for European chains under their own brands, a business with minuscule profit margins. Strauss Coffee identified potential in emerging markets, in particular Brazil and Central and Eastern Europe, and quickly became one of the leading coffee companies in those regions.
Strauss Coffee now has a 14% share of the Brazilian market, which makes up 33% of its business.
Strauss merged 3Coracoes with Santa Clara. I in March 2005 it bought a Serbian coffee firm, and then in September 2005 it invested 26 million euros in the Polish brand MK Premium. It recently spent $93 million to become the second largest coffee company in the Russian market with a 13% share, by buying Chornaya Karta and Kaffa there.
The strategy of international mergers and acquisitions increased Strauss' coffee operating profits from nothing in 2002 to NIS 320 million in 2007, after investing $217 million in purchasing other firms. Strauss has invested a total of $400 million in its coffee subsidiary, and it is now the world's seventh largest.
Strauss intends to invest the $450 million - the total of the present sale plus the 10% option available to TPG - to acquire more companies in emerging markets, in particular Latin America, Eastern and Central Europe and South East Asia.
While Strauss has never officially announced its coffee strategy, it seems its minimal goal is to take over fourth place in the world rankings, which is presently occupied by Procter and Gamble's Folgers.
TPG brings to Strauss not only its enormous financial resources but also an international network of connections and contacts.
Strauss Coffee had 2007 operating profits of NIS 231 million on revenues of NIS 2.9 billion.
Vigodman said: "In the past six years we have turned our coffee company into one of the fastest growing businesses in the world coffee industry, while applying a unique competitive strategy, expanding in regions with the highest growth rate in coffee, building a leading competitive position in all markets in which we operate and creating high value for all our stakeholders."
Stephen Peel, head of TPG's Eurasia Group, said: "Strauss Coffee has rapidly established itself as one of the leaders in the coffee business with innovative, high quality products that are dedicated to the specific tastes of the markets they serve. We have been impressed by management's ability to achieve significant growth, especially through well-orchestrated acquisitions in developing and emerging markets, and we look forward to helping Strauss further extend its leadership position in a consolidating global coffee market."
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