By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Private equity firm Texas Pacific Group (TPG) has filed a lawsuit against Strauss Group Ltd. (TLV:STRS), its partner in Strauss Coffee, a large international coffee business, in The Netherlands. It has asked a court to look into the company’s dealings and, among them, the issue of overcharging for management services and proposed dismissal of Strauss Coffee CEO Todd Morgan.
Texas Pacific Group (TPG) is a minority shareholder of a large international coffee business Strauss Coffee. TPG bought 25% of the venture in 2008 for $293 million while the controlling stake is owned by Strauss Group, a leading Israeli food company. Perhaps a buyout by German consumer products conglomerate Joh. A. Benckiser earlier this year of DE Master Blenders 1753 NV (AMS:DE), a European coffee and tea company for about $10 billion has ignited a desire on the part of Texas Pacific Group to exit the venture. It safe to assume that Texas Pacific Group has an agreement in place with Strauss Group which gives it an option to pursue an IPO of the coffee business in order to sell its stake. The proposed dismissal of the CEO and the resulting lawsuit are viewed by some as efforts by Strauss Group to undermine the IPO of the company.
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According to some media reports, Strauss Group Ltd. (TLV:STRS) has offered to buy out Texas Pacific Group’s stake for about $317 million, implying a total valuation of $1,269 million for Strauss Coffee. Such valuation implies an EV/EBITDA multiple of about x9 (based on annualized H1 2013 results). This compares to a multiple of x16.2 paid in the DE Master Blenders 1753 NV (AMS:DE) transaction. Considering that Strauss Coffee is the world’s fourth largest coffee manufacturer after Nestle SA (VTX:NESN), Kraft Foods Group Inc (NASDAQ:KRFT)/Modelez and DE Master Blenders 1753 NV (AMS:DE), with strong presence in large emerging markets such as Brazil and Russia/CIS, the valuation seems to be outrageously low.
Applying a D.E. Master Blenders transaction multiple for Strauss Coffee would value the company at $2,287 million. Strauss Group Ltd. (TLV:STRS)’s stake is therefore valued at $1,715 million. At the same time, Strauss Group itself currently trades at a market capitalization of $2,051 million. The coffee business therefore represents about 84% of Strauss Group’s market cap, implying that the investor receives the remaining part of the business almost for free – the business which has an EBITDA of about $150 million (based on annualized H1 2013 results).
Some of the claims made in Texas Pacific Group’s lawsuit – specifically a claim regarding overcharging by €3 million annually for different services – may be a hint to Strauss Group Ltd. (TLV:STRS) that they are cutting off the branch they are sitting on, as their objectives as majority shareholders are the same – to maximize the company’s value and not destroy its reputation.