Ascendent founder's SPAC to merge with Tim Hortons China

The coffee-and-donut chain entered China in 2019 and had 137 stores by the end of last year, but it plans to have more than 2,750 by 2026. The business was established as a joint venture between Restaurant Brands International (RBI) – owner of the global franchise, which is in turn controlled by 3G Capital – and US-headquartered private equity firm Cartesian Capital Group.

They are also responsible for building out the Burger King and Popeye's franchises in China. There are more than 1,200 Burger King restaurants in the country, while the first Popeyes outlet opened in Shanghai last year.

In 2020, Tencent Holdings invested in Tim Hortons China, with RBI noting that the technology giant's involvement would be a reference point for digital cooperation. In May, the company secured a new funding round led by Tencent and Sequoia Capital China. Eastern Bell Capital also took part. By this point, there were 150 Tim Hortons outlets and a loyalty program with nearly three million members.

Peter Yu, a managing partner at Cartesian, told investors that the target of 2,750 profitable outlets "is eminently achievable." He gave three reasons for this: China's status as the world's fastest-growing coffee market; Cartesian and RBI's track record with Burger King; and the rapid progress made to date, with Tim Hortons China EBITDA positive at the store level every month for the last 15 months.

Silver Crest Acquisition Corporation, of which Liang Meng, founding managing partner of Ascendent is the chairman and sole manager of the sponsor entity, raised $300 million at the end of 2020. The SPAC targets global consumer tech investments, leveraging changes in consumer behavior, a strategic reshuffling of consumer assets, and opportunities created by the rise of China's middle class.

A source close to the firm told AVCJ at the time of the SPAC's launch that it is run by a separate team from Ascendent, and it would pursue a different investment mandate to the firm's funds.

SPAC investors will hold a 16.4% equity interest in the merged entity, while the SPAC sponsor – sponsors typically receive a 20% stake in the SPAC (not in the merged entity) for a nominal sum post-listing – will own 3.4%. Most of the equity – $1.69 billion out of $2.1 billion – comes from existing investors in Tim Hortons China rolling over their interests. They will own 80.2% of the merged entity.

The transaction, which values the company at 5-6x projected revenue for the 2026 calendar year, will create balance sheet cash of $315 million, according to a presentation. It still needs to be approved by a majority of SPAC investors. On completion, they can exercise their warrants and purchase shares or redeem some or all their shares for cash.

Only 31% of Tim Hortons China's sales are transacted in-store at the counter, with mobile and home delivery accounting for 34% and 35%, respectively. The company expects to reach 458 stores by the end of 2021, with 62 already opened year to date, 65 under construction, and 194 sites approved or under negotiation. Same-store sales growth was up 42.5% year-on-year in the first quarter.

Adjusted revenue and store EBITDA came to RMB206 million and RMB10 million in 2020. They are projected to reach RMB7.64 billion and RMB1.46 billion by 2026. This includes all stores directly owned by the China franchisor.

Tim Hortons faces competition in China from Starbucks, which has 5,100 outlets across 200 cities. The US-headquartered coffee shop chain – which teamed up with Sequoia last year to make strategic investments in next-generation food and retail start-ups – aligned itself with Alibaba Group in 2018.

Meanwhile, Luckin Coffee, which rose from nothing to become the country's second-largest coffee shop chain within the space of 18 months before crashing back to earth amid a massive sales fraud, is stabilizing. Two of the company's existing PE investors committed $250 million in April – with scope to upsize by $150 million – and steps have been taken to reduce cash burn.

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• Topics
• Greater China
• IPO
• Consumer
• China
• SPAC
• Ascendent Capital
• Cartesian Capital
• Tencent
• Sequoia Capital
• Eastern Bell Venture Capital