Deal focus: Longreach finds its magic beans

Over the course of nine years and two private equity owners, Komeda Holdings was transformed from a founder-run business with around 300 outlets – and a litany of growing pains – into a publicly-listed company and the largest full-service coffee shop chain in Japan. Advantage Partners opened nearly 200 stores and doubled revenue during its holding period, generating a 7x return. MBK Partners then picked up the baton, taking the store count past 750 and earning a 5x multiple for its trouble.

The Longreach Group would like to replicate this outcome with Kohikan Corporation, its recently agreed acquisition from UCC Foodservice Systems (UFS). Operating under the Kohikan, Café di Espresso Kohikan, Karakuan, and Kakura brands, the company ranks second after Komeda among Japan’s full-service players. But the gap between the two is substantial: Kohikan has 277 stores nationwide and posted sales of around $55 million last year; Komeda’s revenue came to JPY24 billion ($225 million).

They also differ in terms of operational challenges. “Family-owned businesses tend to be strong but sub-scale in terms of professional management. That’s what you must fix. With a carve-out like Kohikan, the processes and institutionalization are there, but the management of the business to efficiency, profitability and growth is not strong. It is not a heroic set of assumptions to move the numbers very substantially once those changes are made,” says a source familiar with the transaction.

The corporate parent is UCC Holdings, which makes the bulk of its money from selling coffee beans. Longreach is already a UCC customer through First Kitchen, a company it bought in 2016 to develop the Wendy’s franchise in Japan. This set up exclusive negotiations over the non-core asset. It will be the first investment from Longreach’s third fund, which is targeting $650 million.

The UFS subsidiary has a portfolio of more than 650 coffee shops in total, with Kohikan as its full-service, premium middle class offering. In this respect, Kohikan and Komeda sit apart from other leaders in Japan’s coffee shop market, which require customers to collect beverages at the counter before finding a seat. 

While Longreach believes it can generate a strong baseline return in Japan alone, it is relying on this differentiation in service to help crack other markets. Several of UFC’s other brands have found their way into Hong Kong, Taiwan, and Thailand, but mainland China is seen as the most attractive prospect for Kohikan. It is a strategy Longreach is already pursuing with another of its Japanese portfolio companies, bridal jewelry specialist Primo Japan. 

“There is a broad trend of Japanese consumer goods and restaurants coming to Asia,” the source adds. “That concept – a more traditional Japanese service offering, good drip coffee, and an impressive dessert menu – represents a huge opportunity in China.”   

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• Topics
• North Asia
• Consumer
• Buyouts
• Japan
• The Longreach Group Limited