Buying the Business Behind the Brand

Walk into a coffee shop and the name above the door tells you which brand you are buying from. It does not necessarily tell you who owns the business serving your drink.

That distinction becomes important when the business changes hands.

A transaction involving a familiar brand can sound straightforward: one company buys another company’s coffee shops. Behind the headline, however, there may be a share buyback, a transfer of operating businesses, licensing arrangements and cash moving in a direction readers might not expect.

DFI Retail Group’s proposed reorganisation with Maxim’s Caterers offers a useful way to understand these moving parts — and what investors should examine before deciding whether a deal creates value.

First, understand what is changing hands

In its 30 September announcement, DFI said it would exchange its indirect 50% stake in Maxim’s for Maxim’s interests in the Starbucks-licensed business and approximately US$340 million in cash, subject to adjustments.

The business covers more than 1,100 coffeehouses across seven Asian markets: Thailand, Singapore, Vietnam, Cambodia, Laos, Hong Kong and Macau.

Five of these are ASEAN countries. Hong Kong and Macau are special administrative regions of China. The transaction’s footprint should therefore be described as seven Asian markets, rather than seven ASEAN countries.

DFI expects completion by the end of March 2027, subject to conditions including third-party consents, antitrust clearance and separation of the licensed business from Maxim’s other operations.

At the date of writing, this is a conditional transaction. The announcement is not evidence that the transfer has already happened.

Follow the cash carefully

The important detail is that DFI is due to receive the cash.

Describing the arrangement as “DFI buys Starbucks for US$340 million” would misrepresent both the direction of payment and the business involved.

There are two sides to the exchange: the investment being surrendered and the package being received. Looking at the cash component alone leaves out much of the transaction.

Consider a separate, hypothetical example.

An investor owns a stake in a restaurant group. For an agreed exchange, the parties value that stake at US$100 million. The restaurant group offers a particular operating business valued at US$70 million, plus US$30 million in cash, to buy back the stake.

The investor receives cash while taking ownership of a business. That does not mean the business was free. The investor surrendered an existing asset to obtain it.

These figures are fictional and do not represent DFI’s transaction valuations. They illustrate why the full exchange matters more than an isolated cash figure.

Owning the operator is different from owning the brand

A licensed business operates under rights granted by a brand owner. Those rights come with contractual conditions.

Starbucks describes its licensed-store model as generating income from products and supplies sold to operators, alongside royalties and licence fees. The operator’s sales therefore serve a different economic purpose from the brand owner’s licensing income.

For the operator, customer spending must support the costs of running the shops. These can include staffing, rent, ingredients, equipment, maintenance and the payments required under its agreements.

For an investor assessing any licensed-business acquisition, the contract deserves as much attention as the shop count.

How long do the rights last? What renewal conditions apply? Which decisions require the brand owner’s approval? What obligations follow a change in ownership? Who funds refurbishment and expansion?

The answers depend on the actual agreements. A buyer should not assume that acquiring an operating company gives it unlimited freedom over the brand, products or store format.

Why seek greater operating control?

An investment in a diversified group and ownership of a particular operating business offer different ways to earn returns.

In the first arrangement, an investor has exposure to a broader collection of activities. In the second, it can concentrate management attention and capital on a more specific business.

Greater control may allow an owner to coordinate purchasing, technology, store investment and management incentives more closely. It also brings responsibility for making those decisions work.

Imagine two businesses using separate payroll systems and purchasing similar office services. Combining selected support functions might reduce duplicated costs. But the integration itself could require spending on software, training and contract changes.

The useful question is how much lasting benefit remains after those costs, and how long it takes to achieve it.

Control creates opportunities to improve performance. It does not establish that the buyer will execute successfully.

More reported revenue needs interpretation

An acquisition can make a group’s reported revenue larger without existing stores serving more customers.

Under the equity method, an investor generally recognises its share of an associate’s or joint venture’s profit rather than adding that business’s sales line by line to its own revenue. A controlled subsidiary is generally consolidated, bringing its revenue and expenses into the group accounts, subject to the relevant accounting requirements and adjustments.

This distinction matters when comparing financial statements before and after a restructuring.

Suppose a hypothetical group starts consolidating a coffee business with US$200 million in annual sales. The group’s reported revenue can increase because that business is now included. The change alone does not demonstrate that customers bought more coffee or that individual stores became more profitable.

Investors should separate growth caused by an acquisition from growth within the underlying operations.

Useful measures include sales at comparable existing stores, operating margins and cash generated after the spending needed to maintain the business. Each answers a different question.

Revenue measures business activity. Cash available after necessary spending helps show what that activity produces for the owner.

A regional network still needs country-by-country analysis

Operating across several countries gives a business multiple sources of demand. It also exposes it to different commercial conditions.

An investor should examine Thailand, Singapore, Vietnam, Cambodia and Laos individually, rather than apply one assumption to all five. Hong Kong and Macau require their own assessment as well.

The questions can be consistent even when the answers differ:

• What can customers afford, and how frequently do they visit?
• How much of a store’s sales is absorbed by rent and staffing?
• Which local competitors offer attractive alternatives?
• How dependent is a location on office workers, residents or visitors?
• What currency movements could affect costs or reported earnings?

A busy store can still produce disappointing returns if its operating costs are too high. A smaller store may perform well if its sales are dependable and its investment requirements are modest.

Country averages also have limits. Two stores in the same city can have very different economics because their leases, customer traffic and competitive surroundings differ.

Regional expansion is therefore an investment decision repeated across individual locations.

Test the value of what is being surrendered

When a company receives a business and cash, attention naturally moves to what it gains. The asset it gives up deserves equal scrutiny.

An existing investment may provide earnings, distributions and exposure to activities that will no longer be part of the portfolio after the exchange.

A useful assessment compares the expected future cash flows of the old arrangement with those of the new one, allowing for differences in risk, capital requirements and management influence.

Immediate cash strengthens financial flexibility, but its presence does not prove that an exchange is attractively priced. That depends on the value of the entire package and the opportunities being relinquished.

Investors should also examine what management does with the proceeds. Reducing debt, making another acquisition and returning money to shareholders produce different consequences.

The right choice depends on the company’s financial position and the quality of the alternatives available.

What would show that the transaction is working?

After completion, a familiar brand and a larger revenue figure would be only part of the evidence.

Stronger evidence would include healthy store economics, integration spending that remains under control, sustainable cash generation and expansion that earns an acceptable return on the capital invested.

Any management forecast should be assessed against subsequent results. Expected savings are not savings already delivered, and planned openings are not profitable stores already operating.

DFI’s announcement provides a practical reminder of how to read M&A: identify the assets exchanged, follow the cash, understand the contractual rights and examine the operating obligations.

The brand attracts attention. The value of the investment depends on the business underneath it.