Strategic Review musings*Having now achieved a balance between ongoing revenues and expenses which generates positive cash flow, and raised fresh equity funds, the company has apparently achieved financial stability and can review its strategic options under no critical time pressure.
*While the concept has proven difficult to refresh, the remaining 262 leases no doubt include many gems which are hard to accumulate from scratch, and if sold to a specialty coffee retailer, multi-concept owner or PE firm, transfer of leases would presumably be straighforward.
*The franchise contracts however probably limit SCU's attractiveness to most large specialty coffee companies which are all run corporately, ie. SBUX, Costa, Peet's, Caribou, Caffe Nero etc.
*262 locations would probably be too large for most franchised coffee players other than Tim's and Dunkin, both of whom usually operate out of larger locations than SCU and in the case of Tim's would often cannibilize business at their existing locations.
*Prolonged negative growth at SCU would eliminate most PE firms whose base line strategy is to acquire with leverage and make money by a combination of growth and paying back debt, and who would in any case be inheriting the same tricky strategic position SCU currently has when they try to exit in a few years' time. A turnaround specialist PE firm would probably look to buy at a more beaten-down price than the current level, which is essentially where the Serruyas bought their shares at a year ago.
*Multi-concept owners such as MTY and Fairfax/Recipe would seem by default the most likely contenders. Viewed simplistically, MTY's enterprise value per location (roughly $300K) is well above SCU's $140K and they are not afraid to buy tired brands, so there may be scope for an accretive deal, however MTY is notoriously disciplined. Maybe this is one for Fairfax/Recipe.
*The NAC/pot angle is a wild card here, no idea what this may bring, but the street does not seem to have priced in much if any value.
*Conclusion: Given that 1. this is trading at the level that sophisticated insiders SPE bought in at (big ouch for last year's Clarus-underwritten deal buyers!); 2. EV now equates to a reasonable $140K per location, almost all franchised; 3. EBITDA multiple of 12X while not cheap is not ridiculous for a franchised system; 4. The NCIB will keep a steady bid in the market for a while and increase EPS - on balance it looks like there is not much downside to take a punt and see what happens from the strategic process and maybe even the NAC/pot thing