Revolution at the Coffee Republic

IT WAS an opportunity too good to resist. Coffee Republic, one of Britain's four big chains of coffee bars, was forced to admit it had been approached about a possible takeover. So the puns were rolled out: the froth had come off the cappuccino market, something was brewing in the coffee industry; what were the bean counters up to?

And once the puns had been exhausted, everyone's conclusion was much the same - the coffee market, which had undergone such explosive growth over the past decade, was about to consolidate. The big four operators were about to become the big three.

There was only one question: if Coffee Republic was about to be taken over, which of its competitors - US giant Starbucks, Whitbread's Costa Coffee or listed company Caffe Nero - would be the buyer?

The company had been forced to admit to a takeover approach after its share price doubled. One rival operator said: 'I don't know if they're up for sale, but they are talking to a lot of people.'

Another said: 'We've been saying for a long time that there's bound to be consolidation in the market - it's just a question of when and which three will remain.' But while many assume that Coffee Republic will be snapped up by one of its three big competitors, no one should count on it. There are hints that a new entrant might be sniffing around.

A source said: 'Consolidation is one route. But there are other options available to Coffee Republic. Shareholders could be sitting on something very valuable.' With 107 retail outlets, someone could be looking at the group as a property play. Rents, once exorbitantly high in London, are now beginning to soften and Coffee Republic has some extremely welllocated sites that have become more affordable to possible suitors.

Last week, all eyes were on Caffe Nero. The group upped its stake to 10.69%, fuelling rumours that it was looking to buy its rival.

The theory was bolstered by Caffe Nero's announcement that it had secured a further £7m of bank funding to continue its expansion plans, which gave it, according to a statement, £10m of funds available for growth. But sources close to the chain insisted that its ten% stake was merely a 'strategic investment'.

A source told Financial Mail that it did not know who the bidder was, but added: 'We're in a no-lose situation. Something is probably going to happen in the next six months.'

Caffe Nero is thought to be likely to increase its stake in Coffee Republic even further if the price falls. The source said: 'If people realise we're not going to buy it immediately, then the price will drift down and we'll possibly buy some more shares.

'We'll wait to see what happens, but the results have pretty much suggested that they can't go on the way they have been.'

Whitbread, owner of Costa Coffee, which shares pole position in the market with Starbucks, says privately that it is not interested. There is no denying that Coffee Republic, the company founded by brother and sister team Bobby and Sahar Hashemi five years ago, is looking vulnerable to a takeover.

At its preliminary results at the end of last month, which showed an operating loss of £1.9m, Bobby Hashemi admitted that the figures were 'disappointing'.

Coffee Republic's expansion plans were on hold and 18 underperforming bars were to be sold. It was an unexpected return for Hashemi who had retired in April the previous year, leaving a healthy business and shares at 25p.

But he was summoned back from his travels around Europe after just a year to restore a company that had seen sales fall below targets and its shares crash to 4p. He instantly ordered a review of the entire company.

'It was a bold move for us,' he reflected last week. 'We were the first to wake up and say how things were. We have been totally open in saying that the market is not profitable at the moment.'

As for the current speculation, all he will say is: 'We have a safe balance-sheet, gearing at 20%, the support of our banks and we feel comfortable. But the management team's job is to evaluate all options.'

While comparisons between companies are difficult, Costa Coffee made a profit of £6.9m in the year end to March 2, 2002, while Caffe Nero reported a loss of £1.8m in the year ending March 31, 2001.

As well as Caffe Nero, other names have been mentioned. Colourful businessman David Abell secretly bought 2.2% of Coffee Republic, leading to rumours that he might have long-term plans for the outfit.

Abell, chief executive of Corby Trouser Press manufacturers Jourdan plc, formerly headed up industrial conglomerate Suter, which later became the subject of an investigation by the Department of Trade and Industry. While no action was taken, Abell came in for some criticism. But less than a year later had taken control of Jourdan.

Last week, financial website City wire.co.uk revealed that Abell had built up a stake in Coffee Republic. But Abell told Financial Mail this week: 'I am no longer a shareholder in that company.'

Julian Richer, founder of hi-fi retailer Richer Sounds is also a shareholder with 16%. Last week he was away on holiday, but a source said: 'He's just an independent investor. And he's a big fan of the company.'

THE CAFFEINE KINGS

Costa Coffee: 300 outlets, 23.4% market share

Starbucks: 284 outlets, 22.9% market share

Coffee Republic: 107 outlets, 8.3% market share

Caffe Nero: 106 outlets, 8.3% market share

FOR THE BEAN COUNTERS

4.4m cups of coffee are bought each week in Britain.

The total coffee shop market is 7,057 outlets and it is forecast to grow by 5.9% by December 2004.

London accounts for 41.6% of the coffee shop market.