The Surface Logic of Hillhouse Capital's Acquisition of Starbucks

Hillhouse Capital has also joined the bidding war for Starbucks China.

On June 23, according to informed sources, Hillhouse Capital recently participated in a reverse management roadshow for Starbucks China, expressing interest in acquiring Starbucks' business in China.

It is reported that this roadshow also attracted several investment institutions, including Carlyle Group and Xincheng Capital. In previous reports, we have seen that China Resources Holdings, KKR, Fangyuan Capital, PAG, and Meituan have also expressed interest in the acquisition.

It is no wonder that earlier this month, Starbucks' CEO stated in an interview with the Financial Times that Starbucks received a lot of "expressions of interest" when selling its business in China.

Industry insiders estimate that the valuation of Starbucks' business in China is around $5 to $6 billion (approximately 36 to 43 billion RMB), and the transaction is expected to last until 2026. As it is currently in the early stages, the transaction structure has not yet been finalized.

An interesting detail is that the bid for Starbucks' business in China comes from a proactive and clear signal from Hillhouse.

The term "reverse management roadshow" mentioned in the news is also worth pondering. A "reverse management roadshow" invites investors to visit the company's management or production sites for tours or performance presentations. Compared to the "going out" roadshow for listing, this "inviting in" model is referred to as a reverse roadshow.

The purpose is to comprehensively showcase the company's core advantages, convey the company's development strategy, instill confidence in investors regarding the company's sustainable growth capabilities, and convert that confidence into ongoing financial support in the capital market. Typically, reverse roadshows occur in the manufacturing industry, where investors can have direct conversations with the company's management through on-site inspections, reducing the negative impact of information asymmetry.

In simple terms, the reverse management roadshow incorporates due diligence into the roadshow process, aiming to expedite the transaction process and quickly gain investors' trust.

From the arrangement of the reverse management roadshow, it appears that Starbucks is somewhat eager to sell its business in China. Interestingly, this morning, Starbucks officially described its stance on whether to sell its China business with one word: "ambiguous."

Starbucks China stated that it firmly believes in the enormous growth opportunities in the Chinese market. We are evaluating the best ways to seize future growth opportunities. We will continue to focus on revitalizing growth in our China business and maintaining a positive development trend.

"The best way to seize future growth opportunities" is too ambiguous.

According to a report by the 21st Century Business Herald citing informed sources: "February was the first round of negotiations, and this acquisition case may now be in the second or third round of negotiations. Generally speaking, as negotiations enter subsequent rounds, the number of participants tends to decrease. However, the number of investment institutions currently involved has actually increased, which suggests that Starbucks headquarters may not be satisfied with the conditions of the first round of negotiations and has added new participants."

In other words, there are still differences between the buying and selling parties regarding the conditions. Of course, sending various "signal flares" around the transaction is also common in a merger involving billions of dollars, and further negotiations and tug-of-war may occur in the future

Ample Ammunition and Rich Experience

With the further increase in bidders, Starbucks' choices and focuses have also changed. The known bidders include Carlyle Group, Xincheng Capital, China Resources Holdings, KKR, Fangyuan Capital, PAG, and Meituan.

Among them, KKR, Fangyuan Capital, PAG, and Carlyle Group, as established private equity firms, have rich operational experience in the mergers and acquisitions field and have frequently made investments in the past two years.

Xincheng Capital, China Resources Holdings, and Meituan have extensive ecological layouts in the industrial sector. For example, Xincheng Capital has participated in investments in McDonald's China and has certain experience in the business split of cross-border enterprises in China. Similarly, China Resources Holdings has abundant experience in the retail industry, and China Resources Land's MixC can provide store support for Starbucks. Meituan's strength in instant retail and offline store management goes without saying.

With this basic information clarified, let's take a look at Hillhouse Capital's chances in this transaction.

In terms of capital size, Hillhouse manages over 600 billion RMB, giving it a strong advantage in bargaining power. Bain Capital's Zhu Jia mentioned in an interview with TMTPost that in a merger and acquisition transaction, one should consider "what you bring to the company." He believes that it is about brand, price, and resources.

"If you have a good rapport with me, I might ask for 10% less—sellers won't think this way. The price you offer is related to your actions, ideas, and judgments. If you can see better opportunities than others, you are willing to offer a higher price."

In 2021, Hillhouse raised 18 billion USD (over 116 billion RMB) and is still in the investment phase. At that time, it was reported that 10 billion USD of this would be invested in the mergers and acquisitions field.

From past investment experience, in the food and beverage industry alone, Hillhouse Capital has invested in well-known companies in recent years, including Liangpinpuzi, Akwan Foods, Haitian Flavoring & Food, Mixue Bingcheng, and Heytea. In the early stages, it also invested in Haidilao and Xiaobuxiang as a cornerstone investor.

In recent years, Hillhouse has shown a particular preference for tea beverages. For example, in March of this year, Mixue Bingcheng successfully went public in Hong Kong, with Hillhouse Capital being one of the five cornerstone investors introduced for its IPO, subscribing to 30 million USD of Mixue Bingcheng. Coupled with the previously invested 4% stake, Hillhouse Capital became the largest external shareholder of Mixue Bingcheng.

In addition to financial support and risk-sharing, after investing in Mixue Bingcheng in 2020, Hillhouse Capital also utilized its experience and resources to help it complete the transformation and upgrade of its digital construction. Furthermore, the current Chief Financial Officer of Mixue Bingcheng, Zhang Yuan, previously worked at Hillhouse, representing another typical case of a young investor successfully transitioning after Zhou Shuzi.

Moreover, in the coffee sector, Hillhouse Capital also has operational experience. Years ago, when Peet's Coffee, known as the "ancestor of Starbucks," entered the Chinese market, Hillhouse Capital participated in Peet's Coffee's growth process in China from 0 to 1, including but not limited to achieving brand localization, participating in store design, assisting in communication with government departments, and recruiting employees Even back then, Sam Su, a partner at Hillhouse Capital and former chairman and CEO of Yum China, held a key position on the board of directors of Peet's Coffee China.

Of course, when discussing Hillhouse Capital's M&A cases, one cannot overlook Belle. Hillhouse once bottom-fished Belle at the bottom in 2008, and after tracking it for 10 years, in 2017, Hillhouse and CDH Investments jointly offered HKD 53.1 billion to privatize Belle, marking the largest privatization case initiated by a PE institution in China to date.

Subsequently, the sports brand Tabo, spun off from Belle, successfully listed in Hong Kong, with a market value once exceeding HKD 60 billion, making Hillhouse the biggest beneficiary.

As the epitome of the "Hillhouse model," Zhang Lei often cites Belle as an example when discussing "digitalization" and "value creation" in various settings. The Belle case not only brought substantial returns to Hillhouse but also became a leverage for Hillhouse to engage more brands.

Does Starbucks have the potential to become the next "Belle"?

Starbucks China’s current situation is similar to that of Belle back in the day; Starbucks is now facing low-price encirclement, while Belle was confronted with the e-commerce transformation, both undergoing significant industry changes.

Coincidentally, Zhang Lei believes in "investing in key changes at critical moments." He thinks that when the public is hardly aware, the turning point from quantitative change to qualitative change appears, which is the right time to lay out strategies. Only through in-depth cross-industry and cross-regional research can one accurately grasp the timing and opportunities.

In the article "Is Starbucks China Going to Be Sold?", we mentioned that Starbucks CEO Laxman Narasimhan has two tasks upon taking office: to help Starbucks regain its footing in the coffee market and to find solutions in China.

In terms of operations in China, he has adopted a more proactive strategy, the most notable being Starbucks' first price reduction in its 25 years in China. This adjustment is rare in Starbucks' history in China, reflecting management's severe judgment on the market situation.

In mid-June, Starbucks officially announced a price reduction: lowering the prices of 10 products in three major non-coffee categories, including Frappuccino, Iced Shaken Tea, and Tea Latte. For example, the average price reduction for a large cup is about 5 yuan, allowing customers to buy an iced shaken tea for as low as 23 yuan, which immediately sparked speculation in the market about whether it was a "passive response."

In response, Starbucks CEO Laxman Narasimhan addressed this directly. He stated, "We do need to reassess our pricing structure to ensure competitiveness in key categories." Especially in non-coffee categories like tea, Starbucks is undergoing structural adjustments but emphasized that this is not a blind price war.

In addition to price reductions, Starbucks launched the "True Taste No Sugar" system in April, catering to the market with reduced sugar. At the same time, it frequently launched co-branded and celebrity endorsement activities, such as the Snoopy collaboration in March, announcing Mayday as the summer ambassador in April, and collaborating with Zootopia in June, among others.

The moderate adjustments in the Chinese market quickly reflected in the financial reports.

In the second quarter report for fiscal year 2025, Starbucks China achieved revenue of approximately USD 740 million (about RMB 5.31 billion), a year-on-year increase of 5%, with same-store transaction volume increasing by 4% year-on-year As of the end of March this year, the total number of Starbucks stores in China reached 7,758, covering more than 1,000 county-level markets.

With positive signals and the reputation of the Starbucks brand in China, Starbucks should have enough confidence at the negotiation table. Moreover, it's not just Starbucks; recently, there have been reports that the well-known high-end ice cream brand Häagen-Dazs also plans to sell its business in China, and interestingly, some of their bidders overlap.

Mixue Bingcheng dominates the Hong Kong Stock Exchange, and Pop Mart's trendy toys are booming, while the domestic consumption market sees a parallel between the "self-indulgence economy" and consumption downgrade. As the saying goes, "Ride a shared bike to the nightclub, save where you can and spend where you should," this generation of young people is very clear that relying solely on brand premiums can no longer please them. As typical representatives of foreign consumer enterprises entering China, once Starbucks China, Häagen-Dazs, and others are taken over by domestic capital, I believe the signal released for the future of the domestic consumption industry is also very clear— the era of "foreign monks chanting scriptures" as super brands is gone forever.

Risk Warning and Disclaimer

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