BREAKINGVIEWS-Luckin Coffee deal adds extra shot to comeback

By Katrina Hamlin

HONG KONG, March 12 (Reuters Breakingviews) - Luckin Coffee LKNCY.PK has a shot at redemption. Four years after Centurium Capital took control of the scandal-hit and bankrupt java chain, the buyout firm is in advanced talks to buy upscale peer Blue Bottle Coffee for less than $400 million, a source close to the deal told Reuters Breakingviews. A deal could help Luckin offset the impact of intense competition at home in China – and pave the way for a planned U.S. relisting.

The Middle Kingdom's answer to Starbucks SBUX.O was kicked off the Nasdaq following revelations of inflated sales just a year after its much-hyped 2019 debut. A restructuring resulted in early backer Centurium gaining control and leading a turnaround. Thanks to the popularity of its coffees and teas, which are priced at around 25 yuan ($3.6), Luckin's topline grew 43% last year to $7 billion, boosting earnings by more than a fifth to over $500 million. Its over-the-counter shares have gained around 2500% since delisting, valuing the group at $10 billion – more than twice its IPO valuation.

Yet cheap-and-cheerful beverage chains are proliferating across the People's Republic. Rivals include $16 billion Mixue 2097.HK, which has established more than 50,000 stores, mostly in China. It is rapidly growing a rival budget coffee brand, “Lucky Cup”.

Moreover, food delivery platforms owned by Alibaba 9988.HK, Meituan 3690.HK and JD.com 9618.HK have been splurging on subsidies to win customers. While that increased online orders for Luckin on these apps, the coffee chain's fulfilment costs skyrocketed too. Operating profit in the three months to December fell by nearly a fifth year-on-year, to $119 million.

To ease the pressure, CEO Guo Jinyi is following a path well-trodden by compatriots ranging from auto giant BYD 002594.SZ to clothing retailer Anta Sports 2020.HK: hunting for new customers overseas. Luckin is returning to the Big Apple and expanding in Southeast Asia.

Buying Blue Bottle, which Nestlé bought in 2017 at a roughly $700 million valuation, could turbo-charge growth abroad. Meanwhile, Centurium can tap its cost-cutting expertise and Luckin's supply chains to revamp the target, which is unprofitable, according to the person close to the deal. The hipster Californian brand operates slick cafes across the U.S., South Korea, Japan and China that offer $6 lattes and unapologetically pricier treats like avocado-on-toast.

The biggest prize for Centurium and Guo, of course, would be a return to the main board in New York. A deal for Blue Bottle could deliver an extra shot for a comeback.

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CONTEXT NEWS

Centurium Capital, the controlling shareholder of Luckin Coffee, is in talks to acquire the Blue Bottle Coffee chain from Nestlé for less than $400 million, a source close to the deal told Reuters Breakingviews on March 11.

Luckin’s operating income fell 18.5% to 821 million yuan ($119 million) in the three months to December, compared to a year earlier, while revenue grew 33% to 12.8 billion yuan over the same period, according to a business update on February 26.