Luckin eyes new challenge to Starbucks with potential Costa bid

China’s leading coffee chain is reportedly in discussions with one or more banks for a $900 million loan to finance a bid for the British coffee chain, which is being sold by Coca Cola

Key Takeaways:

• Luckin is reportedly considering a bid for Costa Coffee, potentially in partnership with Chinese private equity firm Centurium, according to media reports
• An acquisition would sharply boost Luckin’s global footprint, giving it more than 33,000 stores in around 50 markets, approaching Starbucks’ 40,990 stores worldwide

By Doug Young 

Luckin Coffee Inc. (LKNCY.US) is often called “the Starbucks of China,” with nearly four times as many stores in its home market as the U.S. giant. Now, the homegrown Chinese coffee giant may be looking to shed that title by challenging Starbucks (SBUX.US) worldwide with a potential major acquisition that would instantly expand its global footprint to more than 50 global markets.

That’s what could happen if Luckin moves ahead with a potential bid for Costa Coffee, which is being sold by Coca Cola. Numerous media are reporting that Luckin, as well as its private equity backer Centurium Capital, or both, are exploring a potential bid for Costa, which has a global footprint of around 4,000 stores in 52 countries.

Such an acquisition would hugely boost Luckin’s global footprint, which is currently limited to just four markets – the U.S., Singapore, Malaysia and Hong Kong – outside Mainland China. And even in those markets, Luckin’s number of stores is extremely limited.

Somewhat ironically, Costa’s actual store count is just a small fraction of Luckin’s 29,214 total stores at the end of September, despite the British chain’s big global footprint. A combination of the pair would have more than 33,000 stores, approaching Starbucks global total of 40,990 at the end of September.

It’s not completely clear who is considering the bid for Costa, Luckin or Centurium, the latter a Chinese private equity major founded by former Warburg Pincus veteran David Li. But regardless of who makes the actual bid, it seems like a successful purchase by either company would almost certainly see Costa’s network of stores get folded into Luckin’s.

Luckin and Centurium are still considering whether they want to bid, with other interested parties including Bain and British buyout firm TDR Capital, according to a Bloomberg report on the matter. The reports say a deal could value Costa at about 1 billion pounds ($1.3 billion), or about a quarter of the 3.9 billion pounds Coca Cola paid for the company when it purchased it from Britain’s Whitbread Plc in 2018.

A separate report in Mergermarket says Luckin is in talks with banks for a potential $900 million loan to help pay for the purchase. Securing such a loan doesn’t look too difficult, since Luckin is quite a cash-making machine these days. It had 8.57 billion yuan ($1.2 billion) in cash, short-term investments and term deposits at the end of September, up nearly 50% from the 5.74 billion yuan it had at the end of last year.

Five years ago, Luckin could have probably raised the money easily from the capital markets, since it is quite the hot ticket these days due to its rapid growth and high profitability. But in another big irony, the company would probably have difficulty doing that now – at least on the stock market – because its shares are currently only traded over-the-counter (OTC), which would prevent most major institutional buyers from purchasing them.

The shares were originally traded on the Nasdaq’s main board after its IPO in 2019. But they were demoted to OTC status after a major accounting scandal the next year that uncovered hundreds of millions of dollars in fabricated sales, resulting in the ousting of the company’s top two executives.

Re-listing ahead?

Luckin CEO Guo Jinyi said earlier this month that the company was preparing to relist on the Nasdaq, though he later backtracked on that after numerous media reports appeared on his comments. That’s not too surprising, since a relisting would probably set a major precedent on Wall Street, where companies involved in scandals of such magnitude are rarely given a second chance, even if they reform.

In this case, there’s the added element that Chinese companies are finding themselves in an increasingly unfriendly environment on Wall Street, as some U.S. politicians call for their delisting. Luckin, whose $10 billion market cap probably makes it the most valuable OTC company of all time, could potentially seek a second listing on the Hong Kong Stock Exchange, where a growing number of major U.S.-listed Chinese firms have made second listings in recent years. But even the Hong Kong Stock Exchange might reject such a plan due to its own focus on corporate governance and the bad precedent accepting a Luckin listing might set.

Investors weren’t particularly impressed with news of the potential Costa deal, with Luckin’s U.S.-listed shares falling 2.1% on Thursday after the latest reports came out. The stock is still up 46% this year, though its price-to-earnings (P/E) ratio of 21 looks relatively weak compared with the slightly inflated 54 for Starbucks, and the 27 for Mixue (2097.HK), China’s leading bubble tea seller with a massive 53,000 stores in 12 global markets.

The reports of a potential Costa bid come less than a week after Luckin reported its latest quarterly results showing a continuation of the company’s breakneck expansion. Its revenue rose 50% year-on-year during the quarter to 15.3 billion yuan, with about 70% of that coming from freshly brewed drinks. Its store count rose by 37% year-on-year to our previously mentioned 29,214 by the end of September, showing the company’s revenue-per-store has grown over the last year.

Indeed, Luckin reported same-store sales for its self-operated stores grew 14.4% in the third quarter, its best showing for that metric since it returned to same-store sales growth this year following a year of contraction in 2024. The strong same-store sales growth is probably at least partly tied to the recent easing of a price war that lasted more than a year and was launched by newcomer Cotti, which was founded by the two disgraced Luckin executives who were booted from the company after the accounting scandal.

In one slightly worrisome sign, Luckin reported its delivery expenses tripled in the latest quarter to 2.89 billion yuan, accounting for a fifth of its total operating expenses. That looks at least partly tied to a scale-back in a price war by food delivery companies that were offering big subsidies that benefited companies like Luckin and restaurant operators.

Luckin’s bottom line was also notably less exciting than its top-line revenue growth, with its profit actually falling 2.3% to 1.28 billion yuan as its net margin fell by more than 3 percentage points to 8.4% from 12.9% a year earlier. Still, the overall picture continues to be broadly positive for the company, perhaps emboldening Luckin to try its hand at some major M&A to extend its coffee war with Starbucks to the global stage.

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