When an exit is delayed, patience is required, says Connection Capital director Mark Snaith, and being well prepared becomes invaluable.
What was the deal?
The 100% sale of 23.5 Degrees, a licensee of Starbucks, to Starbucks Coffee Company in the US, completed in October 2024. We didn’t disclose deal value, but it delivered a gross return of 9.0x our initial investment – a record for Connection Capital. Everyone got to exit, including the CEO – not always achievable.
How had the business grown with your backing?
We first invested £5.6m in 23.5 Degrees in September 2015, when it operated 13 stores and had 100 staff. There was £3.4m of follow-on funding in July 2018 to accelerate expansion. The business was led by 23.5 Degrees CEO Mark Hepburn, who was very experienced at working in franchising. We enhanced the management team, introducing a non-executive chair and CFO alongside the CEO.
There was a strategic moment when we collectively decided to be early adopters and secure first-mover advantage for drive-through coffee stores in the UK. The business had predominantly consisted of high-street sites. But roughly a year into our investment, recognising the high return on capital metrics of a drive-through store, we pivoted the business from 100 per cent high street to a far greater proportion of drive-through sites.
When we sold the business it operated 113 Starbucks stores. We had opened, on average, 10 each year, 65% being drive-throughs, which helped boost sales in the COVID-19 lockdowns. Revenue increased more than six-fold during our investment period and the business employed almost 2,000 on exit.
What were the timescales for the sale?
It was actually a slow process. We had a draft information memorandum, ready to launch on 4 April 2020, but COVID-19 stopped that. But that dry run on exit prep and process meant we were well prepared and understood what would be required from a due diligence exercise. We kept our data room topped up, so we could respond quickly and when required.
Who were the advisers?
It was a bilateral deal, so there was no auction process and, given my background in M&A, it was concluded there wasn’t really a role for an M&A adviser. We had legal support from Gateleys, who advised on our initial 2015 investment. We used PwC’s SPA advisory services. Penningtons Manches Cooper oversaw our management of the property data. We took tax advice from Crowe and Mazars.
What were the challenges?
A particular challenge was around capex forecasts, given the business’s capital-intensive nature – investment required in setting up sites and ensuring stores were well maintained. We had to ensure the forecasts properly reflected the future capital spend required, so there was no opportunity for price chipping. As with most bilateral processes our key focus from the outset was maintaining price – everything had to stand up to scrutiny. The management team did a great job.
Starbucks is a multinational corporation, great at what it does, but getting insight into its decision-making was difficult. Then the Starbucks global CEO resigned as we neared exchange and we weren’t sure if the new CEO would sponsor the deal. Another challenge was regulatory approval. As much as you think it’s a slam dunk, you never really know.
Were any lessons learned for future deals?
You need patience, good advisers and preparation. You shouldn’t be afraid to fly halfway across the world at the drop of a hat. There were some challenging conversations. While we speak the same language as the US, in many ways we don’t – that can prove difficult with different time zones and Teams calls. The few face-to-face meetings proved invaluable.
On my CV
Mark Snaith is investment director at Connection Capital. He started his career with Deloitte in London, where he trained as an ACA in the corporate tax team. He joined Grant Thornton in 2012, and subsequently moved into corporate finance. He was promoted to corporate finance manager, and in 2018 joined Connection Capital as investment manager and was promoted to investment director in 2020.
