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Denise Tsang

With the $205 million acquisition, the 12-year-old coffee  shop operator gains a backdoor listing on the main board

Main board-listed Chevalier iTech Holdings has bought  the Pacific Coffee chain for $205 million, in a move that will bring cappuccino culture to the local stock market for the first time.

The acquisition is effectively a back-door listing for the coffee chain, allowing it to tap the rapidly growing but increasingly competitive China market while giving a much-needed boost to Chevalier's shrinking income base.

Chevalier said the purchase would widen its revenue stream, as core earnings from system integration services and computer systems maintenance had been diminishing in recent years.

Pacific Coffee was founded in 1993 by Thomas Neir, a technology executive from San Francisco who complained that he could not find a decent cup of coffee in the city. It has since grown into one of Hong Kong's most recognised retail brands with 39 outlets in the city and  five in Singapore.

It is one of the few Asian coffee chains able to hold its own against the Seattle-based giant of the caffeine industry, Starbucks.

In addition to its retail outlets offering specialty coffees, smoothies and pastries, the company also wholesales coffee beans in Hong Kong, Macau, the mainland and Singapore.

Chevalier took control of the chain after buying out the controlling interests of chief executive Mr Neir  and other corporate and individual shareholders.

'Visiting the coffee house is a new lifestyle in Hong Kong,' Chevalier managing director Fung Pak-kwan said.

'As the local economy picks up, people are more willing to spend on leisure pursuits. And coffee culture is gaining prominence on the mainland as living standards improve. We see tremendous potential there.'

However, analysts said strong competition was brewing fast  in Hong Kong and on the mainland.

Arch-rival Starbucks - locally, a joint venture between Starbucks Coffee International and Maxim's - has opened almost 50 outlets since it appeared in Hong Kong in 2000. The chain now has almost 50 stores in Beijing and Tianjin, plus another 33 in Shanghai, and it opened its first store in southern China last year in Guangzhou.

Competition is even stiffer in Singapore, where Pacific Coffee crosses swords with Starbucks, Coffee Bean & Tea Leave, Coffee Club Xpress and Delifrance.

Pacific Coffee planned a mainland foray with a capable partner, a Chevalier spokeswoman said yesterday.

However, she said the company would not  release details of its expansion plans until after the completion of the deal, scheduled for May 20.

According to a Chevalier statement yesterday, coffee consumption weathered Hong Kong's economic downturn and public health scare during the Sars outbreak in 2003.

After-tax profit at Pacific Coffee more than doubled to  $9.4 million in the 12 months to March 31 last year, from  $4.3 million in 2003.

Earnings before interest, tax and depreciation  soared 36.36 per cent to  $24 million.

The $205 million acquisition price translates into 22 times last year's net earnings.

Net assets at the firm stood at  $70.3 million last year.

Chevalier said Mr Neir had endeavoured to ensure that the  contracts of certain key employees of Pacific Coffee would be protected for at least six months to mitigate any possible disruption of business.



Chevalier buys Pacific Coffee