Cooks Global Foods looking at China JV, may generate positive cash flow in FY18
Cooks Global Foods said advanced talks to establish a new joint venture with Chinese partners and the sale of its Progressive Processors unit mean it may transition to cashflow breakeven in the 2018 financial year although both initiatives will likely mean a non-cash write down of $4 million in the year that ended March 31, 2017.
The initiatives "have the potential to significantly accelerate the growth of the coffee operations whilst reducing the demands on Cooks' financial resources and allowing the company to target a transition to generating positive cashflows in the year to 31 March 2018," the company, which owns the master franchise rights for the Esquires Coffee chain outside New Zealand and Australia, said in a release.
In December, the NZAX-listed company said its net loss widened to $3.8 million, or 92 cents per share, in the six months to Sept. 30, from $1.6 million, or 46 cents per share, a year earlier.
On Thursday, it said the new initiatives will accelerate growth in China while saving the company around $4 million in cash in the first year following conclusion of the agreements. The sale of Progressive Processors ensures its investment programs are directed at core business opportunities, it said.
According to Cooks, Progressive Processors management have acquired Progressive's assets and stock and in return have agreed to relinquish the 2.5 million shares they hold in Cooks. Cooks now has a call option over these shares and may place them to investors at its discretion. The transaction will result in Cooks writing down the carrying value of Progressive by $500,000 and that charge will be incurred in the year that ended March 31, it said.
It also said it is in "advanced discussions" with a third party in China over a term sheet that would create a joint venture between Cooks and a Chinese-based investment entity. The joint venture would own the Master Franchise for the Esquires Coffee brand in China, Hong Kong, Macau and Taiwan, take over the assets and businesses of Cook's wholly-owned subsidiary Beijing Esquires Management Limited (BEML), the exclusive franchisee of Esquires Coffee for mainland China and fund and drive the development of branded coffee houses across the Greater China region.
Cooks will contribute BEML; the rights to operate the Esquires Coffee brand in Greater China and rights to future royalty payments and franchise fees in the region. In exchange Cooks will gain a 30 percent share in the new entity. Meanwhile, the CIE will contribute significant new funding to the venture for a 70 percent stake.
It said the new venture will likely be headquartered in Shanghai and the transaction is expected to result in a one-off non-cash $3.5 million net write down to Cooks' Chinese operations, reflecting the conversion of existing inter-company loans to equity. This charge is likely to be incurred in the financial year to March 31, 2017, it said.
The shares were unchanged at 70 cents but have lost 36 percent over the past year.