Australian group Breville, which markets their coffee machines in the UK under the brand Sage, has purchased Italian espresso equipment manufacturer, LELIT for €113m total consideration.
Watch our analysis below:
Under the deal, LELIT will receive half of the total sum in cash, and the rest as ordinary shares in Breville Group. Their shares will be locked in for five years, meaning they can’t sell them during this period. Companies do this in order to incentivise the recipients to grow the share value over a period of time.
LELIT had been gaining market-share in recent years , and their mixture of innovation, while maintaining a traditional design, saw them gaining a lot of fans both in Europe and in the USA.
LELIT machines where seen as exceptional value in the market place, with the top line LELIT Bianca becoming an affordable ‘grail’ machine with features like pressure profiling and walnut trim.
LELIT Secured a Good Deal
LELIT was a privately owned company, so we can’t be sure about their finances or profitability level, but the valuation the company achieved was impressive. By accepting 50% of the proceeds in stock, with a five year lock-in, they will have helped push that valuation number up.
It’s speculation, but we suspect that Breville paid a significant premium over the regular multiple of EBITDA (Earnings Before Interest Tax, Depreciation, and Amortization).
Breville’s Strategy and the Future of LELIT
None of the founders will join the main Board as was originally reported, and I’m unclear what role they will have in the company. I have to believe Breville is going to tap into the talent, or why else pay such a premium?
There was some discussion and concern over Breville’s plan with Baratza when they took it over, but since the acquisition there are no obvious changes. The website barely mentions they belong to the group, and there have been no integrations into Breville / Sage machines as we had expected..
So, is Breville just making acquisitions in order to do something with their cash-pile? Or do they have a strategy? I think Jim Clayton is playing a long game, and I think it’s a clever one.
You may recall that last year we wrote about how Breville is well-positioned to add smart functionality to their machines to allow for tighter integration with roasters. Using the information it would know about the roast profile of certain beans, it would be able to make quality espresso-based drinks – perhaps not perfectly, but it would get you in the ballpark. The grinder and brew mechanisms would communicate and understand if they were producing a shot within certain parameters.
This month, Breville launched Beanz.com in the US and UK, an online bean subscription service, and I think this is a ‘sleeper’ business, that is, one where the true purpose and value is only revealed later.
Each acquisition on it’s own looks of limited value, but combined together, and the strategy starts to become clear.
BREVILLE AND LELIT WILL SERVE DIFFERENT MARKETS
Jim Clayton has previous experience in private equity, learning the craft of creating large companies under Romesh Wadhwani at Symphony Technology, and then working at LG in Korea on Internet of Things (IoT).
This is not a man with small ideas, or who is afraid of technology. I may not know how Jim plans to build out a global coffee empire combining smart technology with specialty coffee, but I’m convinced this is his ambition.
Breville/Sage will be the Kitchen Appliance
I believe it is possible Breville will continue to evolve as a coffee appliance with more software development and a similar ‘kitchen friendly’ appeal, although one in which they address the ‘repairability’ of the machines to give them a more sustainable longer life span.
LELIT and Baratza will be the Prosumer Brand
They will remove their higher end machines like the Oracle from the Breville product range, however, perhaps rationising the ‘appliance’ line to 3 machines, and introduce LELIT and Baratza companies together, under a ‘Pro’ umbrella brand that will take over the high ground at Breville.
I expect the new equipment to incorporate new innovations, more software advances, and target the prosumer market willing to spend €1,000-3,000.
They will leave the upper end of the market to companies like La Marzocco, Slayer and Victoria Arduino, but take market share from companies like ECM, Profitec and even Rocket.
Jim Clayton is a smart guy, born in America, but well traveled, now living in Australia. He’s building a portfolio of products and now is pulling together his Exec team to execute the strategy. His board of directors doesn’t have anyone from a coffee background, yet when reviewing their Annual Report, it was hard not to notice that the front page was all images of coffee machines.
It will take time to pull all this together, but over the next 3 years, I think the team at LELIT will be hard at work putting the pieces together. If they succeed, they could make Breville one of the most valuable coffee equipment companies globally.
For the sake of transparency, I purchased shares in Breville. I don’t own any meaningful amount and you should not consider anything I say as advice, as I have no special information or insight.