Proposed Loan to
Starbucks Corporation
Presentation to the
JPMorganChase Loan Committee
Paul Byers and Cody Meglio
December 3, 2007
Financial Statement Analysis – Fall 2007
Purpose of the loan
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The Starbucks Corporation (NASDAQ:SBUX) seeks a
$350 million loan to purchase a controlling interest in
The Cheesecake Factory, Inc. (NASDAQ:CAKE).
Starbucks believes that this purchase would create a
mutually beneficial working relationship between the two
companies. A line of products from each company would
be sold at the stores of both chains
Starbucks is confident that Cheesecake’s management,
business practices, strategy, and long term vision will
continue to make Cheesecake a successful and
profitable venture.
Specifics of the deal
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Starbucks officials have already approached
Cheesecake Factory’s BOD
Cheesecake has agreed to issue Starbucks
21 million new shares of common stock @
$23 each. This will give Starbucks a 20.42%
stake in Cheesecake.
Starbucks has planned to fund the purchase
27.5% through sale of marketable and
available-for-sale securities and with cash
About
The Starbucks Corporation
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Operates European-style coffeehouses in the
United States and abroad
Markets “The Starbucks Experience”
Operates about 10,500 stores worldwide
Has a goal of 20,000 locations in the United
States and 20,000 locations overseas
Recently experienced competition from low
cost fast-food chains and doughnut shops
Has launched a new advertising campaign
About
The Cheesecake Factory, Inc.
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Operates full-service, upscale, casual dining
restaurants
Manages 128 locations
Offers a full bar and a lavish décor in all locations
Boasts an extensive menu features over 200
selections
Serves 50 varieties of cheesecakes and desserts
Operates bakery production facilities in California
and North Carolina
Corporate Mix
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The two companies are compatible with one another
Both companies focus on a growth strategy
High financial performance has been a hallmark of
both firms
The value in catering to more affluent customers
who are less price sensitive is recognized
Both companies strive to recruit and retain good
employees to ensure superior customer service
Preservation of brand value is a priority in both firms
Quick Ratio
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
-
2002
2003
2004
2005
2006
Cheesecake Factory
0.89
1.13
0.84
1.15
1.12
Starbucks
1.10
0.99
1.24
0.54
0.46
Debt/Equity Ratio
1.05
0.90
0.75
0.60
0.45
0.30
0.15
-
2002
2003
2004
2005
2006
Cheesecake Factory
0.22
0.34
0.40
0.43
0.46
Starbucks
0.29
0.34
0.37
0.68
0.99
EBITDA/Minimum Fixed
Obligations Ratio
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2002
2003
2004
2005
2006
Cheesecake Factory
2.11
2.05
2.08
2.40
1.96
Starbucks
2.31
2.43
2.64
2.67
2.52
Return on Equity
28.00%
24.00%
20.00%
16.00%
12.00%
8.00%
4.00%
0.00%
2003
2004
2005
2006
Cheesecake Factory
13.69%
13.31%
14.79%
11.97%
Starbucks
13.99%
17.13%
21.68%
26.93%
Operating Profit Margin
15.00%
12.00%
9.00%
6.00%
3.00%
0.00%
2002
2003
2004
2005
2006
Cheesecake Factory
10.78%
10.58%
10.20%
10.98%
8.12%
Starbucks
9.62%
10.42%
11.46%
12.25%
11.48%
Year-over-Year
Net Sales Growth
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2003
2004
2005
2006
Cheesecake Factory
18.69%
25.25%
21.96%
11.27%
Starbucks
23.92%
29.90%
20.31%
22.26%
Ratio Analysis Summary
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Both companies are more profitable and more
liquid than the peer group
The debt paying ability of Starbucks is sufficient
to cover loan payments
Overall, both companies are stable, and,
because of the market segment each caters to,
both should still be stable in the case of an
economic downturn
Sales and profits are continuing to grow at an
impressive pace for both companies
Concerns
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Yearly financials Starbucks have been restated or
reclassified and these have been material
In the beginning years, Starbucks’ equity earnings
from Cheesecake will not cover the loan payments by
itself
Future growth may be too slow or fast
Customers could fail to accept new products
Either company’s brand could deteriorate
Competition could consume either company’s market
share
Final Recommendation
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We recommend that Starbucks be granted
the $350 million loan
The companies have compatible
management strategies and growth goals
The future for each company looks promising
both numerically and qualitatively
We anticipate that the management teams for
both companies can successfully mitigate all
concerns