Deal in Focus: Isis exits Kafevend to trade

The exit awarded Isis with a 2.5x return and an IRR of 13.8%.

Consumer demand for a wider range of products is a significant underlying factor for growth in the coffee vending machine market. As consumer taste becomes more sophisticated, understandably a more diverse range of available products is required.

With a clear understanding of this growth trend, not only did Isis expand Kafevend's product range to meet consumer demand, it also introduced diversification and greater flexibility towards how customers buy its products. According to Benoit Broch, investment director at Isis, it was the development of Kafevend's contracts that propelled the company to the UK's largest supplier of coffee vending machines, and arguably securing its eventual sale to trade buyer Eden Springs.

Grinding out sales
Prior to investing in Kafevend in 2005, Isis had observed strong growth in the UK coffee vending machine market, but crucially, that this market was under-penetrated. The investment strategy for Kafevend was to boost its penetration rate through increased sales and marketing activities. To do this, Isis set about beefing up Kafevend's sales and marketing ability in order to get in front of new customers and explain the cost-effectiveness of its offering.

Post-investment, Isis first implemented a new financial director and introduced operating partner Julian Spooner (former director at Diageo) as the company's chairman. The next step was developing the company's sales activities. Says Broch: "When we invested, the company had four sales offices and a limited central marketing function. Over the investment period we added sales offices in London and Manchester, and penetrated Scotland. We substantially increased the number of our field sales personnel and developed this sales support team and improved the sophistication of the marketing function."

Of course, coffee from a vending machine is not as cost-effective as instant granules and a kettle. However, for companies, typically SMEs, wanting to offer employees more than just Nescafé Original, vending machines can provide a neat solution. But the key to boosting Kafevend's position in the market was introducing a greater range of contracts.

"At first, customer contracts were predominantly based on cost-per-cup pricing over a multi-year period, with no requirement for initial capital outlay from customers," explains Broch. "Everything was included in a simple price, including supplies and maintenance." While this is still an important option for Kafevend's customers, Isis developed a range of options where customers could simply rent machines, or use a leasing provider. By offering tailored and bespoke contracts, Kafevend's turnover grew from £10.8m with profit of £2.7m in 2005 to a turnover of £19m with profit of £5.4m in 2012.

Coffee cacophony
Isis also ensured end-users benefited from Kafevend's new-found multifariousness by extending its product range. The company introduced premium offerings such as bean-to-cup machines, as well as multi-vend machines providing teas, water, snacks and items such as stirrers to create a one-stop shop for every employee's refreshment needs.

A key development for Kafevend came in 2010 when it formalised its partnership with Mars Drinks. "We already had a good relationship with Mars Drinks through working together on market intelligence projects," says Broch. But Mars Drinks was increasingly moving away from selling coffee machines straight to market and a partnership with Kafevend allowed the drinks behemoth to fulfil this shift.

The eventual sale to Eden Springs was somewhat serendipitous for Isis. The buyout house had been developing relationships with potential buyers for several years prior to the deal and, in particular, had been in talks with Eden Springs for around 18 months. Despite running a formal process managed by Clearwater Corporate Finance, thanks to its recent acquisition by Rhone Capital (in October 2013), Eden Springs was the most suited buyer for Kafevend as it pursued its strategy of increasing its presence in the coffee vending machine market.

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• Topics
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• ISIS Equity Partners
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