International lenders looking to partake in the funding backing the high-profile acquisition of Starbucks China's operations will almost certainly see their hopes dashed as Boyu Capital Holdings banks on domestic lenders to fund the deal.
The Hong Kong-based alternative investment firm’s Chinese relationship banks, including Industrial Bank, Ping An Bank and Shanghai Pudong Development Bank, are expected to provide the 10-year financing of around Rmb10bn (US$1.41bn).
According to bankers, international lenders have been shut out of the financing backing one of China’s largest private equity investments in the consumer sector this year because of its unusually long 10-year tenor and the deal's political sensitivity.
“International banks will remain on the sidelines in Chinese M&A financings as we can’t match the long tenor, low pricing and looser covenants Chinese banks can provide,” said a Hong Kong-based senior loan banker from an international bank.
The deal's long-tenor structure is designed to take advantage of relaxed lending rules for non-resident borrowers in Lingang New Area, part of the Shanghai Free Trade Zone.
The initiative, introduced in September 2024 and applicable to financial institutions based in Lingang or companies registered in the area, allows banks to provide loans for cross-border acquisitions under more flexible conditions, including a higher loan-to-value ratio of 80% (up from 60%) and extended maturities of up to 10 years (up from seven years). “The policy shift has encouraged more domestic Chinese banks to participate in M&A deals,” the banker said.
The Lingang policy is part of China’s wider efforts to boost M&A activity and support strategic industries. In August, the National Financial Regulatory Administration proposed nationwide reforms that mirror these changes to further ease M&A lending rules.
In August, four Chinese banks – Bank of China, China Minsheng Banking Corp, Industrial Bank and SPDB – provided a 10-year renminbi-denominated loan of around US$1.1bn-equivalent to support KKR’s leveraged buyout of a majority stake in China's Dayao Beverages.
“There is a growing trend that a small group of Chinese banks now dominates LBO financings for premium assets like Starbucks,” said a loan banker from a Chinese bank. “Given our strong demand for high-quality assets and robust balance sheets, we see no need for wider syndication.”
International banks have been absent from China-related M&A loans for about a year. The most recent China-related M&A loan involving international banks was a Rmb3.65bn five-year facility in November last year backing
Brewing a comeback
Despite facing long odds, some international banks were quite keen to provide support to the Starbucks deal and had backed other PE firms that were involved in the bidding. But, according to bankers familiar with the situation, Boyu only wanted Chinese banks to be involved in its financing because of the politically sensitive nature of the deal and Boyu’s political pedigree – one of the firm’s co-founders is the grandson of former Chinese president Jiang Zemin.
Bankers also said that they were not aware if Boyu had brought in other investors such as internet giant Tencent to contribute to the equity component of its purchase of Starbucks China. Tencent was one of the initial bidders for Starbucks China and has previously been a co-investor with Boyu in other deals.
Starbucks announced a plan earlier this month to sell up to a 60% stake in its China business to Boyu for US$4bn through a joint venture.
Losing share
The US coffee giant has been losing market share for years to local competitors in China, its second-largest market. Starbucks entered China in 1999 and once dominated the market, but has lost ground to homegrown rivals such as Luckin Coffee and Cotti Coffee that have won over cost-conscious consumers with cheaper offerings and deeper reach into smaller cities.
Luckin Coffee, founded in 2017, has expanded to 22,300 stores, far eclipsing Starbucks China’s 8,000 outlets as of the end of last year. According to London-based market research company Euromonitor International, Starbucks’ market share in China’s coffee sector slid to 14% in 2024, down from 34% in 2019, underscoring the growing challenges of competing in a more price-sensitive and fast-evolving market.
In October, Starbucks reported that same-store sales in China rose just 2% in its fiscal fourth quarter, supported by a 9% increase in traffic. However, extensive use of discounts to retain customers has reduced average spending per visit, placing pressure on margins.
“Starbucks’ struggles reflect broader economic headwinds and changing consumer habits. Some local competitors are selling drinks for as little as Rmb5, capturing market share in cities where Starbucks has struggled to sustain growth,” said a second loan banker at a Chinese bank.
Yet others are optimistic that Boyu’s involvement will turn around the fortunes of Starbucks China. Partnering with a local heavyweight gives Starbucks instant access to extensive local networks, while facilitating smoother navigation of regulations and stronger supply-chain integration in lower-tier cities, where local expertise and government relationships are critical, bankers said.
Boyu’s track record in scaling consumer brands – exemplified by its stake in Mixue Group, whose bubble tea chain has grown to more than 30,000 stores and expanded overseas – aligns with Starbucks’ ambition to reach 20,000 outlets and deepen its presence in smaller Chinese cities.
China’s coffee market is forecast to expand at a compound annual growth rate of 2.75% between 2025 and 2032, rising from US$24.61bn in 2024 to US$30.57bn in 2032, according to a report from market intelligence provider Marketsandata.
“Boyu’s portfolio, which includes stakes in Alibaba, Meituan and SF Express, spans the entire e-commerce, logistics and retail ecosystem, offering synergies that could accelerate Starbucks’ expansion,” said a third banker from a Chinese bank.