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Updated Thursday, November 29, 2012 at 10:31 AM

Bidder offers $4.3M for Tully’s Coffee chain

By Amy Martinez
Seattle Times business reporter

The troubled Tully’s Coffee chain, which filed for bankruptcy protection last month, has reached an agreement with private-equity firm Kachi Partners to sell the business for $4.3 million.

Seattle-based Tully’s said Wednesday that Kachi, of Boulder, Colo., made the offer in advance of a bankruptcy-court auction to determine the final buyer.

Tully’s Chief Executive Scott Pearson said in a statement that the agreement puts it in position to emerge from bankruptcy next year as “a much stronger company.”

The chain also described the offer as its best chance to preserve jobs and keep stores open.

Tully’s filed for Chapter 11 bankruptcy protection in October, listing more than $3.7 million in debts, and has since closed 19 unprofitable coffee shops. The chain now operates 47 corporate-owned stores in Washington and California, and has partnerships with franchisees and grocery chains throughout the western United States and Asia.

Founded in 1992, Tully’s said it struggled to turn a profit even after the 2009 sale of its wholesale business to Green Mountain Coffee Roasters for $40 million, which enabled it to wipe $19.3 million in debt off its books and to distribute nearly $6 million to shareholders.

In 2010 and 2011, the company tried to “right-size” its business through aggressive cost cutting, but determined it would need to close a substantial number of stores to become profitable.

Tully’s employs 515 people, down from about 600 when it began bankruptcy proceedings Oct. 10.

Kachi, which tends to invest in distressed middle-market companies, would pay$1.25 million in cash. The bid also includes the assumption of $1 million in gift-card liabilities and up to $1.6 million in other contract obligations, such as leases.

Tully’s noted that Kachi “is the only party that has expressed a willingness to acquire all” of its assets.

Kachi plans to operate the chain under the Tully’s name and is prepared to finalize the sale by Dec. 31, according to the filing. It would receive a breakup fee of $200,000 if things don’t work out.

Tully’s said its financial advisers are contacting possible bidders to participate in the auction, though a date has not yet been set.

Neither Tully’s nor Kachi could be reached for additional comment Wednesday.

Retail-industry analyst Dan Geiman, of McAdams Wright Ragen in Seattle, said that to be successful Tully’s must carve a niche for itself between coffee giant Starbucks and small, independent cafes.

“It seems like they’ve been stuck in the middle without the capital to expand,” Geiman said. “They’ve got to make themselves distinctive.”

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com


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