Leading analysts Nigel Parson, at Canaccord, has described Deltic’s proposal to merge with Revolution Bars Group as offering “greater but more uncertain upside for Revolution shareholders” compared to the £100m cash offer from Stonegate.
He recommended that Deltic management be given time to make an offer on its proposed expedited timetable. He said the enlarged entity should capture material synergies and could be a powerful competitor to Stonegate and suggested that Stonegate needs to sweeten its offer to avoid this scenario.
He said: On 31 July Revolution Bars announced that it had received a conditional 200p/share cash from Stonegate with a put-up or shut-up date of 28 August. Today Deltic Group announced that Revolution Bars had rejected a proposal for an all-share merger through an acquisition of Deltic by Revolution by using Revolution shares as consideration with a put-up or shut-up date of 12 September.
“We believe that Revolution Bars should allow both sides an opportunity to confirm a bid (or shut-up) using 12 September as the long-stop date. Shareholders can then properly evaluate the contrasting merits of a 200p/cash offer with the greater but more uncertain potential upside of an all-share merger. We believe that the merger could create at least £4m of synergies (50% of Revolution Bars HO) and create a stronger, faster-growing entity. Deltic was formed by buying Luminar out of administration in 2011. However, it’s a very different business in an industry where supply has moved back in kilter with demand. Over the last decade nightclubs have halved to 1,885 clubs. The major players are Stonegate with 72 (smaller) clubs and Deltic with 58 (bigger) clubs.
“Trading at individual clubs can be volatile but a portfolio should deliver a reasonable stable and strong cashflow. Revolution is slightly bigger than Deltic and the fit would be very complementary. In the year to March 2017 Deltic generated an EBITDA of £11.5m (LY £13.4m). It is developing a late night presence through its nascent brand, Bar & Beyond concept, but Revolution would short-cut this development process.
“Stonegate’s 200p share price offer is the same as Revolution’s IPO price in March 2015 and values Revolution Bars on an undemanding valuation of 15.9x PE, 6.6x EV/ EBITDA and 8.7% FCF yield for FY16A. Assuming synergies, Deltic’s share offer could be potentially worth 30% more. Our 220p share price target is based on our view that Stonegate needs to shut-out Deltic with a higher cash offer as the stakes have now been raised for Stonegate. If it fails then New Revolution should be a much stronger competitor and a higher premium is worth paying to avoid this scenario.”
