Following the news that The Restaurant Group (TRG) has set the wheels in motion to acquire Wagamama, Barclays lends its thoughts on the subject, and warns the brand not to go changing.

The note from Barclays read: “Restaurant Group has agreed to acquire Wagamama for an EV of £559m part funded by a rights issue of £315m. This implies a multiple of 8.7x LTM August 2018 EBITDA including cost synergies and site conversion, but the headline transaction multiple (ex-synergies) is much higher, at an EV/EBITDA of 13x.

“We believe the latter is towards the top end of multiples paid for a leasehold restaurant estate, albeit we would recognise that this is a unique asset that has materially outperformed most UK casual dining operators in a very tough market.

“The acquisition is expected to result in estimated cost synergies and site conversions synergies of c.£22m (£15m cost synergies, £7m uplift from RTN site conversions into Wagamama sites).

“The current trading update is slightly disappointing, with LFLs of +1.4% for the 14 weeks since the H1 results at the end of August following the World Cup (this is a slowdown vs the +2.4% after the 6 weeks following the World Cup), leaving the 42 wk LFLs at -2.2% (total sales -0.5%). Barclays FY18 LFL forecasts are -2%.

“Judging by the LFL sales growth performance of Wagamama (228 weeks of trading ahead of market, Q1 LFLs of 8.5%), and strong customer appeal, we believe there is little question that this is “a very strong business.

”The key question that we think management will have to answer, and then subsequently prove, is how to sustain this. Synergies always look great hardcoded in a spreadsheet, but a glance at Wagamama’s investor presentations show that the company’s Net Promoter Scores (sector leading, and materially higher than Frankie & Benny’s) and staff churn (65%, on a falling trend) are excellent, and these are the key inputs that have helped to build a sector-leading business.

“We see parallels with JD Wetherspoon, in this respect. What Restaurant Group brings to the table (site conversion opportunities, concessions opportunities) is potentially interesting, but our main concern for investors would be how RTN management can sustain these ‘inputs’ that have ensured that Wagamama has delivered such strong customer satisfaction stores, and sustained market outperformance.

“Management were clear on the conference call that they have a track record of leaving businesses well alone (e.g., Brunning and Price, RTN’s pubs division, is largely autonomous and successful). We believe that allowing Wagamama to remain a genuinely autonomous company will be an important part of whether this deal is ultimately successful.”