There have been a range of positive and negative reactions from analysts following the proposed sale of Wagamama to The Restaurant Group, but despite some concerns Goodbody feels is it a deal that can deliver.
The note from Goodbody said that it initial sense of the Wagamama transaction was that it was positive, and that further analysis had reinforced this view.
“Post transaction, RTN will be transformed into a group with three of its four business units showing good growth prospects (68% of FY20 EBITDA). We believe the Wagamama business is complimentary to the Leisure and Concessions businesses and there should be scope to drive synergies beyond the guided £22m (Split £15m cost & £7m revenue),” it said.
While Goodbody said it has concerns across the sector about the margin impact of using the online delivery aggregators, it feels that the Wagamama format is well suited to this channel (quick & cost effective to package and travels well) and there will be an offset in waiting staff costs.
“There should also be a scale benefit in the margin given up to the aggregators although this is very hard to quantify. The high-street in the UK is undoubtedly challenged but the good concepts continue to perform, consumers still enjoy eating out and delivery is growing strongly,” it said.
“Restaurant Group has clearly paid a high multiple for this business (13x pre-synergies & 8.7x post) but the deal is transformative. Post transaction the majority of the business will be delivering growth and we believe the 15-site conversion target from Leisure is conservative.”
The analyst set up three principal areas it sees revenue synergies coming from:
1) Concessions – “As highlighted on the call there are three Wagamama concessions in airports. We think this format lends itself very well to both airports and travel hubs as it is quick to prepare and consume and differentiated to many of the existing offers.
“Given the concession rents are generally calculated as a percentage of sales, airports have a vested interest in getting good formats in place. Historically, management has noted that the concessions business could be internationalised, we think that the Wagamama would facilitate this rollout. We would again highlight that airports have very attractive footfall dynamics versus the high street.”
2) Dark kitchens: - “The potential benefits of this are very hard to quantify but at the H1 stage RTN noted that it was trialling delivery only brands such as Burger Burger and Kick-Ass Burrito. Wagamama currently operates a dark kitchen and in our view there are clear operational efficiencies from preparing and delivering several food formats in one “dark kitchen.”
3) Site conversions: “Given there are c. 250 Frankie & Benny’s sites, 85 Chiquito, 16 Coast to Coast and eight Garfunkel’s generating what we believe is c. £50m of EBITDA we think it is safe to assume that a proportion of the leisure estate is contributing very marginal profitability.
“Management has targeted £7m of incremental EBITDA from 15 conversions suggesting c. £460K of incremental EBTIDA per site. The CEO also noted that payback on these sites is two years. Given the difference in profitability between an average UK Wagamama site (c.£500K) and a RTN Leisure site (c. £150K by our estimate) conversions should be highly accretive although we would note that there will be big variance in levels of profitability across sites in both formats.”
It also laid out its areas of concern, which it said centred around the valuation, given the stage in the cycle. “Paying just over 13x EBITDA is a lofty multiple for a leasehold business. However, as discussed above, synergies are highly achievable so we value them in our SOTP scenario.
“Our second concern would be that management focus will be distracted from the good work that has been done to date on stabilising the challenged Leisure business. This is offset somewhat by our view that management will convert more than 15 sites to the more attractive Wagamama format, which in itself should further stabilise the leisure business.
“We would have concerns about the investment in the US. We have seen numerous plc’s in our coverage (albeit mostly in different sectors) struggle to gain scale in the US. It can be a costly adventure and we would encourage management to assess the potential for selling these stores to a franchise operator with local buying power and scale.
“Finally, and possibly most pertinently, leverage will be 4.4x on a lease adjusted basis in 2020 post deal. We think this is manageable in the current environment but given the upcoming macro-economic risks we do harbour concerns about leverage across our leisure names. We would concentrate more on the fixed charge to EBITDAR ratio, which is 2.2x in 2020 which gives us comfort that the group can weather a recession without having to cut the dividend further. We would very much like to see a clear path to debt paydown and would prefer to see the group start with a conservative payout ratio.”
