Leading analysts Douglas Jack and Ivor Jones, of Peel Hunt, discuss the revelation by Revolution Bars Group that it is in preliminary discussions with former suitor, Deltic. They examine the attractions of the deal and main negotiation points.

The note reads: “Revolution Bars Group ‘is in the very preliminary stages of considering a transaction involving a possible acquisition of Deltic’. This represents a change in approach towards Deltic cf the company’s stance last year. A sensible, fair approach to the process could create a c£35m EBITDA business with an enhanced management team, c0.5x net EBITDA and good growth opportunities.

“Why RBG is attracted to Deltic. Deltic’s estate of 54 nightclubs and bars includes six freeholds (worth £15m), and generates £14.5m EBITDA postcentrals. Off a stable number of outlets, Deltic has generated 3% average LFL sales growth and 47% EBITDA growth since 2014.The company has industry-leading marketing systems and is a leader in the late-night entertainment market.

“RBG also trades into the late night, but typically with three-quarters of revenue occurring before midnight, and Revolución de Cuba being a predominantly over-25’s brand. Thus, to some extent the businesses are complementary, with RBG having food, a stronger pre-booking business, as well as sector-leading cocktails, spirits and masterclasses. Also, the overlap on locations is not high.

“There are likely to be fewer synergies than a year ago due to RBG’s costreduction programme, although £4m-£5m could still be possible. As a consequence, there would be more cash to roll out Revolución de Cuba, and a stronger combined management team to oversee this and other growth opportunities.

“We expect both RBG and Deltic had a difficult summer, without which both companies should be growing profitability. Late-night businesses tend to suffer during heatwaves, but typically only c20% of annual profits are earned between June and August.

“Where was the leak? Both boards are displeased that RBG has been forced to make this statement. This is disruptive for the staff, as it was last year. After last year’s events, the last thing either company needs is for this to be played out yet again in the public arena. As RBG is potentially acquiring Deltic, this transaction could occur without altering Stonegate’s lock up, which expires on 17 October 2018. However, this is early days, and RBG’s shareholders need to be on board. Then, the transaction should effectively be an equity merger, with the three main decisions being: equity split; management split; and head office location. After last year’s events, this needs to be simple, and low cost, and without further leaks.”