Following the news this morning that The Restaurant Group is to acquire Wagamama, we round-up some of the latest analysts’ reaction on the deal, including Shore Capital, Goodbody, Berenberg and JP Morgan.
Shore Capital: “The enlarged group would generate some £150m of EBITDA with pro-forma net debt of c£300m (including Wagamama’s £225m bond) reflecting a debt/EBITDA ratio of 2x – although slightly above our comfort levels we would expect the group to be highly cash generative.
“Including synergies and we estimate underlying EPS of c22-23p (based on a rights issue at par), materially above our current year EPS estimates of 20p, valuing the stock on c13x earnings and 7.5x EBITDA. The group expects to introduce a dividend policy of 2x cover following the acquisition which would imply c10p+ which compares with 17p at present, implying a sharp cut at the prelims.
“The acquisition increases its exposure to fast growing channels, i.e. away from Frankie & Benny’s, to 70% from just over half at present, and we would expect this trend to continue further reducing the drag the structurally exposed leisure parks business. Wagamama continues to grow strongly (mid-to-high single digit LFL) and management believes there is scope to expand the business further, with some 40-60 sites in the UK and through concessions.
“The deal significantly transforms the RTN investment case, which should lead to faster growth and reduce its exposure to the structurally challenged parts of the group. We do harbour some concerns of moving back to the high street and reducing the proportionate mix of higher value concessions, especially given the debt, although on balance a much-improved business is set to emerge. The update on current trading is also encouraging with YTD LFL sales of -2.2% implying +1% over the last 8 weeks, consistent with our full year expectations. We reiterate our BUY stance.”
Paul Ruddy, Goodbody: “Overall this seems like a good deal, RTN will diversify into a higher growth business which is well suited to delivery channels. The deal will be accretive and it will give RTN the opportunity to convert underperforming legacy sites to Wagamama.
“There is still a good pipeline of growth with the statement noting that there is the potential for 40-60 more Wagamama sites in the UK without saturation. Post deal 70% of EBITDA will derive from Pubs, Concessions and Wagamama which are delivering good growth.”
Berenberg: “This is a transformational acquisition by The Restaurant Group. The headline multiple is pretty high for a casual dining chain.
“However, the deal will significantly improve the average quality of the estate given that Wagamama has been one of the best performing businesses in this market over the past few years, demonstrated by achieving 228 consecutive weeks of lfl growth ahead of the market.
“In addition, if the company can achieve the targeted synergies the multiple becomes more reasonable.”
Alexander Mees, JP Morgan: “We believe the brand is advantaged by a number of structural consumer trends – health, speed and takeaway – and has consistently outperformed the UK market.
“TRG believes the UK estate can be expanded by a further 40-60 restaurants (30-45%), partly through the conversion of 15 TRG sites. There are opportunities to penetrate further into the UK concessions space (airports).
“The brand and cuisine of Wagamama are, in TRG’s opinion, well suited to delivery and collection, which may be complemented by a new food-to-go concept. Furthermore, Wagamama already has a presence overseas, in the US and elsewhere, which may offer significant opportunities for growth.”
Canaccord Genuity: ”We like the proposed deal as The Restaurant Group continues to reshape towards higher growth segments. Wagamama has a straightforward format and a strong brand. The deal complements RTN’s multi-pronged strategy and pan-Asian food works well, particularly for delivery and ‘food-to-go’ offerings. We expect RTN will be keen to take the brand into its concessions business.”
