Leading analyst Douglas Jack, of Peel Hunt, has said the rumoured takeover of Gail’s Bakery by Patisserie Holdings would be materially accretive if it becomes a reality.
He said: “The company’s executive chairman, Luke Johnson, also has a majority stake in Gail’s parent, Bread Holdings, via Risk Capital. According to Sky, a deal to buy Gail’s is unlikely to be agreed until March, and the chairman is not involved in the negotiations because of the potential for a conflict of interest. Other prospective bidders are said to have expressed interest in Gail’s Bakery.
“Gail’s has nearly 40 Gail’s-branded outlets. Its first site opened in Hampstead, north London, in 2005, but its growth has been strongest since 2011, after Risk Capital invested in the business. Its retail operations are concentrated in affluent London locations with high footfall, and it has plans to further expand both its retail and wholesale operations.
“Bread Holdings’ turnover rose by 24% to £79.0m in the year to February 2017. Given that Gail’s turnover rose by 30% in 2017 vs 4% in the rest of Bread, we estimate that Gail’s generated just over 80% (c£64m) of Bread’s turnover in 2017.
“Bread generated EBITDA of £9.7m post-centrals in 2017. We do not know the margins of the different parts of the company, but the combination of Gail’s dominance in relation to Bread’s turnover, annual growth and the potential for central/purchasing synergies, all point towards Gail’s potentially contributing £12-15m of EBITDA in 2019E if CAKE acquires it, by our estimates.
“Gail’s could cost £150m, according to Sky. In comparison, we forecast CAKE having net cash of £46m in 2019E. Add £35m from a placing, and net debt is c£70m + transaction expenses. In comparison, pro forma EBITDA (assuming Gail’s adds £13.5m) should be c£45m, leaving the company on c1.6x net debt/EBITDA in 2019E, falling to c1.0x in 2020E, by our estimates.
“A £35m shares placing would add c10% to the equity base; however, the acquisition could add 30% to PBT, aided by making the balance sheet more efficient, if our assumptions have any accuracy. We estimate that such a scenario would take the P/E down from c20x to c14x based on the current share price. With earnings potentially progressing towards 25p/share, a share price approaching 500p could be achievable over the next two years if the company is able to make this acquisition, on the terms shown above.”
