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Is Restaurant Group paying too much for Wagamama?
Shares in Frankie & Benny’s operator Restaurant Group (RTN) fell nearly 14% on 30 October amid concerns it is overpaying for the acquisition of Asian fusion chain Wagamama, plus dilution relating to a rights issue to help fund the deal.
The £559m price equates to 13.3 times EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation), far higher than one would expect from a casual dining business.
The deal price drops to 8.7 times EV/EBITDA once you include cost and site conversion synergies, says broker Canaccord Genuity.
Wagamama has ‘significantly outperformed’ the core UK market and benefits from demand for its healthy dishes, speed of service and delivery, argues Restaurant Group.
Shareholders need to question whether the transformational deal is the right move, given the difficult environment for casual dining restaurants.
Investment bank Citi is cautious about future growth at Wagamama, which delivered an average of 9.6% like-for-like growth over the last four years, but limited profit growth.
Broker Peel Hunt is also concerned, saying Restaurant Group will have additional debt obligations. It notes that current trading from the acquirer’s existing estate has experienced a slowdown in like-for-like sales growth at 1.4% for the past 14 weeks versus 2.4% gain in the first six weeks of this period.
Like-for-like sales are now down 2.2% year-to-date, which is behind market expectations. (LMJ)