The mid to long-term growth prospects of Domino’s Pizza (DOM) could be in jeopardy after the pizza delivery firm announces it is effectively winding down its loss-making German operations.
Domino’s has formed a joint venture with Australia’s Domino’s Pizza Enterprises (DMP:ASX), which will acquire the master franchise rights for the Domino's brand in Germany and acquire 15 Domino's stores for £18.2 million, payable in six instalments.
The joint venture, in which Domino’s Pizza will have a 33% equity stake, is buying the German pizza delivery operator Joey’s Pizza for £32.8 million, which could rise to £56 million depending on future earnings. Domino’s can sell its stake in four years and DMP has a call option to buy its stake in six years.
Domino’s says the deal will boost its underlying profits next year, sending shares in the £1.6 billion cap up 3.3% to £10.01.
Forecasts by N+1 Singer suggest the deal could lift earnings before interest and tax could by around 6% in in the 2016 financial yaer, but the analyst warns the move negatively impacts the mid to long-term growth thesis of the company. This growth was dependent on a successful 100% owned German business.
‘In this context we question why management did not opt to go it alone and buy the Joey’s business given the low valuation and the national store coverage the deal would have afforded. Overall, whilst we see short-term financial benefits of the deal we feel the move could weigh on the growth premium in the valuation,’ says analyst Sahill Shan.
Shan says that as a pure UK business, which is not far off maturity, there’s a real risk the shares could de-rate from a growth stock to one valued as a mature cash cow. He has downgraded his recommendation from ‘buy’ to ‘hold’.