- Restaurant Group sells underperforming leisure division
- Nominal price of £1 plus cash contribution of £7.5 million
- Proposed sale accelerates margin accretion and debt reduction plans
Shares in Wagamama owner Restaurant Group (RTN) jumped a further 7% to 50.6p on Monday, taking gains over the last five trading sessions to over 16% after the company agreed to sell its leisure division to private equity firm Epiris (through its The Big Table UK restaurants venture).
First-half results last week (6 September) revealed the leisure businesses largely comprising Italian American themed Frankie & Benny’s and Mexican restaurant chain Chiquito lost £0.8 million compared with healthy profits at the groups other divisions.
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PAYING THE BUYER TO OFFLOAD THE BUSINESS
The proposed sale at a nominal price of £1 includes a cash contribution from Restaurant Group of £7.5 million which underscores the desperate situation facing the company.
Investment director Russ Mould at AJ Bell said: ‘Frankie & Benny’s and Chiquito were once the jewels in the crown for the business, helping it to grow rapidly across the UK and cater for a growing appetite among the public to eat out.
‘The two brands got left behind a decade or so ago when there was a big wave of new casual dining propositions including posh burgers and burritos packed with fresh ingredients. Its sites became tired and the menus bloated with overpriced fried food.
‘Add in the combination of paying top dollar to buy Wagamama and the disruption from the pandemic, and The Restaurant Group found itself in a tricky situation financially.’
WHY DID THE SHARES GO UP?
Investors see the financial benefits from the disposal for the remaining businesses.
The company said the sale is expected to accelerate the group’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation) margin accretion plan more than 1% in the first year following the completion in the first quarter of 2024.
In addition, the sale removes around £50 million of lease liabilities and between £1 million and £2 million of annual cash outflows from remaining lease liabilities on closed sites.
CEO Andy Hornby commented: ‘A sale of our Leisure business significantly accelerates our medium-term strategic plans to increase adjusted EBITDA margins and reduce leverage.’
POSITIVE ANALYST COMMENT
Leisure analyst at Shore Capital Gregg Johnson believes the proposed deal is attractive for shareholders. ‘We see the proposed disposal as a significant milestone for the Group, improving cash flow, limiting the ongoing drag to revenues and profitability, and significantly enhancing margins.’
‘We see the proposed transaction as consistent with the strategic review and would expect today’s announcement to be taken positive (especially given the modest cost of exit).’
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Johnson said his fair value for the group stands at 70p per share and he sees potential for over 100p if the company can deliver on its 2025 targets for margin accretion and debt reduction.
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor of the article (Tom Sieber) own shares in AJ Bell.
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