Shareholders at Restaurant Group (RTN) are preparing to vote on the proposed acquisition of Wagamama on Wednesday (28 Nov), potentially putting management at jeopardy if the deal is rejected.
The owner of Frankie & Benny’s plans to take over Asian fusion chain Wagamama for £559m, funded through a heavily discounted rights issue.
Since the news was announced on 30 October the shares are some 20% lower at 237.6p.
Media reports suggest the deal is likely to be approved, but nothing is guaranteed and several major shareholders have come out against the deal.
Investors are concerned over the price tag as Restaurant Group would be paying 13.2 times EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation), which is seen as expensive.
Wagamama has outperformed the competition, which has been hammered by issues of oversaturation and rising costs, thanks to its speedy service and healthy dishes.
REJECTION: THE ‘NUCLEAR’ OPTION
‘Rejection of the deal would be a nuclear option for shareholders and would be effectively a vote of no confidence in the Restaurant Group board,’ comments Canaccord Genuity analyst Nigel Parson.
If this happens, management could find themselves on the chopping block.
High debt levels are a key issue for shareholders with the net debt to earnings ratio forecast to rise to 3.4 times, exceeding a generally comfortable threshold of up to three times.
Parson argues debt would rapidly fall to 2.1 times in 2019 and further in later years, but concedes valid concerns over Brexit uncertainty.
On the flip side, Parson believes there is a good opportunity for Restaurant Group to develop a substantial Asian food standalone business with the option to generate a delivery network.
