Shares in Wagamama owner Restaurant Group (RTN) leapt 37% on Thursday after the board unanimously recommended an all-cash 65p per share offer from private equity giant Apollo Global Management.

The shares briefly traded above the agreed offer price suggesting investors think there is a chance Apollo will need to increase its price or another bidder will appear.

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WHY IS MANAGEMENT RECOMMENDING THE OFFER?

The offer values Restaurant Group at £506 million and implies an enterprise value (total value of the business including net debts) at £701 million.

The offer price represents a 34% premium to the prior closing price and a 49% premium to the volume-weighted average price over the last six months.

Management is taking credit for its ‘positive’ actions to reshape the business, which have already resulted in the share price rising 49% over the past year.

In terms of valuation, the offer represents a multiple to trailing EBITDA (earnings before interest, tax, depreciation, and amortisation) of roughly nine times.

On a one-year forward basis management believes the group’s enterprise value to EBITDA multiple is at a premium to UK listed peers and in line with average pre-pandemic multiples.

The board said it has considered several scenarios for the future shape of the group but concluded that all of them would deliver cash proceeds below both sell-side analysts’ and the board’s own expectations and represent less value for shareholders compared with Apollo’s proposed acquisition.

Restaurant Group has secured support from leading shareholders Oasis and Irenic representing around 20% of the issued shares.

WHAT DO THE EXPERTS THINK?

The alternative view is that management has already done all the hard work of restructuring and effectively de-risking the business (admittedly with pressure from activist shareholders), leaving all the upside to Apollo.

Greg Johnson, leisure analyst at Shore Capital, is of the view that the offer is insufficient: ‘We see the price of 65p per share, a 35% premium to last night’s close of 49p, as too low.

‘We would see 80p per share as a starting point more consistent with the longer-term opportunity or maybe we just long for a bygone era for UK equities.’

AJ Bell investment director Russ Mould commented: ‘The fact the share price at 66.4p is trading slightly higher than the takeover offer suggests the market believes we could either see a competing bid or shareholder opposition to the price in an attempt to make Apollo raise its offer.

‘Such moves have been commonplace over the past few years, with private equity players throwing their hat into the ring to gauge appetite and then upping their offer to a more reasonable level.

‘Interestingly, activist investors Oasis and Irenic Capital, who own 17.8% and 1.9% stakes respectively, have voted in favour of the offer. Therefore, any opposition over the takeover price will have to be led by asset managers Columbia Threadneedle, Royal London and Cyrus Capital, being three of the other biggest shareholders on the register.’

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 (James Crux) own shares in AJ Bell.

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