The votes have been counted and the deal waved through as shareholders in Frankie & Benny’s-owner Restaurant Group (RTN) approve its £559m takeover of Asian fusion chain Wagamama.
But only just. There was significant resistance to the proposal and several vocal fund managers happy to air their disapproval. In the end around 60% of shareholders gave the deal the green light, enough to to carry the day.
Now the hard part comes. Management will have to quickly and efficiently integrate the business and show that there is plenty of growth potential left on the table. The top team also need to get spiralling net debt under control, one of the biggest risks to this acquisition going pear-shaped given the implied 3.4-times earnings before interest, tax, depreciation and amortisation (EBITDA).
That sort of burden has hurt acquisitive companies in the past and it will make lenders nervous, who typically get the jitters at anything above three-times EBITDA.
But the first thing management must get sorted out is soothing investors sentiment in the wake of the accompanying £315m rights issue needed to part fund the purchase of Wagamama. Priced at 108.5p per share, this will massively dilute shareholders who do not take part, flooding the market with more than 290m new shares, or 144% of the current share in issue.
They are due to hit the market tomorrow (29 November). All things considered, it is surprising that Restaurant Group shares are down only 13% in afternoon trade today, at 204p.
AMBITIOUS ROLLOUT PLAN
Unlike Restaurant Group’s struggling Frankie & Benny’s chain, Wagamama has been trouncing its rivals with quickly prepared, healthy dishes.
An aspiration for Restaurant Group is to open between 40 to 60 Wagamama restaurants and potentially develop a delivery network for future growth.
Investors will be keen for the company to generate the promised £22m of cost synergies from the acquisition, which is expected to boost earnings in the first full year and be ‘strongly accretive’ after.
Investment bank Citi has some reservations 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.
