Proactive Investors - Run By Investors For Investors

Restaurant Group launches discounted £315mln rights issue to help fund Wagamama takeover

"This a transformative deal which accelerates our growth strategy and adds a differentiated, high growth brand to our portfolio,” said Restaurant Group boss Andy McCue
Wagamama
The Restaurant Group has agreed to buy Wagamama for £357mln in cash

The Restaurant Group PLC (LON:RTN), the owner of Frankie & Benny’s and Garfunkel’s restaurants, has launched a discounted rights issue to raise £315mln to support its acquisition of Wagamama.

Last month, the group announced that it had agreed to buy Mabel Topco Limited -- the holding company of a group that owns the Asian restaurant Wagamama -- for a cash payment of £357mln, valuing the business at £559mln.

READ: Restaurant Group's proposed Wagamama takeover considered a bold move by analysts

The rights issue, which is being fully underwritten by JP Morgan Securities PLC, will be used to fund part of the cash payment for the deal. 

Shares fell 5% to 239p at noon. 

Rights issue heavily discounted 

The 13-for-9 rights issue is priced at 108.5p, representing a 56.9% discount to the closing price of TRG on Friday. 

"This a transformative deal which accelerates our growth strategy and adds a differentiated, high growth brand to our portfolio," said TRG chief executive Andy McCue.

"The transaction benefits both businesses, creating an enlarged group that has scale benefits and will create significant value for our shareholders, underpinned by £22mln of quantified cost and revenue synergies."

Shareholders will vote on the proposed acquisition and rights issue at a general meeting on November 28.

TRG also updated investors on its recent trading performance, saying total sales in the year to date are down 0.5% compared to a year ago and like-for-like sales have dropped 2.2%. The company said in the 14 weeks after the FIFA World Cup ended on July 15, like-for-like sales have gained 1.4%.

Wagamama's like-for-like sales increased by 12.2% in the 11 weeks to November 4 and the group believes it is well-positioned for another year of continued growth, TRG said. 

However, it expects the acquisition will be "marginally earnings" dilutive in the financial year ended December 2019 but "strongly accretive" in each financial year thereafter.

Restaurant Group under pressure to get deal right amid tough market, says analyst

“The Restaurant Group’s announcement of a discounted rights issue to fund its acquisition of Wagamama shows management has not been dissuaded by a negative market reaction to the transaction," said AJ Bell investment director Russ Mould.

“In one sense this is reassuring. If its faith in the takeover was sufficiently shaky that it could be put off purely by investor sentiment it would suggest there wasn’t much substance behind the move."

But Mould said the company is under pressure to get the deal right against a weak consumer backdrop and in an arguably over-saturated casual dining market.

"A change in guidance, suggesting the acquisition will be modestly dilutive of earnings rather than accretive in the first full year of ownership, is not a great start," he said.

Liberum expects the acquisition will be earnings dilutive in the first full year by 2.3% but will be accretive from 2020 by more than 13%.

The broker maintained a 'hold' rating on TRG, saying the scale of the discount on the rights issue price was "alarming" and puts existing shareholders in a "difficult position".

"Does TRG need this deal, probably not, and we baulked at the price when originally announced," Liberum said.

"We also do not feel a return on invested capital exceeding the weighted average cost of capital by year three as attractive enough."

View full RTN profile View Profile

Restaurant Group PLC Timeline

© Proactive Investors 2019

Proactive Investors Limited, trading as “Proactiveinvestors United Kingdom”, is Authorised and regulated by the Financial Conduct Authority.
Registered in England with Company Registration number 05639690. Group VAT registration number 872070825 FCA Registration number 559082. You can contact us here.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use