Restaurant Group to buy Wagamama for £357m

Frankie & Benny's and Chiquito's owner Restaurant Group has agreed to buy the Wagamama restaurant chain for £357m in cash, giving an enterprise value of £559m.

The deal will be funded through a combination of cash, a £315m rights issue and a £220m debt facility.

Restaurant Group said the transaction is expected to result in estimated cost synergies and site conversions synergies of around £22m. In addition, it should enhance earnings per share in the first full year after completion and be "strongly" accretive thereafter.

Chief executive officer Andy McRue said: "This transaction is an exciting and transformative opportunity to create a business which can pursue a truly multi-pronged growth strategy and create substantial value for our shareholders.

"Wagamama is a fantastic brand, with a market leading pan-Asian proposition, which has consistently outperformed the casual dining market in recent years. Central to this success has been a cohesive culture and clear brand values which are focused on making the right choices for customers.

"The transaction not only gives us a great brand but also creates a business with a multi-pronged growth strategy which will enhance earnings with continued selective UK rollout, accelerated via conversions of some TRG sites; by further leveraging the brand in concessions both in the UK and internationally; by maximising the opportunities presented by the rapidly growing delivery sector; and by optimising the potential within international markets."

Restaurant Group also gave a very brief update on trading, noting that since its half-year results in August, like-for-like sales are up 1.4% in the 14 weeks following the end of the World Cup.

At 0905 GMT, Restaurant Group shares were down 16.3% to 248.60p.

Russ Mould, investment director at AJ Bell, said the acquisition looks a "brave move" given the saturated nature of the casual dining market and the "iffy" consumer outlook.

"Growth is about more than getting bigger and while the deal would add a little under 200 new restaurants to its 509-strong portfolio, there have to be serious question marks over the scope to expand Wagamama - even if it is a successful operator.

"The fact Wagamama is being bought out of private equity ownership is not necessarily a positive either. While it is not always the case, private equity assets can often be under-invested as their owners have looked to squeeze every possible drop of cash out of them. The price paid by Restaurant Group for the business also looks fairly chunky."

Shore Capital analyst Greg Johnson said: "The acquisition increases its exposure to fast growing channels, i.e. away from Frankie & Benny’s, to 70% from just over half at present, and we would expect this trend to continue further reducing the drag the structurally exposed leisure parks business.

"Wagamama continues to grow strongly (mid-to-high single digit LFL) and management believes there is scope to expand the business further, with some 40-60 sites in the UK and through concessions. The deal significantly transforms the RTN investment case, which should lead to faster growth and reduce its exposure to the structurally challenged parts of the group."

Paul Hickman, analyst at Edison Investment Research, said: "This is a big strategic move at a time when Restaurant Group is still in the process of sorting out its heritage estate. Like-for-like sales decline of 2.2% for the last 42 weeks means that the core operation is losing significant profit contribution.

"The rationale for the acquisition rests on the fact that Restaurant Group’s leisure operations, making up about half its EBITDA (the rest is split between pubs and concessions, typically at airports) remain exposed to retail headwinds, and that it therefore sees potential in scaling up and aligning with consumer trends via this acquisition. Meanwhile the acquisition multiple of 8.7 times EBITDA including site synergies is not cheap. We therefore expect that the move will be controversial."

Canaccord Genuity said it likes the deal.

"Wagamama has a straightforward format and a strong brand. The deal complements RTN’s multi-pronged strategy and pan-Asian food works well, particularly for delivery and ‘food-to-go’ offerings. We expect RTN will be keen to take the brand into its concessions business. Wagamama’s food options are typically low in protein - lowering the pressure on margins.

"The Wagamama brand is well-positioned to benefit from multiple consumer trends; the increased focus on healthy options, popularity of Asian food, consumer demand for quick service and delivery."