Management buyouts targeting restaurant chains in the UK should not be ruled out in the next 12 months or so.
Several restaurant chains do not price in an M&A premium right now. They have promising growth prospects, but their equity valuations have retraced in recent weeks. If weakness persists, some of them will certainly become tasty takeover targets for private equity. If they don’t, Tasty (LSE: TAST) and Prezzo (LSE: PRZ) could still be attractive investments.
Tasty Buy
AIM-listed Tasty operates 31 outlets — including DimTs, Wildwoods and Wildwood Kitchens — in London and in the south-east. It has a market cap of £50 million and is net cash to tune of £2.4m. This tiny group has grown revenue to £23m from £1.2m in the last decade.
If forecasts are accurate, Tasty will hit £31m and $42m in 2014 and 2015, respectively. Its earnings per share are expected to double in the next 18 months. To achieve these targets, Tasty will simply have to repeat the trailing performance it recorded in the last couple of years.
Yes, Tasty sports rich trading multiples, but the promise of growth and better margins back a relatively high valuation for its equity. Moreover, with a market cap plus net debt, or enterprise value (EV), of 10x forward earnings before interest taxes depreciation and amortisation (EBITDA), it doesn’t look too expensive right now.
Of course, if growth sputters, it could be in trouble. Tasty’s track record suggests otherwise: its one-year performance reads +13.2%. A management buyout would make sense, so I am surprised private equity firms haven’t shown interest so far. A tie-up with a domestic food retailer holds logic, too, in my opinion. The same applies to other larger rivals.
The Kaye family controls Tasty and is also at the helm of Prezzo.
A Prezzo Deal
This restaurant chain has been trading under the Prezzo brand across the UK for 14 years. Its specialty is Italian food.
With just less than 200 restaurants and a market cap of £336m, AIM-listed Prezzo is a bigger group than Tasty. It’s net cash, which signals a strong balance sheet. It has already started paying dividends, which is a good sign, too. Its relative valuation, on a forward EV/EBITDA basis, is about 10% lower than Tasty’s.
That reflects a different stage of maturity, and a lower growth rate for revenue, among other things. A takeover may be easier to execute because its free float, at about 40%, is higher than Tasty’s. In spite of recent weakness, its one-year performance reads +28.8%.
Domino’s Pizza Takeaway Deal
With a forward EV/EBITDA of 14x, LSE-listed Domino’s Pizza (LSE: DOM) is by far the most expensive stock in this universe. It boasts a market cap of £885m. It’s the biggest by size, with more than 570 stores based in England, Scotland, Wales and Ireland. Its revenue growth trajectory is lower than Prezzo’s and Tasty’s, but its operating profitability is higher.
Projections for growth are encouraging. Still, its stock price has struggled to keep up with its previous performance in the last 12 months. Its one-year performance reads -20%.
It could be time to act for suitors. The biggest pizza delivery chain in Britain needs a breath of fresh air to appeal to investors in the same way it did in the past. It doesn’t need the public market to shine. Its dividend yield stands at 3%, while its free float is 97.8%.
Restaurant Group
Finally, Restaurant Group (LSE: RTN) is the biggest of the four by market cap (£1.2bn). Its sales are forecast to grow faster than Domino’s, but not as fast as those of Tasty and Prezzo. It has 422 restaurants and operates a concessions division which trades at more than “50 outlets primarily in UK airports,” according to the company.
Restaurant’s valuation looks a tad expensive as its stock trades on a forward EV/EBITDA multiple of 10.5x. Restaurant has £50m of gross debt on its balance sheet, as at the end of 2013, which poses no problem. Its dividend yield is 2.3%, while its free float is 97.8%.
Extraordinary corporate activity, such as the buyback programme it recently announced, is not the way forward. Alternatives, such as a take-private deal, should be sought.
