Langton Capital – 2018-11-05 – Restaurant Group, Pat Val, optimism bias, Brexit & other:
Restaurant Group, Pat Val, optimism bias, Brexit & other:
A DAY IN THE LIFE:
So, when deleting emails, who out there has accidentally got rid of stuff that they subsequently wished they hadn’t?
And here I’m talking about meeting confirmations, travel details and the like which, as they sometimes come with multi-megabyte attachments, are always begging to be deleted as they’re clogging up your mailbox and often slow everything down.
Because I have and on the very rare occasions when I’ve missed meetings, not been able to print off a boarding card or ‘misplaced’ massive Powerpoints about something important, this is often the reason why and it doesn’t help that Google now replicates emails in an ‘important’ file where, if you delete an email as being duplicated, it removes both emails and leaves you with a hole where your agenda used to be.
Twenty-first century problems, no doubt. On to the news:
RESTAURANT GROUP – WAGAMAMA:
Logic, pricing etc.:
• As the much-parodied Dick Barton narrator suggested, with one bound our hero was free. See our comments on the optimism bias below.
• Meanwhile, in the real world, recovery is often down to hard work & many acquisitions, other than bolt-ons, are more beneficial to the selling shareholders than they are to the buyers.
• Synergies can prove elusive, operators get deal-fever as advisors advise to ‘do something’ (check their fee incentives) and indigestion – particularly if a high price is paid for a purchase – can last for some time.
• Moody’s reports that the deal is ‘credit positive’ – but it is referring to Wagamama bondholders rather than Restaurant Group. It says that the noodle-companies’ bonds will, post the acquisition, be underwritten by Restaurant Group’s shareholders.
• Telegraph reports ‘the Restaurant Group’s blockbuster takeover of Wagamama’s is under threat as concerns mount over the logic of the deal.’
• Rather rudely, the FT says deal looks pricey and it stinks
• Telegraph quotes shareholder as saying ‘we would be more interested if they first turned around their legacy business properly.’
• Could be a bit of argy-bargy ahead of the pricing of the Rights. Potential subscribers will want the price to be set as low as possible.
• Deal is accretive in part because of the proposed financing structure (taking on more cheap debt) and it becomes dilutive if new shares are issued much below 200p per share.
The dividend cut…
• Langton forecast a dividend cut in March 2017 saying ‘our belief is that the group will cut its payment next week because, with a new Chairman, CEO and CFO, why wouldn’t it?’
• We said the group was more likely to cut its dividend than pass it altogether and said ‘a c50% dividend cut would acknowledge what the market already knows. There’s work to be done & a halving of value looks about right.’
• The group, some 20mths later, is doing just this.
• When the dividend was held, we suggested the cut was ‘maybe (at least for this management) a ‘once-only’ opportunity.’ We had suggested that ‘when in a hole, stop digging’.
• The purchase of Wagamama gives the group a second opportunity to cut its payout. It is likely (in our opinion) that, even if the purchase is voted down, the dividend will still be cut.
• On holding the dividend, we commented ‘where this will be place on the ‘bravado vs confidence’ spectrum will become clear over time.’
• We said ‘RTN needs to press the marketing button, cut capex, cut prices & generally sharpen up. It needs to compete with nimble competitors and some of these are true throat-cutters. It must own the social media space & make itself relevant.’
Terms & conditions:
• The pricing of the Rights Issue is critical. Getting it voted through by shareholders (on a date yet to be announced) is even more so.
• Paying massive fees on a success-basis may sometimes incentivise advisors to push for a deal almost at any cost (to someone other than themselves).
• Wagamama is a great brand but it is pretty far along the growth curve and its best years, in terms of growth, are arguably behind it.
• The CEO is not coming, delivery (low margin) is supporting sales, there are a limited number of new sites available in the UK, overseas expansion is trickier (even Nando’s has had a salutary experience with franchising) and, as an incumbent, Wagamama is there to be shot at by new entrants.
• The capacity of large companies to mess up (i.e. kill the vibe of) small acquisitions is legend.
• £4m per c£800k leasehold restaurants is a high price. Highly paid advisors cannot be relied upon to tell the king that he’s not wearing clothes. A chain of fifty (with the potential to go to 200+) may be ‘worth £4m per restaurant but when you’ve got 140 or so and ‘could add 40’ then the price looks steep.
• Waga restructured in July 2017 and, as the latest accounts at Companies’ House are from before that date, we do not know the structure that RTN is buying.
• Prior to the restructure, Waga had a negative net worth of £245m.
• There could be unit conversions from a RTN brand to Wagas. RTN has identified around 15 units.
• Overseas is a big place.
• Noodles are cheap & they lend themselves to delivery moderately well.
• RTN mentions a ‘multi-pronged growth strategy’ in its RNS quite a few times.
• Wagas has been owned by 5 or so PE houses, all of whom have taken a slice. RTN is now taking a turn. There could be more in it. We may find out when the music stops.
• The directors, with a mighty 0.11% of the shares, are committed to supporting the deal. Other shareholders are making their views privately – and now not so privately – known.
• There are £26m of synergy costs and rebranding expenses to be added to the cost of the deal when comparing the total cost to post-synergy EBITDA.
60 SECONDS ON – THE OPTIMISM BIAS:
Where are we now?
• Managements tend to be optimistic. That type of person is drawn to that type of job
• This is good in that optimistic people get things done.
• It’s less good in that, whilst they rarely tell untruths, they do tell the truth as they (and sometimes only they) see it
• Private & quasi-private company (and other very, very able directors) may be allowed to be downbeat
• They have security of tenure, but this wouldn’t work for a hired hand
• If he/she can’t be upbeat, shareholders may put in somebody who can be
Optimism bias. Climbing a rock-face without crampons…
• Virtually no newly-weds believe they will get divorced, c80% of drivers believe they are better than average, etc.
• And many managers accept that disasters can happen. Only not to them…
• Such managers promote growth but might not sufficiently plan for adverse eventualities
• This may be particularly the case if businesses are held for only three to five years
Things to watch out for:
• Observing a manager through his/her career would take too long to be useful
• But there may be some pointers.
• For example, are break clauses built into leases even if this costs a bit of margin?
• Is everything maxed out all the time or are there unutilised reserves?
• Are managers accused of having an ‘inefficient balance sheet’?
• This may not be a bad thing as reserves should, well, be held in reserve
PUBS & RESTAURANTS:
• Re Pat Val. Telegraph reports Luke Johnson ‘remains on the board of dozens of companies – many of them loss-making – despite a promise to rein in his other interests and concentrate on saving the stricken coffee and cake chain.’
• Luke Johnson, chairman of Patisserie Valerie, has relinquished his salary and resigned from several other jobs in order to focus on the troubled chain. Johnson had previously been criticised by corporate governance watchdogs for having too many jobs.
• CH & Co Catering Group has reported results to end-December 2017 to Companies House. The group consolidates the results of events catering company Concerto as well as those of a number of other specialist corporate and commercial catering businesses ‘providing catering and service solutions to a diverse range of customers in the outsourced food service market’. The group reports that revenues, on the back of a number of acquisitions, rose to £240m from £191m and normalised EBITDA rose to £15.1m from £8.2m.
• CH has reported PBT of £355k after interest and exceptional charges totalling some £14.7m. The group has an accumulated loss since incorporation of £3.3m.
• Casual Dining Group, owner of Café Rouge and Bella Italia, appoints a restructuring advisor to try and strong-arm landlords into cutting rents. Despite a rise in LfLs of 2.2% last year, the company reported a loss of £60m. Steve Richards, CEO, said ‘A small number of our sites are loss-making due to high rents and rates, and we are taking action to ensure that the core business is in good shape for future growth’.
• Single-use coffee cup sales rose by more than a million a day despite the industry’s pledge to reduce the number going to landfill in 2016. The Chancellor decided not to impose a so-called ‘latte levy’ on single-use cups in the budget.
• The MCA’s Pub Brand Monitor has shown that fewer lunches are being eaten in a sit-down environment. The amount of visits by customers to pub restaurants for lunch has decreased by 0.9% to 16.4%, while food-to-go now accounts for 37.5% of the market in comparison to 34.4% in Q3 2017.
• Fulham Shore is set to open its 43rd Franco Manca site in Aldwych, the MCA has reported.
• The drinks giant Constellation Brands has completed a $4bn investment with Canadian cannabis company Canopy Growth. The CEO of Constellation Brands, Rob Sands stated: ‘The global cannabis market presents a significant growth opportunity and Canopy Growth is well-positioned to establish a strong leadership position in this fast-evolving category’.
• The largest franchisee of Costa Coffee in the UK has sold 14 of its 60 stores to AM Coffee Holdings in a deal believed to worth several million pounds.
• Shake Shake Inc has announced that same-store sales have decreased 0.7% in Q3 2018. Tara Comonte, Shake Shack’s chief financial officer commented: ‘While none of us prefer to see a lower quarterly comp figure, we do believe this is a metric that will continue to show some degree of volatility as long as we’re aggressively expanding and growing market share’.
• Oakman Inns & Restaurants has announced the appointment of Dermot King as Chief Operating Officer. Peter Borg-Neal, the CEO and Founder of Oakman Inns, commented: ‘Some months ago, it became clear that to myself and my executive directors (Joseph Evans, CFO, Alex Ford, Operations Director and Jill Scatchard, HR Director) that we were about to become far busier. We had a clear understanding of the challenges posed by our planned rate of expansion as well as the further opportunities that were presenting themselves and we had secured a solid asset-based investment platform’.
• The NPD blog claims subscription-based fresh delivery kits are facing pressure, with low retention rates, many finding them too expensive and supermarkets starting to stock non-subscription kits. However, the subscription-based kits still appeal to a growing number of time-sensitive consumers.
• Retail butcher Crawshaw Group has announced that Ernst & Young has been appointed administrator to a number of group companies
HOLIDAYS & LEISURE TRAVEL:
• European Tour Operators Association (Etoa) chief, Tom Jenkins, warns Brexit uncertainty will persist after March 29 next year, saying ‘The real discussions and real rows will start at the end of March. The problems will not be over on March 29.’
• Director of public affairs for Getlink UK, John Keefe, claims informal talks offer the best prospect of avoiding a post-Brexit ‘breakdown’ in cross-Channel traffic. Keefe said ‘when we talk to the French government, they say ‘We can’t talk to you’, even though they are party to a bilateral [Channel Tunnel] agreement’.
• Host Hotel & Resorts reports Q3 RevPAR in-line with expectations, helped by outperformance in food and beverage and ‘broad productivity gains’. President and CEO James Risoleo said ‘We continue to focus our capital recycling efforts on reducing our international and New York exposure…Combined with our existing cash on hand, these dispositions provide us incredible flexibility as we explore investment opportunities to create shareholder value’.
• Uber launches Ride Pass scheme in five US cities, allowing passengers to avoid price surging. Uber plans to expand the scheme to other US cities in 2019, but says it has no plans at present to introduce it in London or other UK cities.
• Per Moody’s, an increase in UK remote gaming duty from 15% to 21% is credit negative for the industry, including William Hill, GVC and JPJ. The duty only applies to online gaming, not to online sports betting.
FINANCE & ECONOMICS:
• The sale of new cars in the UK in October fell 3% y-o-y to 153k units per SMMT.
• Wages in the US grew at the fastest rate in 9yrs in October.
• Sterling mixed at $1.2987 and €1.1403
• Oil down at $72.50
• UK 10yr gilt yield up 4bps at 1.50%
• Brexit etc.:
o More than 70 business leaders write to Sunday Times calling for a people’s vote on the terms of Brexit
o Arron Banks investigated by police. Says Rock Services (a UK company) paid £8m to vote leave campaign when in fact it had been loaned the money from another source.
o Arron Banks says this isn’t the Brexit he would like to see and adds that he would have voted Remain if given his time again
o Theresa May could keep the whole of the UK in a customs union after Brexit. This would solve the Irish question but infuriate many Brexiters
o Mrs May’s office has dismissed the above as just speculation.
PRIOR DAY LATER TWEETS:
• Later tweets: Has MIFID II exacerbated issues at Pat Val in that brokers have very little reason to investigate issues without a specific client mandate?
• Incentives: Pat Val driven by bonuses, RTN driven (now) by ‘need’ to get deal done & MIFID II disincentivises digging into accounts etc
• Red Flags. Sometimes not red and/or not flaglike. Need to dig for them. But little incentive to do so. No-one cares. Until they really, really do
• FT’s Lombard says RTN’s Wagamama deal has similarities with Pidan (1000yr old eggs). Says they are both expensive & stink. Not a fan, then?
• RTN depends on what price can get Rights Issue away at. Too high & underwriters will baulk, too low & deal is dilutive
• RTN. Jane Holbrook is leaving. You can’t run many restaurants from an Excel spreadsheet. You need hands on, operational brain etc.
• BDO tracker has physical High St sales down 0.3% LfL. Factor in inflation & footfall still firmly in reverse…
• B o England says business is at the point of ‘maximum uncertainty’. Cynic in us suggests Pols are grandstanding, will pluck deal end-Nov
• Give us strength. Xmas TV ads start next week. Langton prediction. Christmas will, once again, happen…
• UK Construction PMI up to 53.2 in Oct from 52.1 in Sept. Says positive but ‘underlying survey data paint a less rosy picture…’
START THE DAY WITH A SONG:
Last Friday’s song was FourFiveSeconds by Rihanna. Today, who sang:
I’m gonna call her on the telephone,
Have her over ’cause I’m all alone
RETAIL NEWS WITH NICK BUBB:
• Saturday Press and News (1): The recent focus on the bullying tactics of the beleaguered Philip Green has dropped off a bit, but the Guardian kept up the pressure, with a front page story about how Arcadia staff have come forward with lurid accounts of the tense atmosphere in HQ (“Staff hit back at Green: “It’s not banter, it’s a climate of fear””). Otherwise, the main spotlight in the Saturday papers was on the negative reaction on Wall Street to the news that Apple is to stop publishing IPhone unit sales information, with feature articles in both the FT (“Apple’s vanishing trick sparks iPhone fears”) and the Guardian (“Is Apple losing its shine? Move to keep iPhone sales secret sparks fall in shares”). And Lex column in the FT led with the subject of Apple and thundered that “Obscuring unit figures will simply fuel suspicion that sales are falling”.
• Saturday Press and News (2): In other news, the Times flagged that Julian Dunkerton is stepping up his campaign to return to Superdry and that, after meeting with shareholders last week, he has also met with Peter Bamford, the Chairman. And the main Business story in the Daily Mail (“Marks faces more pain before gain”) was that analysts expect next week’s interim results from Marks & Spencer to be “deeply underwhelming”. Finally, one of the FT’s political correspondents, Henry Mance, wrote an amusing column about how some leading businessmen could be UK ambassadors, according to the Foreign Secretary’s silly new idea, with, inter alia, Philip Green put up as the ambassador to Brazil and Mike Ashley as the ambassador to Venezuela…
• Sunday Press and News (1): The main focus in the Sunday papers was, inevitably, on Marks & Spencer ahead of next week’s interim results, with the Sunday Times leading its Business front page with the news that M&S looked at splitting the Food and Clothing businesses 2 years ago and that the idea of some kind of separation may be back on the agenda under Chairman Archie Norman. And there was a big feature about how the ubiquitous Archie Norman now dominates M&S (“Archie Norman and deathly High Street”) with his “notoriously hands-on approach” , highlighting the pressure on CEO Steve Rowe and quoting a former M&S director as saying “It’s tough for Steve because Archie’s solution to every problem is more Archie”…In his Sunday Times column, Oliver Shah highlighted that “Now it’s Food giving M&S indigestion” and said “Archie Norman has one hell of a task on his hands”.
• Sunday Press and News (2): In other news, the Sunday Telegraph led its Business front page with an expose of the lost jobs in the High Street that result from Mike Ashley’s acquisitions of distressed retailers like House of Fraser and Evans Cycles (“Jobs toll of Ashley’s raids on dying High Street”) and there was a brutal Business editorial about how “Ashley’s retail rescue act comes at a high price”, castigating Mike Ashley’s “cynical opportunism” and thundering that his approach is “financial asset-stripping masquerading as brilliant retailing”. The Sunday Telegraph also flagged that Julian Dunkerton is claiming to have made great progress in his campaign to return to Superdry and that there has been a “seismic shift” among major investors. And both the Sunday Telegraph and the Sunday Times highlighted that the planned IPO of the discount chain, The Range, has been postponed
• Sunday Press and News (3): In terms of company news previews, the Sunday Times front page Business feature about M&S also flagged that Sainsbury is expected to report a 12% increase in PBT in its interim results on Thursday (with a 0.8% increase in Q2 LFL sales) and that its rival Morrisons is expected to report a 1.8% LFL sales increase in its Q3 update on Tuesday. The Sunday Times also noted that Halfords interims on Thursday will be impacted by the weather, whilst the Mail on Sunday noted that the recent colder weather could boost Superdry’s pre-close trading update on Thursday.
Today’s Press and News: There are plenty of previews of this week’s company results in today’s papers, with the Daily Mail highlighting that on Wednesday, with its interims, Mulberry will announce a big hit from the collapse of House of Fraser: “Mulberry set to take a major hit as crisis at House of Fraser claims another victim”. The Daily Mail also has a Business editorial about M&S (“Reviving M%S the right way”), noting that M&S is still at risk of falling out of the FTSE 100 index and that “Rowe and Norman will need all their acumen and a large dollop of luck”. The Times flags that M&S will announce with their interims that the restructuring is on track despite lower H1 sales. The Telegraph has a “SWOT” analysis on Burberry ahead of their interims on Thursday. And the Daily Mail picks up the Sunday Telegraph story that Mike Ashley’s use of pre-pack administration deals
News Flow This Week: A very busy week kicks off this morning with the SMMT new car sales figures for October. Then first thing tomorrow brings the BRC-KPMG Retail Sales survey for October (the 4 weeks to Oct 27th), followed by the Morrison’s Q3 update and the ABF (Primark) finals. On Wednesday we get the much-awaited Marks & Spencer interims, as well as the Mulberry interims and the Lookers Q3 update. Then on “Super Thursday” we get no less than 8 separate scheduled company updates: the Sainsbury interims, the Burberry interims, the Halfords interims, the Game Digital interims, the Inchcape Q3, the Howden trading update, the Superdry pre-close update and The Works pre-close update! And by tradition the much-hyped Christmas TV adverts start at the end of this week, with most of the focus on the latest John Lewis offering…