Langton Capital – 2018-11-12 – RTN downgrade & dilutive rights, GBK, Diageo & other:
RTN downgrade & dilutive rights, GBK, Diageo & other:
A DAY IN THE LIFE:
Here’s a task. Watch Bridge over the River Kwai and read up on the 1956 Suez Crisis.
Because, apparently diligently working to get Mr Corbyn elected into Downing Street, Mrs May is Bridge over the River Kwai-like in her determination to do something that she doesn’t believe in and can’t quite remember why she’s doing it in the first place.
Anyway, that’s a bit heavy for a Monday so let’s just say that I’ll have to do the gardening in my suit going forward as somebody stuffed my gardening clothes with newspaper over the weekend, stuck a burst football on top and threw the whole lot on a bonfire.
On to the news:
RESTAURANT GROUP – WAGAMAMA:
• Restaurant Group announces heavily dilutive Rights Issue as it pushes ahead with Wagamama acquisition.
• RTN is to issue 290m shares on a 13 new for 9 old basis at 108.5p.
• Directors, who only own 0.07% of the company, will take up their shares.
• Not surprisingly at such a heavy discount, the group is able to say that the issue is fully underwritten. Existing shareholders not taking up their rights will be heavily diluted.
• RTN reiterates the intention to buy etc.
• RTN says that the directors’ intention to take up their Rights on 0.07% of the issue is ‘demonstrating their strong ongoing commitment to the TRG business and, following Completion, to the Enlarged Group.’
• CEO Andy McCue says ‘this (sic) a transformative deal which accelerates our growth strategy and adds a differentiated, high growth brand to our portfolio.’
• He says ‘the transaction benefits both businesses, creating an enlarged group that has scale benefits and will create significant value for our shareholders, underpinned by £22m of quantified cost and revenue synergies. We look forward to welcoming the Wagamama team into the Restaurant Group.’
• RTN says the Rights Issue ‘Price represents a 56.9 per cent. discount to the closing middle market price of TRG of 251.8 pence per existing ordinary share of the Company…on 9 November 2018…and a 35.1 per cent. discount to the Theoretical Ex-Rights Price…of 167.1 pence per New Ordinary Share calculated by reference to the closing middle market price on the same basis.’
• TRG reports that cumulative week 40 sales are down 0.5%.
• For ‘the 11-week period from 20 August 2018 to 4 November 2018, Wagamama’s like-for-like sales increased by 12.2 per cent.’ No margin is given and much of this may be down to delivery.
• Downgrade as co says it ‘confirms that it expects Adjusted PBT…for the 52-week period ended 30 December 2018 to be not less than £50 million.’ Langton had £54m pencilled in, others £52m to £55m.
• RTN says this is ‘broadly in-line with current market expectations given the impact of adverse weather and the World Cup.’
Impact of the deal:
• RTN no longer says that the deal will be accretive in the first full year of ownership.
• It says ‘the Directors expect that the Acquisition will be marginally earnings dilutive in the first full year following Completion (the financial year ended December 2019) and strongly accretive in each financial year thereafter.’
• The deal will cover its cost of capital in the ‘third full year’. Few people really know what will be going on in December 2021.
• The directors nonetheless ‘believe that the Acquisition will enhance shareholder value.’
• As of 4 November 2018, Wagamama’s like-for-like sales had outperformed the market, as measured by the Coffer-Peach tracker, for 233 consecutive weeks.
• We had expected an announcement as to the terms of the Rights Issue on Friday.
• This because the group had said it would announce terms in ‘early November’ and have an EGM to approve the purchase and Rights Issue ‘in November’.
• As a GM of a group’s shareholders normally requires 21 days’ notice, we had expected these events to take place on 9 and 30 November.
• The law has changed & is a little complicated at possible as it states that public companies are now required by statute to give at least 14 clear days’ notice of a general meeting.
• It says, however, that this time lag may be increased for traded companies which are now required, following the implementation of the Shareholder Rights Directive, to give at least 21 clear days’ notice of all shareholder meetings.
• It says they (quoted companies) are permitted to continue taking advantage of the 14 clear day notice period for general meetings (other than AGMs), subject to their articles, provided that they have first obtained shareholder authority to do so
• it says that Main Market companies (such as RTN) should, however, note the preference of the NAPF and some other institutional groups that Main Market companies only use the shorter 14 day notice period in limited circumstances where it would clearly be to the advantage of shareholders as a whole to do so and where the proposals at the meeting are time sensitive.
• The meeting is to be held on 28 Nov suggesting that the group believe it is to the advantage of shareholders to hold it without 21 days’ notice.
• Restaurant Group’s takeover of Wagamama wa ‘on a knife-edge’ over the weekend reports Telegraph. Says ‘concerns mount over the logic of the deal.’
• Telegraph quotes on of RTN’s ‘largest institutional shareholders’ as saying ‘we would be more interested if they first turned around their legacy business properly.’ Concerns have also been aired over the level of debt and the potential for dilutions if the Rights Issue is not pitched comfortably above 200p.
• The price paid for Wagamama assumes considerable continued growth, some suggest. This could possibly be forthcoming, but the group’s UK footprint at least is substantially complete. RTN itself says ‘we are encouraged by the level of support we are receiving.’
Conclusion, Langton view etc.:
• This deal looks to be heavily dilutive.
• Serious discussions must have taken place last week.
• The group has nonetheless pushed ahead with the deal.
• We may be wrong but acknowledge that deal fever exists on occasion. See our comments on Bridge over the River Kwai above.
PUBS & RESTAURANTS:
• Local Data Company says the number of new openings (of all categories of shops, restaurants etc.) on the UK’s High Streets fell by 2.1% in H1 2018 versus the prior year.
• LDC says number of closures rose by 16.9%. This ‘equated to a net loss of 4,402 units across GB, as the tough retail climate saw several major retailers announce CVAs, go into administration or announce consolidation programmes.’
• LDC says that, while the number of companies falling into administration could be lower this year than last, they will be larger and the number of units impacted could be around 50% higher.
• LDC says ‘the biggest decline was in the leisure category which saw the strong growth of the previous four years faltering, with a significant net decline of over 1,000 units in the six months of H1 2018 – a figure driven mostly by pub closures.’
• LDC says that retail parks continue to grow. It says ‘the fastest growing category in H1 2018 was barbers, with a net increase of 349 units, adding to the 624 net increase in 2017.’ How long hipsters continue to grow beards is anybody’s guess.
• LDC says ‘the demand for value products continues to rise based on net increases in store numbers in the 12 month period from July 2017 to July 2018. Home Bargains, B&M Bargains, Card Factory, Lidl and Aldi were all winners.’
• Diageo has sold nineteen of its brands to Sazerac in a deal valued at $550m. Diageo has commented that the net proceeds of c£340m will be returned to shareholders through share repurchases. Ivan Menezes, Chief Executive of Diageo, said: ‘Diageo has a clear strategy to deliver consistent efficient growth and value creation for our shareholders. This includes a disciplined approach to allocating resources and capital to ensure we maximise returns over time’. The brands to be sold include; Seagram’s VO, Seagram’s 83, Seagram’s Five Star, Myers’s, Parrot Bay, Romana Sambuca, Popov, Yukon Jack, Goldschlager, Stirrings, The Club, Scoresby, Black Haus, Peligroso, Relska, Grind, Piehole, Booth’s and John Begg.
• Chief Executive of Carluccio’s, Mark Jones has admitted the group was ‘three weeks away from going bust’ but now will reach ‘end year with 75 profitable and sustainable restaurants’. Jones made the remarks at the Propel Multi Club Conference, continuing with ‘2018 has been a very tough year. We went from being a rapidly expanding casual dining brand to suddenly being in a business that had an existential moment’.
• GBK’s CVA proposal has been voted through by ‘an overwhelming majority’ at a meeting by the group’s unsecured creditors. The group, which overexpanded and failed to maintain its position in a market rapidly filling with ‘better burger’ operators, will shed 17 restaurants and operate from a more profitable base.
• GBK says ‘we would like to thank the landlord community, our trade suppliers and our restaurant teams for their support through a challenging process.’ It says ‘with the positive vote on our proposal to restructure our property portfolio, we are now able to execute the final stage of our turnaround plan, which we are confident will position the business for long term sustainable growth’. Owner Famous Brands has taken a near £50m write down on its investment.
• A report from GLA Economics has found that London is set to increase its night time activities over the next 20 years, while drinking of alcohol is likely to become less frequent.
• A group of 15 prominent food and drink industry leaders have called for people working in the hospitality sector to write to their local MP and outline the damage to their local restaurants and hotels created by wither a hard or soft Brexit. The group of restaurant figures includes Trevor Gulliver, Fergus Henderson, Mark Hix, Jeremy King, Ruth Rogers, Rick Stein, Paul Moran and Gary Usher.
• Brigid Simmonds, Chief Executive of the British Beer & Pub Association commented on the Chancellor: ‘Clearly, the Chancellor listened to the numerous representations from MPs and the 117,000 British pub-goers spurred by the Long Live The Local campaign and announced a Budget which supports brewing and pubs. Pubs are vital to their local communities, they are also third on the list of things to do for overseas tourists when they visit the UK and yet one in every three pounds spent in a pub goes to the Treasury’.
• The Morning Advertiser has reported that sandwiches are becoming less popular among British adults as a lunch option. The report found that 15% of adults said they regularly eat sandwiches, making it the ninth most popular food option. The most common lunch option was salads with 42% followed by wraps with 37%.
• CG Restaurants, the owner of the Dirty Martini cocktail bar chain, is believed to be considering its options following a number of unsolicited approaches, the MCA has reported.
• Waste & Resources Action Programme claims food waste costs the pub sector alone £357m a year, with pubs responsible for 19% of total food waste across the hospitality and foodservice sector.
• The head of McDonalds in the UK, Paul Pomroy, stated that the Big Mac is healthier than high street chain sandwiches as the burger has fewer than 500 calories.
• The Guardian has estimated that 85,000 people have lost their jobs due to the decline of the UK high street in the first nine months of this year.
• Chinese e-commerce giant Alibaba Group has achieved $30.7bn in sales on its Singles’ Day promotion on Sunday.
HOLIDAYS & LEISURE TRAVEL:
• Meliá Hotels International reports revenues of €1.4bn for the first nine months of the year, down yoy due to renovations and opening costs. Net profit increased by 10.1% compared to the previous year and EBITDA grew by 9.1%.
• Norwegian Cruise Line reports Q3 revenue up 12.5% to $1.9bn with ‘stellar’ forward bookings for 2019. Q3 profits were $506.4m, up from $427m the year before.
• Europcar Mobility reports Q3 revenue up 25% in constant currency to €989m with EBITDA up 50% to €241m
• Eurostar reports Q3 passenger numbers up 12% yoy to three million with revenue up 17% to £247m.
FINANCE & ECONOMICS:
• UK economy grew by 0.6% in the three months to September per ONS.
• Sterling sharply lower at $1.2893 and €1.1398
• Oil up at $71.48
• UK 10yr gilt yield sharply down at 1.49%
• World markets mixed on Friday, Asia up today.
• Brexit etc.:
o Some sort of ‘deal’ likely this week.
o Jo Johnson says ‘inflicting such serious economic and political harm on the country will leave an indelible impression of incompetence in the minds of the public.’
o You can say that again. Tories take us into Europe, agonise for decades, split the country and then take us out again in a deal absolutely nobody voted on in June 2016.
o Downing St says there will be no second referendum under any circumstances.
o Some say HMG is putting Tory ‘unity’ ahead of the interests of the party.
o DUP ‘cannot support the deal’. Which is as yet unknown.
PRIOR DAY LATER TWEETS:
• Later tweets: Restaurant Group Wagamama documents should be priced, printed & despatched today if group is to stick to November timetable.
• RTN: Any rights price<200p would imply potential dilution in short term as a result of the deal. Above that & underwriters get twitchy
• So, Prezzo has reported an absolutely humumgous loss to Companies House, has it? Not Plan A, we would imagine
• The Local Data Company has reported that the rate of closures across high street leisure operators accelerated in H1 this year.
• PwC has similarly reported that around 14 shops are closing every day as UK high streets continue to struggle.
• Shop closures feel structural rather than cyclical. Hard to see the ‘next occupant’. Phone shops now exiting, got enough casual diners etc.
START THE DAY WITH A SONG:
Last Friday’s song was Wouldn’t it Be Nice by the Beach Boys, today who sang:
Nobody wants him
He just stares at the world
Planning his vengeance
That he will soon unfurl
RETAIL NEWS WITH NICK BUBB:
• Dignity: Today’s admirably detailed Q3 trading from the embattled funeral services provider Dignity shows the impact of its price cutting response to increasing discount competition, with operating profits down from £19.9m to £12.2m, but the company says that it is still trading in line with market expectations for the year.
• Saturday Press and News: The main Retail focus in the Saturday papers was on the news that retailers have won their appeal against High Street ATM’s being charged Business Rates and the only real coverage of AO.com’s agreement to buy the Online phone retailer Mobile Phones Direct was in the Times (albeit it was surprisingly uncritical in tone, given the sharp drop in the AO share price on Friday). The Times was also one of the few papers to pick up the news that Iceland’s Christmas TV ad protesting against the use of palm oil has been banned for being too political. The Guardian mocked the fact that the Chancellor chose to visit the Fuller’s Brewery in Chiswick on Friday to trumpet the Q3 GDP growth figures and also flagged the record-breaking sales of the new “Red Dead Redemption 2” video game in the first 8 days after launch (17m units worldwide). The “Share Punt of the Week” in the
• Sunday Press and News: The Sunday Times had plenty of Retail stories, as usual, but perhaps the most interesting news in the Sunday papers was that, as flagged by the Mail on Sunday, big Fashion retailers like Marks & Spencer and House of Fraser will not part in “Black Friday” discounting this year. The Mail on Sunday also highlighted that Superdry founder Julian Dunkerton has said that pre-Christmas discounting is “daft”. Talking of House of Fraser, the Sunday Times flagged that Mike Ashley is about to announce more store closures, having failed to reach agreement with landlords over rent reductions. The Sunday Times also noted the poor results announced by the All Saints fashion chain and its “Inside the City” investment column looked sceptically at Halfords after last week’s interims, saying the shares are an “Avoid”. And the Sunday Times had an interesting feature about the
• Today’s Press and News: Relatively thin pickings today, but the Telegraph flags that yesterday’s “Singles Day” in China saw Alibaba, the Chinese Online giant, see record trading. Back at home, the Telegraph highlights that hedge funds have increased their short bets against High Street retailers like M&S, Debenhams and Pets at Home and that the latest customer footfall data from Springboard shows a 2% decline in October (as also noted by the Daily Mail). And the Times goes to town on the news that Fortnum & Mason is to open a store in the City, in the Royal Exchange building.
• News Flow This Week: Tomorrow bring the B&M interims and the latest Kantar/Nielsen grocery sales data (for the 4/12 weeks to Nov 3rd/4th). On Thursday we get the Card Factory Q3 update and the ONS Retail Sales figures for October, as well as the Asda/Walmart Q3 results. It is also a big week in the world of the beleaguered Shopping Centre landlords, with the interims from Land Secs tomorrow and British Land on Wednesday, ahead of the revised “PUSU” deadline on Thursday for the John Whittaker consortium over its bid for Intu Properties.