There are two ways to look at Restaurant Group’s proposed £559m purchase of Wagamama, a deal that shareholders will back or reject on Wednesday.
The first is the one management prefers: the noodle chain will inject growth into a company that needs something fresh to revitalise a tired-looking portfolio that includes Frankie & Benny’s and Garfunkel’s. The other view is that, however popular Wagamama has become, paying the equivalent of 13 times earnings to the current private equity owners, Duke Street, is asking for trouble.
This column was in the sceptical camp when Restaurant Group unveiled its big idea last month. That opinion has only been strengthened by seeing an eye-catching calculation from Langton Capital analyst Mark Brumby. The proposed price for Wagamama, reckons Brumby, could be the highest per restaurant ever paid in the UK. A few trophy restaurants may have gone for more, but Wagamama would be changing hands at roughly £4m per leasehold site, which is the steepest he can remember for a chain of any size.
As Brumby rightly adds, you might pay £4m a unit for a successful 10-strong chain if you thought the format could support 200 outlets. But Wagamama already has 133 directly owned restaurants in the UK and even the would-be acquirer is only talking about opening another 40 to 60. It should be added that Wagamama also has five restaurants in the US and 58 franchises in Europe, the Middle East and New Zealand. But the UK end is the core of the operation and this deal look very expensive however you cut the numbers.
A few shareholders, notably 7.7% owner Columbia Threadneedle, will vote against but Restaurant Group is thought to have the numbers to get its purchase, and accompanying £315m rights issue, across the line. Good luck: paying a record-breaking sum, all in cash, for a noodle chain in the current consumer climate is brave.
It will take more than a merger for BDO to challenge rivals
Always read the qualifications in an audit report. The same applies to the planned merger of BDO and Moore Stephens to create the UK’s fifth largest firm of auditors and consultants. The deal signals “desire” to improve competition at the top end of the market, according to the partners. That is a long way short of being a claim that the UK’s cosy-looking auditing industry is suddenly primed for revolution.
Caution is wise. A glance at the figures demonstrates the gulf between an expanded BDO’s ambition to boost competition and its ability to disrupt the lifestyles of its big four rivals. With combined UK revenues of £590m, BDO and Moore Stephens will still be a minnow against KPMG, which had income of slightly more than £2bn last year and was the smallest of the big four.
The makeup of the client lists reinforces the point. BDO is top for auditing companies listed on the Alternative Investment Market but can boast just one FTSE 100 firm (Randgold Resources) and four FTSE 250 companies. The Competition and Markets Authority, on a post-Carillion mission to improve competition and quality in UK auditing, definitely should not conclude that market forces have done its job for it.
One can conclude, though, that a bigger BDO is better placed to capitalise if the CMA, and then the government, chooses to shake up the industry. A good start would be to impose a 20% cap on audit market shares within FTSE 350 companies. Then ban the selling of auditing and advisory services (often more lucrative) to the same big-company clients.
If both those changes happen, BDO may be in a decent position to challenge. In that sense, absorbing Moore Stephens is a smart manoeuvre. But the ball remains firmly in the court of the CMA and the government. Be radical.
The lady’s not for minting
Margaret Thatcher’s contribution, as a food scientist, to the development of Mr Whippy ice-cream is disputed – but not by the Bank of England. The former prime minister is on the list of eligible scientists to adorn the next £50 note and the Bank, bizarrely, explained why with a reference to the alleged soft-scoop breakthrough.
In practice, the chances of Thatcher getting on a science-themed note are approximately zero. But the same could be said of roughly 98% of names on the 800-strong list of eligible nominations. Every vaguely scientific name you’ve heard of is there and many more besides.
This exercise in consulting the public is meant to portray the Bank as open and inclusive but, in the end, we all know the banknote character advisory committee (really) will choose from about half a dozen obvious names. Wouldn’t it be simpler to cut to the chase?
