The Restaurant Group: Apollo has a taste for Wagamama owner

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Sophisticated mainlanders love to slam British dining. Given the mixed reviews from customers of chains like Garfunkel’s and Frankie & Benny’s, restaurant groups must shoulder some of the blame. The former has closed, while TRG’s loss-making divisions, including the Frankie & Benny’s chain, were sold last month.

TRG is also on the menu Thursday. The offer from buyout fund Apollo values ​​the group at £700 million including debt. Apollo will gain access to the 80 or so pubs owned by TRG, as well as lucrative airport concessions.

Shareholders may find the price no more appetizing than a hot lasagna. Prior to the acquisition, the company’s stock price had fallen approximately 80% over the past five years. This period coincides with TRG owning its top asset, Asian-style chain Wagamama, which it acquired in 2018 for £560m.

Activist fund Oasis should be happy. It has been agitating for change over the past year, with some results. A year ago, the company’s shares were trading as low as 26p. The cash offer of 65p is 67% above the one-year average price. Oasis has agreed to hand over 18% of its shares.

Any long-term shareholder will want to think more thoroughly about the details. Compared to peers such as Loungers which trade at 6x, an enterprise value multiple of around 8x next year’s EBITDA seems fair. Bowling alley operators received similar valuations. Pub chain Mitchells & Butlers trades on a price-to-earnings ratio of 8 times, but it does own 80% of the property.

And property provided the real meat that Apollo sought. TRG has its own freehold property portfolio, which was worth £160m at the end of last year. Apollo may seek to generate cash from the sale and leaseback transactions. This in turn reduces the enterprise value of the deal if viewed as a source of cash.

From this point of view, the transaction valuation multiple has dropped to nearly 6 times. For TRG’s long-suffering shareholders, the price is cheap enough to make it worth taking a few more crumbs from Apollo’s plate. Even with some discount to the property’s valuation, shareholders should hold out for a price close to 80p.