Johannesburg - Analysts were surprised by fast food group Famous Brands' announcement on Monday that it has added Mugg & Bean to its list of franchise chains, at a cost of R104m.
"We were expecting an acquisition in the fast food chicken space," said head of research at Kagiso Asset Management Abdul Davids, adding that the buy seems pricey.
"The deal will be earnings neutral, so Famous Brands will be paying a similar price earnings multiple to its own (roughly 12.6 times), which we think is a bit steep in the current market, even taking into account Mugg & Bean's growth prospects."
However, Famous Brands chief operating officer Kevin Hedderwick described the deal as "fantastic". "Mugg & Bean is a brand leader and a great brand for us to have," he said. Famous Brands is also the controlling group of Wimpy, Debonairs and Steers. It will effectively buy Mugg & Bean's franchise agreements and control the related revenue streams.
Founder and CEO of Mugg & Bean Ben Filmalter said the sale was opportune as "we found ourselves in the difficult position of not being big enough or small enough".
He said the group is comfortable with Famous Brands taking over Mugg & Bean's South African and African operations, because the group knows franchising and is big and experienced enough to grow the business.
The acquisition will be financed by debt, said Hedderwick.
He said the company will not become financially stressed because of this. "We are comfortable with a gearing level of anything from 60% to 80% as franchising is cash generative," he said.
Davids agreed. "Famous Brands is a very cash generative business and the company should be able to comfortably manage the increased level of debt," he said.
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This acquisition will raise Famous Brands' gearing level to 56%.
Famous Brands earlier announced capital expenditure plans to open 135 new outlets and revamp 100 of its current restaurants in this financial year.
"It's not too much to handle and there will be minimal disruption to our existing business," said Hedderwick. Filmalter and his partner Michael Maree will remain part of the management team for three months.
"We decided against staying on board," said Filmalter. Together with Maree, he will remain in control of the group's international operations (excluding Africa).
Hedderwick said Africa presents opportunities for putting forward the Mugg & Bean brand but Famous Brands is "far more excited about the opportunities present in South Africa". He said Famous Brands wants to grow the brand at shopping centres and in suburban areas.
"Famous Brands has been very good at extracting synergistic value from acquisitions by buying brands similar to its existing portfolio of primarily fast food businesses with relatively simple menu structures and a lot of cross-product opportunities," said Davis.
"Mugg & Bean, on the other hand, is primarily a sit-down restaurant with a much wider and complex menu offering which will make it more difficult to extract synergies.
"However, Famous Brands should be able to efficiently roll out the concept and enhance its offering by catering for a more sophisticated market."
Famous Brand shares were trading 4.99% higher at 2 000c/share in late trade on Monday.
- Fin24.com