Famous Brands makes U-turn on Gourmet Burger Kitchen investment as coronavirus strikes | Fin24
 
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Famous Brands makes U-turn on Gourmet Burger Kitchen investment as coronavirus strikes

Apr 02 2020 17:28
Khulekani Magubane

Famous Brands, the owner of Steers and Wimpy, will cut funding to its long-time struggling British fast food operation, Gourmet Burger Kitchen, due to a deterioration in sales caused by the coronavirus pandemic.

The company bought GBK in 2016 as part of its strategy to reduce its dependence on South African consumers, who were under pressure, over the past few years. However, the plan proved costly as the burger chain took strain as a result of economic struggles abroad post-Brexit

The Darren Hele-led Famous Brands said its British operation was vulnerable to the economic impact of the coronavirus and that a write-off of the R2.3bn investment was not off the cards.

"The board’s decision to withhold further financial support for GBK may result in an impairment of the full value of Famous Brands’ investment in GBK," the company said.

GBK’s UK based website said all of the 20-year old chain’s stores were closed due to Covid-19. There are 29 474 confirmed cases of coronavirus and 2 352 deaths in the UK, according to the British Broadcasting Corporation.

The decision to stop supporting its UK business was well-received by markets, with Famous Brands shares gaining as much as 8%.

Analyst Simon Brown told Fin24 that while the coronavirus pandemic has made business even harder for GBK, the outbreak was merely the "final nail in the coffin" for a deal that never worked as well as Famous Brands had expected.

"It’s never been profitable, but for a while they have had the TVS (tenant verification services) process where tenants can use the legal process to get reductions from landlords. Famous Brands have been putting money into GBK since they’ve owned it and now, they are essentially pulling back. If you read between the lines, they are abandoning the business," said Brown.

Ongoing pressure

Brown said the news that Famous Brands would no longer be financially assisting GBK was likely well received by shareholders, as GBK would no longer sap financial resources from Famous Brands without meaningful returns.

"In essence, they still have GBK debt to pay for. But at least it does not take company cash any long. The stock is up on the news of that. The lockdown is not helping Steers and Wimpy, but the signature brands they have  - Turn 'n Tender, Vovo Telo (Bakery & Café) - have also been struggling before Covid-19, and they will see more pressure as the lockdown continues," Brown said.

Brown said Famous Brands could look forward to good business once the national lockdown in South Africa ended, as it had a number of well-known brands that consumers would flock to once their doors opened again.

"Famous Brands itself will survive. Steers, Debonairs and Wimpy are huge brands and they will bounce back very quickly. These brands are well frequented and well-known in South Africa. Famous Brands at its core will ride this out," he said.

Despite Famous Brands' stock gain on Thursday, its shares have plunged about 49% since it acquired GBK in September 2016 to the start of this year. From the beginning of the year, the stock has shed almost 70% as a result of the coronavirus outbreak. 

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