RFG - Retail Food Group

[skc]

They're buying Gloria Jeans. $163.5m + $16.5 earnout. Funded by $100m in cash/debt. They're claiming EBIT for 2016 of $24m. Street Talk claims they were forecasting $11m EBIT for FY15 (and NPAT of $6m). There's no mention on how they plan to double EBIT.

I think the acquisition is scheduled to complete by H1 FY15 so there'd only be 6 months of contribution.

I'd also be curious as to how they came up with an EV/EBIT multiple of 6.2-6.4x for 2016. It seems as though they've excluded milestone payments and the share based payment.

May be they are including the $4m synergy by FY16 which brings EBIT to $28m against total cost of $180m that is 6.4x.

So after the acquisition...

Current RFG EBIT = $57.3m. Add GJ's $28m. Total => $85.3m
Current RFG Interest expense = $4.5m. New loan of ~$100m @ say 6.5% = $6.5m. Total => $11m
So NPAT = $52m

Apparently shares are being issued at $4.80, so 13.54m new shares to raise $65m required.

Total shares on issue = 146m + 13.54m = ~160m.

EPS on enlarged share base = 52/160 = 32.5c in FY16 (vs 26.5c just reported, or +23%).

If they trade on PE 17x (recently trading at ~18x) = $5.53 in FY16. Discount it back by 7% to bring it back to present value ~$5.15.

So one'd expect shares to open north of $5? Or it could open above the recent all time high at $5.17 and run away with it.... I hope so as I happened to hold them as a pair...

 

[Ves]

I think the acquisition is scheduled to complete by H1 FY15 so there'd only be 6 months of contribution.



May be they are including the $4m synergy by FY16 which brings EBIT to $28m against total cost of $180m that is 6.4x.

So after the acquisition...

Current RFG EBIT = $57.3m. Add GJ's $28m. Total => $85.3m
Current RFG Interest expense = $4.5m. New loan of ~$100m @ say 6.5% = $6.5m. Total => $11m
So NPAT = $52m

I don't think those revised figures include the La Porchetta contribution because it hasn't yet settled so there's probably 7-8 months not counted - unless I am mis-reading the company presentation.

In any event, I don't think that the full year earnings contributions will flow through properly for all of these acquisitions (provided they are successfully integrated as planned) until at least 2017 FY. Until then it's a bit messy, and we need to wait to see how synergies play out.

This is all about successfully leveraging scale now. Both pizza and coffee.

Good to see you back Ves.


pinkboy

Thanks mate

 

[galumay]

Interesting aquisition, as a coffee tragic I would never step foot inside a Gloria Jeans or any other coffee chain. I am a boutique roaster and have a small understanding of the business from green bean to cup. While its not the sort of coffee I drink there is a strong market for it, the margins are fantastic and the effect for RFG of scaling up their vertically integrated business to that extent will be very positive I imagine.

Happy to hold in my SMSF, I only bought very recently so its a nice surprise.

 

[TPI]

Interesting aquisition, as a coffee tragic I would never step foot inside a Gloria Jeans or any other coffee chain. I am a boutique roaster and have a small understanding of the business from green bean to cup. While its not the sort of coffee I drink there is a strong market for it, the margins are fantastic and the effect for RFG of scaling up their vertically integrated business to that extent will be very positive I imagine.

Happy to hold in my SMSF, I only bought very recently so its a nice surprise.

galumay are you gong to participate in the share purchase plan?

Not sure what the discount will be?

 

[McLovin]

My understanding is that by having access to their own wholesale coffee & production facilities not only can they sell to suppliers & other businesses, but they can lock in production capacity / asset utilisation in these operations by cross-selling through their franchise network. The wholesale coffee & production segment isn't the greatest business in the world, but it looks like it is de-risked substantially by the franchise networks, and provides diversification via a complementary revenue stream.

They have a pretty strong bargaining position over their franchisees & are good at making agreements that enhance profitability, so it would be hard to say "No we don't want to purchase the coffee from you."

Interesting. I guess the question then becomes, if the roasting business is so marginal why not just outsource it to someone else? With the volume they do I imagine they'd have some pretty strong pricing power over their supplier/s.

I was digging around on this. Does anyone know anything more about why Yellow Pages Singapore pulled out of buying GJ's? It seems like it fell through only a few months ago and there is very little information on the internet. (the whole transaction seems pretty bizarre to me. Like Fairfax buying Red Rooster or something)

Global Yellow Pages Limited bought the Castle Hill based coffee chain for $55.3m in a cash and shares deal in December, BRW reported yesterday.

The company will maintain its Australian headquarters in Castle Hill.

“Our global headquarters will now be in Singapore,” a GYP spokesman told The Hills Shire Times.
Gloria Jeans Coffees executive chairman Nabi Saleh said GYP is the perfect partner for their business because they shared “guiding values” and see expansion into Asia including China as a key focus.

http://www.dailytelegraph.com.au/ne...stores-may-close/story-fngr8i1f-1226829529167

 

[skc]

I was digging around on this. Does anyone know anything more about why Yellow Pages Singapore pulled out of buying GJ's? It seems like it fell through only a few months ago and there is very little information on the internet. (the whole transaction seems pretty bizarre to me.

http://www.dailytelegraph.com.au/ne...stores-may-close/story-fngr8i1f-1226829529167

I believe the yellowpages looked at the success of Starbucks offering free wifi internet back in the early 00's and thought to emulate them by offering free use of yellowpages in Gloria Jeans cafes to attract more patronage.

I think the GYP (SGX:Y07) was a bit of a shell company (albeit a large shell with dying cashflow). Reading through the announcements on SGX didn't actually explain how the sale failed, except noting that the vendor pulled out themselves. But the sale price was only $35.6m (+$12m debt I think), first announced on 19 Dec. The deal failed in July 2014 after GYP completed the rights issue and raised all the funds for the acquisition - and it decided NOT to return the funds to shareholders. I'd be pretty pi$$ed off if I took up those rights.

Anyway, not sure why the transaction price has changed so much. May be it was a dodgy transaction to help GYP raise some capital (the original purchase price seems ridiculously low at 3-3.7x EBIT on FY13 EBIT of $12.9m), or may be RFG is just paying too much - although a trade buyer would certainly be able to pay more due to available synergies...

Strange... I agree.

 

[galumay]

Interesting. I guess the question then becomes, if the roasting business is so marginal why not just outsource it to someone else?

Roasting business is not something I would describe as marginal, unless there is something I am not aware of with scaling it up to that sort of size. (and I would expect that to improve the margins.)

 

[McLovin]

Anyway, not sure why the transaction price has changed so much. May be it was a dodgy transaction to help GYP raise some capital (the original purchase price seems ridiculously low at 3-3.7x EBIT on FY13 EBIT of $12.9m), or may be RFG is just paying too much - although a trade buyer would certainly be able to pay more due to available synergies...

Strange... I agree.

Yes, very strange.

Roasting business is not something I would describe as marginal, unless there is something I am not aware of with scaling it up to that sort of size. (and I would expect that to improve the margins.)

I mean marginal as in returns approach cost of capital. I imagine it's a bit more capital intensive than running a franchise system too.

I need to do some more work on this.

 

[galumay]

I mean marginal as in returns approach cost of capital. I imagine it's a bit more capital intensive than running a franchise system too.

I need to do some more work on this.

Its always hard to work out in a vertically integrated business as well, because the transactions that take place in separate businesses are hidden within.

Green beans I buy as a small roaster for about $12KG, I am buying high quality boutique beans for artisan roasting, roasting for rubbish coffee like Gloria Jeans they would be paying in the region of $5-7KG (or less if they buy direct rather than through a wholesaler).

I sell my beans roasted for $40KG, allowing for moisture loss in roasting and all other costs margin is obviously very good. A cafe would be paying around $20KG if they were buying in bulk I expect, but of course in a vertically integrated business you don't see that transaction.

A kilo of coffee yields about 50 double shots allowing for wastage, so at $4 a cup thats $200KG return on your $7KG beans!

I know its very difficult to relate all of that to big business like RFG, and I know your point was more about the cost of capital and returns, but a roaster is not a very capital intensive thing, you need a warehouse, commercial roaster, a bagger and you are off and running.

 

[Ves]

Interesting. I guess the question then becomes, if the roasting business is so marginal why not just outsource it to someone else? With the volume they do I imagine they'd have some pretty strong pricing power over their supplier/s.

My opinion is that franchise systems are all about creating a customer experience that is of a consistent and easily recognised quality on a mass-scale. To do this successfully there are a few important considerations: the brand control needs be exercised by the franchise system owner (ie. RFG sets menu choices, marketing, store layout, suppliers) and the individual franchises should be able to be run by anyone ("the any idiot can run it" rule).

RFG would most likely, all other profitability considerations aside, run their own coffee operations because it gives them absolute control over the different blends in their coffee brands (Michels, Donut King etc) and allows them to control the customer experience to a higher level.

 

[skc]

My opinion is that franchise systems are all about creating a customer experience that is of a consistent and easily recognised quality on a mass-scale. To do this successfully there are a few important considerations: the brand control needs be exercised by the franchise system owner (ie. RFG sets menu choices, marketing, store layout, suppliers) and the individual franchises should be able to be run by anyone ("the any idiot can run it" rule).

Agree.

RFG would most likely, all other profitability considerations aside, run their own coffee operations because it gives them absolute control over the different blends in their coffee brands (Michels, Donut King etc) and allows them to control the customer experience to a higher level.

Not sure. You can get pretty good control without ownership I'd suspect.

P.S. Not a big coffee person (I think Nestle Instant Gold is pretty good) but surely no one goes to Donut King for a great coffee?!

 

[finnsk]

To do this successfully there are a few important considerations: the brand control needs be exercised by the franchise system owner (ie. RFG sets menu choices, marketing, store layout, suppliers) and the individual franchises should be able to be run by anyone ("the any idiot can run it" rule).

All this is very good but the most important is that the franchises has to be profitable. Cannot help that the husband and wife team has to work somewhere else to get by day by day.

 

[ROE]

All this is very good but the most important is that the franchises has to be profitable. Cannot help that the husband and wife team has to work somewhere else to get by day by day.

Most RFG franchisee is very profitable, something like Donut King cost you little to setup but can earn you
6 figures income...you aren't going to have 1000s of stores if they aren't profitable, the words do get around
like Wendy ice cream you aren't going to have any franchisee if aren't profitable, some RFG franchisee own multiple stores cos they are so profitable.

The market price for scale of coffee roasting, most franchisee has to buy their products from nominated suppliers
as dictate by franchiser to control quality and to keep thing consistence

in this case RFG going to supplies all of the coffee to all the franchisee, this scale will cost them less
to buy and roast, it can pass some of their saving to its franchisee or keep it to themselves.

RFG isn't the best coffee but it isn't the dog either, I am a coffee drinker and I buy my $35-$40/kg bucks fresh bean
from local roaster and when I am out and about I just grab a coffee at Michels or one of the RFG franchisee
it won't be the same as stuff I make at home but it is good enough for me.

the coffee snoop that only drink at boutique shop are small minority, the mass drink coffee at Michels and Donut kings and they ok with it and you aren't making big bucks selling stuff to minority, the mass market is where you have to target.

RFG aren't competing with small boutique coffee shop, they out to create a brand name for the mass to bring consistent quality to the mass, just like Macas and KFC and you certainly aren't going there for a quality meal but
you know what to expect when you do pop in.

 

[ROE]

P.S. Not a big coffee person (I think Nestle Instant Gold is pretty good) but surely no one goes to Donut King for a great coffee?!

Try it one day at Michels and Donut king it aren't bad as you think, some franchisee has some decent employee who can brew decent coffee and they taste pretty good.

 

[ROE]

I like their strategy very much, building a scale in coffee and that in a few years should be a very good moat.
Coffee is now entrench in Australian culture and RFG is the first to move to control this market

after this Di Bella Group acquisition they control around 13-15% of coffee market, move to 20% and they in a sweat spot

 

[Wysiwyg]

Notice out today about a J/V into China with the Gloria Jean's coffee franchise although a measly 20% interest retained by RFG. However my share purchase came about with the formation of what appears to be a symmetrical triangle pattern. Price today bumping up against resistance at the upper line.

 

[Ves]

Is there only an EGM because the assets they are acquiring (Di Bella / GJs) are required to be put forth as security on the bank loans (ie. the acquired companies are technically giving "financial assistance" to RFG before they have been acquired / made subsidiaries)?

Or am I missing something here? I don't believe I have seen an EGM re debt finance to fund an acquisition before....

 

[galumay]

Or am I missing something here? I don't believe I have seen an EGM re debt finance to fund an acquisition before....

I wondered exactly the same thing, I came to the conclusion that I simply hadnt owned shares in a company that had structured the aquisition in this way - which is what i understand lead to the need for an EGM.

 

[ROE]

Is there only an EGM because the assets they are acquiring (Di Bella / GJs) are required to be put forth as security on the bank loans (ie. the acquired companies are technically giving "financial assistance" to RFG before they have been acquired / made subsidiaries)?

Sound like it, too much complication these structure
I need to go for a run to clear the confusion I just read

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s260a.html

I just want a business that supply/sell coffee and cake and pocket a few bucks here and there
and pay me my dividend every 6 months

 

[galumay]

I just want a business that supply/sell coffee and cake and pocket a few bucks here and there
and pay me my dividend every 6 months

if only life were that simple!!