SA quick service & casual dining companies have done some of the worst M&A deals in recent times. To be fair, the restaurant business is challenging in itself.
Sometimes arrogant, sometimes unlucky... but always overpaying. Here's how bad deals ruin great businesses [Thread]
Sometimes arrogant, sometimes unlucky... but always overpaying. Here's how bad deals ruin great businesses [Thread]
Famous Brands is an empire. Their leading brands include Steers, Debonairs, Wimpy, Milky Lane, Mugg & Bean. Signature brands include Tashas.
In 2016, Famous Brands bought a British chain, GBK (Gourmet Burger Kitchen) for R2.3bn.
They funded this acquisition through debt.
In 2016, Famous Brands bought a British chain, GBK (Gourmet Burger Kitchen) for R2.3bn.
They funded this acquisition through debt.
Thesis was simple. SA is challenging, let's diversify & hedge our earnings through offshore exposure.
At the time, offshore acquisitions were the HOT trend for SA companies. M&A bankers were constantly looking for cross-border deals. We never slept.
Excerpts from investor pack:
At the time, offshore acquisitions were the HOT trend for SA companies. M&A bankers were constantly looking for cross-border deals. We never slept.
Excerpts from investor pack:
Then came Brexit, steep rental costs, aggressive roll-outs, higher operating costs.
Less flattering reasons? GBK was an old business, failed to innovate & lost the customer vote.
They also made an advert mocking vegetarians as the world turned to plant based foods. Yes, really.
Less flattering reasons? GBK was an old business, failed to innovate & lost the customer vote.
They also made an advert mocking vegetarians as the world turned to plant based foods. Yes, really.
When businesses die, it's never a bang (like in the movies). It's a slow death bleeding cash. Management become "turnaround saviours", but it's too late.
If you overpay, you can never turn back.
Two years later they wrote off R874m. Today they're considering writing R2.3bn off.
If you overpay, you can never turn back.
Two years later they wrote off R874m. Today they're considering writing R2.3bn off.
Since that fateful day in 2016, Famous Brands has lost over 75% of its value. Excluding the impact of COVID, closer to 50%.
The former CEO said "don't blame me alone". He's absolutely right. Doing deals with listed companies involves LOTS of people.
(@FinancialMail article)
The former CEO said "don't blame me alone". He's absolutely right. Doing deals with listed companies involves LOTS of people.
(@FinancialMail article)
Taste Holdings portfolio included Domino's, Starbucks, Scooters, St Elmos, Fish & Chip Co.
Things got so so bad they couldn't find a buyer for Domino's, it's liquidated.
Taste spent over R1.4bn keeping Starbucks alive. They sold it for R7m.
They now own Arthur Kaplan & NWJ
Things got so so bad they couldn't find a buyer for Domino's, it's liquidated.
Taste spent over R1.4bn keeping Starbucks alive. They sold it for R7m.
They now own Arthur Kaplan & NWJ
I know you're thinking, "Starbucks coffee is trash" & "why spend 40 bucks of a cup of pure sugar?!" You're 100% right.
So what happened to Taste Holdings stock price?! Great question.
Less than 5yrs ago it was R82. Today you can scoop up shares for 2c.
I am not joking.
So what happened to Taste Holdings stock price?! Great question.
Less than 5yrs ago it was R82. Today you can scoop up shares for 2c.
I am not joking.
Why deals fail deserves its own thread. (Based on my life as a VP in M&A)
- Overpaying!!
- Overconfidence ++ Egos
- Overestimating synergies
- Not factoring integration costs
- Too many advisors
- Poor deal structuring (funding)
- Limited management incentives
- Poor diligence
- Overpaying!!
- Overconfidence ++ Egos
- Overestimating synergies
- Not factoring integration costs
- Too many advisors
- Poor deal structuring (funding)
- Limited management incentives
- Poor diligence
++ Pro-tip on structuring
If you ever see a company doing a deal, find out how it's funded. What are you giving away? Stock? Cash? Debt?
In nearly every case, paying cash works out cheapest.
Famous Brands paid more than R2.3bn for GBK. Why?
They borrowed cash to buy this.
If you ever see a company doing a deal, find out how it's funded. What are you giving away? Stock? Cash? Debt?
In nearly every case, paying cash works out cheapest.
Famous Brands paid more than R2.3bn for GBK. Why?
They borrowed cash to buy this.
Glossary:
M&A = Mergers & Acquisitions
Generally companies of equal size combining is a merger. Across takeovers, we hardly see mergers in SA.
If you want to sound like an OG, you call it "murders & executions". But don't do that in an interview - will end badly.
M&A = Mergers & Acquisitions
Generally companies of equal size combining is a merger. Across takeovers, we hardly see mergers in SA.
If you want to sound like an OG, you call it "murders & executions". But don't do that in an interview - will end badly.
Another reason for massive companies taking on disproportionate risk?
Stock incentives are aligned to earnings growth.
So if you want to get a bigger bonus, you grow the company. Quickest way to grow the company? Exactly! Buy shit.
*enter bad deals..*
Stock incentives are aligned to earnings growth.
So if you want to get a bigger bonus, you grow the company. Quickest way to grow the company? Exactly! Buy shit.
*enter bad deals..*
CORRECTION: Taste Holdings is still at 2c (think its 3c now) but was at R5.25 in 2015. It remains 99.4% down after 5 years.
Also most stock exchanges won't let your stock price fall below 1c.
Also most stock exchanges won't let your stock price fall below 1c.
