Analysts express doubt over The Restaurant Group’s takeover of Wagamama’s

Analysts have expressed doubt over Frankie and Benny’s owner The Restaurant Group’s (TRG) £600m acquisition of Asian fusion chain Wagamama’s.

TRG is the preferred bidder in the sales process which was sparked in June by Goldman Sachs on behalf of private equity backers Duke Street and Hutton Collins, it was announced last month.

However analysts warned that the “complex” deal could disappoint investors due to a potential rights issue dilution.

“The deal is complex and creates confusion as to what the TRG investment case is. In summary…this is like putting on a new roof of a building, while doing an extension but the plumbing has not been fixed and the building needs a bit of a paint job,” Liberum analyst Wayne Brown commented.

“Overriding this, we just don’t know what the cost to shareholders will be (potential rights issue dilution) and some will be disappointed with the dividend cut.”

TRG, which also owns Chiquito and Joe’s Kitchen, was forced to close a string of venues after issuing multiple profit warnings in 2016. The group is only itself valued at £600m but the deal would be funded by an equity issue and a significant debt package.

“Under a typical scenario, we would likely be more negative but we are fans of the Wagamama brand, the highly cash generative nature of the group and acknowledge the management have done a good job so far in the turnaround of the core TRG business," Brown continued.

“However management stretch and execution risk is a concern while much higher leverage at a time when the market dynamics are not ideal.

“We also need to have a close look at the numbers but our initial view is that most of the shareholder accretion is dependent on the proposed cost synergies and these are back-end loaded."

“At this stage we have mixed views about the proposed deal and reduce our recommendation,” a note from N+1 Singer added.

However, other analysts, including Goodbody and Shore Capital, came out in support of the deal. 

A spokesperson for The Restaurant Group commented: “The transaction process remains on track. This is a transformational deal that will deliver significant long-term value to shareholders.”