RBD - Restaurant Brands

[Blendy]

Thank you Snoopy for your extremely interesting and useful analysis on this situation! I appreciate the time you've put in to peel back the layers to see what lies beneath the shiny wrapping.

[weasel]

I think the best outcome for everyone is to accept the $9.45 on offer. Even if you do not want to sell your shares. Post the offer the shares are likely to be trading lower and you can buy back to the amount you wanted to retain. So even if I end up with 25% of my holding, that is not a problem, I can always buy more or sell the remainder knowing I received $9.45 for the 75% taken over.

I don't quite understand the waiver (takeover at 50.01%). is it:
- only if it doesn't make 75%? or
- completely at the discretion of the offeror?

[Snoopy]

I don't quite understand the waiver (takeover at 50.01%). is it:
- only if it doesn't make 75%? or
- completely at the discretion of the offeror?

Are you referring to information listed in the scheme of arrangement takeover offer? Or something else?

I don't have the offer document with me and don't know exactly what you are referring to. IIRC the Mexicans want 75% of all shares RBD. But if they don't get offered enough shares to reach that total, then they may at their discretion accept a lesser amount and still go through with the offer as long as they gain some kind of majority shareholding. If this were to happen it is likely that those shareholders who offered their shares to the Mexicans would get $9.45 for all of their shares and they would be left with none. If the Mexicans don't get offered 50.01% of the shares then the offer is dead and no-one gets $9.45 for any shares. That is the way I read it.

The terms of the offer are always at the discretion of whoever makes the offer. The only exception to this is that having made a formal offer, the Mexicans cannot reduce the consideration of that offer after shareholders accept the original terms of the offer. IOW they can't now say we will only offer you $9.00 per share for up to 75% of the company, not the $9.45 offered in the booklet. And they also can't say we will continue to offer shareholders $9.45 but only for 50.01% of their shares, not a minimum of 75%.

SNOOPY

[weasel]

Are you referring to information listed in the scheme of arrangement takeover offer? Or something else?

I don't have the offer document with me and don't know exactly what you are referring to. IIRC the Mexicans want 75% of all shares RBD. But if they don't get offered enough shares to reach that total, then they may at their discretion accept a lesser amount and still go through with the offer as long as they gain some kind of majority shareholding. If this were to happen it is likely that those shareholders who offered their shares to the Mexicans would get $9.45 for all of their shares and they would be left with none.

SNOOPY

Yes, this is the bit I am not so sure about, reading the document. If they get less than 75% I'm not convinced that "shareholders who offered their shares to the Mexicans would get $9.45 for all of their shares" - the oferror can perhaps only purchase a total of 50.01 at their discretion. Because it states in the document that if 75% is achieved then those who offered 75% of their own shares will definitely have them all sold. But it is not so clear if the 75% is not met.

If the Mexicans don't get offered 50.01% of the shares then the offer is dead and no-one gets $9.45 for any shares. That is the way I read it.
SNOOPY

Correct

The terms of the offer are always at the discretion of whoever makes the offer. The only exception to this is that having made a formal offer, the Mexicans cannot reduce the consideration of that offer after shareholders accept the original terms of the offer. IOW they can't now say we will only offer you $9.00 per share for up to 75% of the company, not the $9.45 offered in the booklet. And they also can't say we will continue to offer shareholders $9.45 but only for 50.01% of their shares, not a minimum of 75%.

SNOOPY

Right - but in the case that they get 74.9% I fear that they can scale that back to 50.01.%. I am unclear about this part. PS: document is online at www.rbdtakeover.co.nz/


Thanks
Wease

[Rep]

Deep.breath.inhale.hold.exhale.

There is no advantage in accepting the offer by Global Valar now as the offer closes on March 12 2019 - still well over a month away. Those accepting the offer early - depending on the number of shares that they accepted the offer (including all the ones they currently own) effectively lock themselves into the offer for the accepted shares and there is very little to be gained from doing so under the offer as under the takeover offer scaling will be applied across all of the parcels that were offered if oversubscribed at the $9.45 mark. No one including Global Valar is going to really know what level that they will obtain until we get closer to March 12th - they are required to file SSH notices each time they receive acceptance of each additional 1% of the shares on issue via the offer AND they will be probably visiting as many of the large institutional holders to lobby as they can in the next 6 weeks.

In the week immediately preceding the March 12th you will probably see a flurry of postal acceptances changing the acceptance rate and the SSH notices being posted daily - again if you are filing your acceptance online then a holder will have the luxury of being able to see the level of acceptances right up until the day prior to close and then using their holder number and acceptance number to file their acceptance right up to close (depending on the vagaries of the internet and presumably LINK who seem to be processing the offer) - at that time you will probably get a fairly good read whether they will cross the 50% or 75% thresholds at $9.45. if they don't get want they want, they could always extend the offer and sweeten the pot (i.e. offer more than $9.45) but the new terms would then apply to all of the acceptances so even if you had accepted at $9.45 then if the offer rises to say $9.55 then everyone get the new price.

Do you own research and by all means worry about things you have no control over but focus action on the things you can control and if you have the luxury to wait for additional information that is costless (there's no advantage in accepting earlier than March 12th) then wait before making a decision. Me - I'm not worrying about what I will do until March 12th when I will have a better read on what the level of acceptance might be although I doubt Global Valar will be updating during the day unless they are getting close to 50% or 75% to push the deal through on fence sitters like me.

Remember the $9.45 offer is for control which is why it is at a premium over the current SP of $8.60 - if you are really worried about being a minority holder then you can always sell your shares on the open market. It won't be $9.45 but $8.60 at the moment for the lot is a premium on the SP of about $7.50 in December and in my case shiploads more than my weighted average buy price.

[Snoopy]

Yes, this is the bit I am not so sure about, reading the document. If they get less than 75% I'm not convinced that "shareholders who offered their shares to the Mexicans would get $9.45 for all of their shares" - the oferror can perhaps only purchase a total of 50.01 at their discretion. Because it states in the document that if 75% is achieved then those who offered 75% of their own shares will definitely have them all sold. But it is not so clear if the 75% is not met.

Weasel, let me preface my post by saying that I am not a corporate lawyer and not familiar with all the legal ins and outs of a "scheme of arrangement", such as being offered here. However, I do wish to remind everyone that the offer price is not $9.45, because that offer is only for a guaranteed 75% of the shares you own.

The day before the Mexican offer was tabled, the share price was $7.60. So if that is an assessment of 'fair value' in the absence of the offer, then the real offer price is:

($7.60+3x $9.45)/4 = $8.99

If, as you suggest, there is a 'get out' clause that enables the Mexicans to pull back and only get 50% of the shares then the real offer price is:

(2x$7.60+2x $9.45)/4 = $8.53

Thus those who accepted the original offer at an equivalent of $8.99 would suddenly lose 46c per share of the payout they were expecting. Furthermore to pull off this act of trickery, it would only require a single shareholder to not accept on behalf of the shares they own for the offerer to get 74.99% of the shares on issue not 75%, and use this shortfall to reprice the deal. Since it is almost certain that one shareholder at least will not accept the deal, that is tantamount to the original offer being a dishonest representation.

The Mexicans want 75% to gain control of decisions like potentially jettisoning a substantial part of the business in the future, a deal that could otherwise be blocked by minority shareholders. So there is a real reason to believe they really want 75% of shares, not 50.01%. Perhaps it will be clearer to you if you reread the offer and see that the Mexicans are after 75% of RBD shares in total, not 75% of your RBD shares.

SNOOPY

[Snoopy]

Here follows my 'Snoopshot' on evaluating Restaurant Brands.

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Restaurant Brands is the principal New Zealand licence holder for the following US “quick service restaurant” brands. The first two business concepts are licensed from master franchise holder ‘YUM brands’, a United States based company.

1/ KFC, the fast food chicken chain: 91 stores (there are additionally 6 independently franchised KFC outlets)
2/ Pizza Hut, the delco takeaway pizza chain : 46 stores (plus 42 independently franchised outlets).
3/ Starbucks, a coffee cafe chain, (licensed from master franchise holder the Starbucks Company based in Seattle USA). 26 stores.
4/ Carl’s Junior, a “burger chain” master franchised by CKE Restaurants Inc (USA): 18 stores. Carl’s Junior is very much in a development phase in New Zealand.

Operating licence agreements are generally for a ten-year term A ten-year option on extending the arrangements further is common.

Competition? In the fast food chicken market, KFC have 97 outlets. Second place is so far behind, no-one knows who they are!

In the takeaway Pizza market, Dominos Pizza lead with more than 90 stores. Pizza Hut is a close number 2 with 88 stores. That is still substantially more than the 66 outlets of Hell Pizza. These are the three chains with a national footprint.

The coffee shop chain market is lead by has many national chain players. Number 1, helped by their association with Mitre 10 Mega, is Columbus Coffee (67) with Robert Harris (40 outlets), and Esquires (29) and ‘The Coffee Club’ (28) all ahead of Starbucks (26) in Outlet terms. BBs café (23) and the fast growing Coffee Culture (20 outlets, including 15 in their Christchurch base) are other names to watch. Starbucks is officially now a ‘niche player’, clearly spelt out on p25 of AR2015.

The burger market is lead by McDonalds (187 outlets) , Burger King (80 outlets), Burger Fuel (42 outlets) and Wendy’s Burgers (22 outlets).. Carl’s Juniors 18+ outlets clearly have a difficult growth path ahead.

Restaurant Brands success so far is entirely driven by the KFC chain which makes up 82% of concept EBITDA, on ‘only’ 74% of revenue. Pizza Hut has been barely profitable over years of resizing and changing the ownership structure. Starbucks have closed over 40% of NZ outlets since FY2007. Carl’s Junior are an unproven growth prospect.

Conclusion: Yes for KFC and Pizza Hut. No for Starbucks. The jury is out for Carl’s Junior.

During 2016 'Restaurant Brands' has reinvented itself. What was a 'domestic franchisee' has become a 'multi-brand international restaurant business'. The vision is now:

"To be a leading operator of enduring and innovative Quick Service Restaurant (QSR) Brands in the jurisdictions in which the company operates."

Since this 'change of focus', there has been a push into the Australian and in particular the New South Wales' market. Restaurant Brands now owns more KFC outlets in Sydney/ New South Wales than any other KFC operator (61 stores). Similarly the push into Hawaii, with the acquisition of 'Pacific Island Restaurants', sees them controlling the largest QSR restaurant chain in that state (with 45 Pizza Hut Stores combined with 37 Taco Bell outlets). As part of this transition, the Starbucks franchise of coffee stores within New Zealand has been sold. The KFC chain (No. 1 in the fast food chicken market) and Pizza Hut (no.2 in the Pizza market) remain as part of the stable. Restaurant Brands is now the 'master franchisee' for Pizza Hut in New Zealand, with the provincial and lower volume stores being sold off to local operators. The roll out of the Carls Junior Burger chain seems to have stalled with total chain numbers down to 18. They are not a top three market player, being behind McDonalds (167 outlets), Burger King (83 outlets) and the locally owned Burger Fuel chain (52 outlets), and Wendy's Burgers (21 outlets).

Restaurants Brands must carefully follow the prescription of their master franchise owners for each restaurant concept. However there is some freedom and Restaurant Brands feel they can add particular value in both:

1/ Marketing AND
2/ Facility and supply chain management

Conclusion: Pass Test for New Zealand, Hawaii and New South Wales (with the exception of Carls Junior in the burger market in NZ).

[Snoopy]

I have used the net profit after tax, excluding non-trading items for the purpose of this comparison. Non trading items include those associated with store closures and sales transformation costs and insurance payments. These are omitted because they obscure how the business is performing on the ground.

Net Profit/No.of Shares

2011: $25.1m /97.763m= 25.7cps
2012: $18.4m /97.809m= 18.8cps
2013: $17.7m /97.856m= 18.1cps
2014: $18.9m /97.871m = 19.3cps
2015: $22.5m /97.871m = 23.0cps

Conclusion: No

I have used the net profit after tax, excluding non-trading items for the purpose of this comparison. Non trading items include those associated with store closures and sales transformation costs and insurance payments. These are omitted because they obscure how the business is performing on the ground.

Net Profit/No.of Shares

2014: $18.863m /97.871m = 19.3cps
2015: $22.523m /97.871m = 23.0cps
2016: $24.207m /102.871m = 23.5cps
2017: $30.567m /122.843m = 24.9cps
2018: $40.361m /123.629m = 32.7cps


Conclusion: Pass Test

[Snoopy]

This is the net profit, excluding non-trading items, divided by the end of year shareholders equity.

2011: $25.1m / $58.9m= 42.6%
2012: $18.4m / $59.8m= 30.8%
2013: $17.7m / $60.3m= 29.4%
2014: $18.9m / $64.7m = 29.2%
2015: $22.5m / $71.2m = 31.6%

Conclusion: Yes

Net Profit excl. non trading / Shareholder Equity EOFY

2014: $18.863m / $64.656m = 29.2%
2015: $22.523m / $71.210m = 31.6%
2016: $24.207m / $75.617m = 32.3%
2017: $30.567m / $192.059m = 15.9%
2018: $40.361m / $201.608m = 20.0%

Conclusion: Pass Test

PS For comparative trend purposes the annualized latest half year ROE is as follows:

HY2019: ($21.853m x2) / $217.075m = 20.1%

[Snoopy]

This is the net profit, excluding non-trading items, divided by the total sales for the year.

2011: $25.1m / $324.4m= 7.74%
2012: $18.4m / $308.2m= 5.97%
2013: $17.7m / $311.9m= 5.68%
2014: $18.9m / $329.3m = 5.74%
2015: $22.5m / $359.5m = 6.26%

The margin has reduced over the five-year period examined. Nevertheless, the ability to recover margin after a market squeeze has been apparent over the last three years. Centralizing the company’s recruitment system and updating point of sale technology over FY2013 were partially behind the subsequent years’ recovery..

Conclusion: Yes

This is the net profit, excluding non-trading items, divided by the total sales for the year. Note that in a change from the 2015 perspective I am now including 'other revenue' as part of the representative ongoing revenue of the company. This is because the largest part of other revenue is money received from YUM to act as master franchise holder for Pizza Hut in New Zealand. And this is a revenue stream that will be ongoing

2014: $18.863m / $330.399m = 5.7%
2015: $22.523m / $372.803m = 6.0%
2016: $24.207m / $404.095m = 6.0%
2017: $30.567m / $517.549m = 5.9%
2018: $40.361m / $766.289m = 5.3%

Conclusion: Fail Test

SNOOPY