RBD - Restaurant Brands

[Snoopy]

So Note 5 says they made a loss of $1.664m selling stores with $3.192m of booked goodwill attached. (Note 8 suggests originally about $13m but written down over prior years).

The entire amount was not 'written-off' but as a result of the sales the amount of goodwill owned by the company decreased.

The buyers paid more than $2.484m for PP&E valued by RBD at $958k so the buyers were willing to pay at least $1.5m for goodwill which appears as cold-hard cash.

Thanks for the analysis PT. It starts to make sense when put like that. Buyers willing to pay more than asset value is not bad news. However, I don't think RBD management are quite off the hook. The buyers payed RBD $1.5m in goodwill and as a result the goodwill on the books at RBD reduced by $3.192m.

That still means $3.192m - $1.5m = $1.692m of goodwill has been taken off the books yet not paid for. Does that not represent a $1.692m loss for shareholders, based on the audited goodwill valuation of AR2012?

SNOOPY

[Snoopy]

Snoopy - did the goodwill right off relate to just the sold stores or is that they sold slight under carrying value so they revalued all the stores downwards (via goodwill right off).

I would be questioning their annual impairment reviews (and the auditors review of the review) if they were that much out on just the sold stores. Remind me how many they sold again?

CJ the wording in the Analysis of Expenses was "Goodwill disposed of", under the super heading 'Loss on sale of stores'. So I take that to mean all $3.192m of goodwill removed from the accounts directly related to the disposed of stores only.

Total number of stores disposed of was 13 during the year (AR2013, p17).

Referring to my previous post in response to Paper Tiger, it looks like $1.692m worth of goodwill was not paid for in the sales. That is on average $130,000 per store on a total price of some $500,000 (my estimate). Is that enough of an error to get anyone else annoyed?

RBD management obviously do not admit to any such goodwill valuation error because the goodwill attached to their remaining stores is unchanged during the year.

SNOOPY

[Snow Leopard]

... Does that not represent a $1.692m loss for shareholders, based on the audited goodwill valuation of AR2012?

SNOOPY

The total loss on the transactions is the $1M664 (in note 5). The loss on sale of goodwill will be less than this because there will be other expenses involved in the sales that add to the loss.

What RBD considers the carrying value of goodwill of an outlet as part of a national chain and the value an independent operator is willing to pay are going to vary.

Best Wishes
Paper Tiger

[bull....]

CJ the wording in the Analysis of Expenses was "Goodwill disposed of", under the super heading 'Loss on sale of stores'. So I take that to mean all $3.192m of goodwill removed from the accounts directly related to the disposed of stores only.

Total number of stores disposed of was 13 during the year (AR2013, p17).

Referring to my previous post in response to Paper Tiger, it looks like $1.692m worth of goodwill was not paid for in the sales. That is on average $130,000 per store on a total price of some $500,000 (my estimate). Is that enough of an error to get anyone else annoyed?

RBD management obviously do not admit to any such goodwill valuation error because the goodwill attached to their remaining stores is unchanged during the year.

SNOOPY

valid points but rbd historically write off goodwill on sold stores but dont have any impairment on carrying stores.
considering they have raised there growth valuations on pizza hut the goodwill loss may be less on the stores to be sold this year because they can sell them for more based on the increased sales provided they acheive them otherwise the opportsite may happen.

[Snoopy]

The total loss on the transactions is the $1.664m (in note 5). The loss on sale of goodwill will be less than this because there will be other expenses involved in the sales that add to the loss.

What RBD considers the carrying value of goodwill of an outlet as part of a national chain and the value an independent operator is willing to pay are going to vary.

The question heading this post is something that I have believed for some time. Of course when RBD was trading on a PE of 10 there was a much larger margin of safety than now. So overstating profits by not reducing goodwill by a couple of million did not affect my decision as to whether RBD was a good investment or not. Now the PE is nearer to 15, some of what were small points should not be so readily swept under the carpet.

PT I fully accept there may be some business broker fees and/or legal costs associated with the sale of each PH branch. However it is hard to imagine these being much more than say $10k on each sale. So instead of these PH stores having $130,000 written off their goodwill on sale, it might ""only" be $120,000.

I also accept your point that goodwill associated with being part of a national chain, and goodwill as agreed to by an independent buyer may vary. But I would have thought that, if anything, a good independent operator who knows their local market might be willing to pay a bit more for that PH store on the block (implying higher goodwill than on the RBD books), not less. Nevertheless I do see that on a one off basis, a variation of goodwill by $120,000 could happen on the sale of a store.

The problem I have with this argument is that we are not talking about the sale of one store. We are talking about the sale of thirteen stores. Why is the 'error' in book valuation something like 20% of thirteen store? "Whoops" once or twice I will tolerate. "Whoops" thirteen times and I start to wonder whose shoes have been resoled with banana skins.

SNOOPY

PS For those 'worried about the recent RBD share price decline, I should point out it went ex-dividend last Friday.

[CJ]

PS For those 'worried about the recent RBD share price decline, I should point out it went ex-dividend last Friday.

ACC has just sold down a bit too.

[winner69]

Snoopy - work out what Mr Beneish would think

He has a model to identify the manipulators

[Snoopy]

Snoopy - work out what Mr Beneish would think

He has a model to identify the manipulators

Thanks Winner. I looked up the Beneish factor, did the back of the envelope calculation and it came out "non manipulative".

However, that doesn't address my point. Nowhere in that Beneish calculation is the word 'goodwill' mentioned.

The Pizza Hut goodwill was generated when RBD took over 'Eagle Boys Pizza' all those years ago. After FY2006, the accounting standard changed and PH goodwill that was being written off at over $2m per year was officially frozen. However, goodwill does imply a certain level of ongoing profitability and I would argue that with Pizza Hut this hasn't happened, despite a series of 'one off' PH goodwill write offs since FY2006 along the way. Nevertheless this 'error' is coming to light as RBD seeks to sell down their chain to smaller operators.

SNOOPY

[Snoopy]

CJ the wording in the Analysis of Expenses was "Goodwill disposed of", under the super heading 'Loss on sale of stores'. So I take that to mean all $3.192m of goodwill removed from the accounts directly related to the disposed of stores only.

Total number of stores disposed of was 13 during the year (AR2013, p17).

Referring to my previous post in response to Paper Tiger, it looks like $1.692m worth of goodwill was not paid for in the sales. That is on average $130,000 per store on a total price of some $500,000 (my estimate). Is that enough of an error to get anyone else annoyed?

I have dived back another year in the records to FY2012 where eight Pizza Hut stores were sold to owner operators.

Net sales were $1.237m. Property plant and equipment disposed of $1.045m. So implied goodwill 'bought' by the new owners was near enough to $192k (I say near enough in deference to Paper Tiger's point that there may be extra sale related charges that form part of the net price paid eg legal fees for contracts drawn up by RBD to get the sales process right. If for example legal fees totaled $25,000 for each of the 8 stores sold, that would sum to $200k. Thus the implied goodwill paid as a collective amount would go up to $192k +$200k = $392k).

I note in the accounts that total goodwill disposed of was $1.518m. Let's give PTs assumption the benefit of the doubt and say that $392k of goodwill was bought by the new owners collectively. That still leaves $1.518m- $0.392m= $1.126m to be accounted for and that comes to $140,750 per store 'written off'.

Frankly, I don't think that much variation on what surely must be a circa $500k purchase is an acceptable error to hold on the books in FY2012. And my subsequent FY2013 calculations show the goodwill was still overvalued in FY2013 because of similar goodwill write downs in PH stores sold in the current year.

SNOOPY

[CJ]

Thanks Snoopy.

What's your current view on the current price. I know you are a long time holder but do you consider it under/over/fairly valued?

Disc: I sold down half my holding today to lock in my gains and to increase my cash holding (sold a few other shares too. Should have sold a little while ago but was a bit slow). I think it is at its upper range and its dividend yield not as attractive as when I first bought. May look to get back in on weakness or if Carl Jr goes better than expected.