Auric Pacific to Eat Up Food Junction in Voluntary Cash Offer

Ser Jing - Auric Pacific to Eat Up Food Junction in Voluntary Cash Offer (pic)In a restaurant shake-out, Auric Pacific (SGX: A23) made an announcement yesterday afternoon that it is looking to acquire in cash, all remaining shares of Food Junction Holdings (SGX: 529) at S$0.255. The acquisition price represents a 40% premium over Food Junction’s last transacted price of S$0.182 on Friday, 20 June 2013.

Food Junction might be familiar with consumers in Singapore as the parent company behind the eponymous Food Junction food courts. But, it also counts Chinese cuisine (under the Lippo Chiuchow and LiXuan brands) and Mediterranean fare (under the Medz brand) restaurants under its banner, among many others.

As of 31 March 2013, Food Junction operates a total of 15 food courts, 26 self-operated food-court stalls and 22 other different-brand outlets in Singapore, China, Malaysia and Indonesia.

Auric Pacific already owns 61% of Food Junctions prior to the announcement. The company believes that the full acquisition of Food Junction would serve up “synergistic benefits” that “complements Auric’s existing portfolio” of bakeries (example: Sunshine and Top-one Breads), eateries (example: Delifrance Cafés) and food products (example: Pure Creamery Butter) among others.

For any acquisition, the price that’s paid by the acquirer will have great bearing on whether the acquired company can add value for shareholders of the acquirer. Pay too high a price, and value gets destroyed.

Food Junction’s profitability has been falling in recent years as it struggled with rental-lease expenses and a challenging operating environment for its outlets. The company’s profits of S$4.3m in 2009 have shrunk to a loss of S$6.9m last year and recent first quarter results for 2013 saw it make quarterly losses of S$540,000.

At the offer price, Auric Pacific will pay a total of $12m for the remaining 39% of Food Junction that it does not own yet. That translates into Auric paying 50 cents for every dollar of revenue that Food Junction has brought in over the past year.

That seems fair on first glance when compared to industry peers like BreadTalk Group (SGX: 5DA), which is valued at 0.53 times trailing twelve months’ revenue. But the crucial difference is that BreadTalk’s a profitable company whose earnings have been growing, unlike the currently loss-making Food Junction.

Auric Pacific has no plans to make any sweeping changes to Food Junction’s businesses, so they might have foreseen much better days ahead for Food Junction’s operations. In any case, the verdict’s still out on whether the Food Junction acquisition makes sense for Auric Pacific’s shareholders in terms of value-creation. But, shareholders of Auric Pacific should still keep a watchful eye over how Food Junction fares in the future to use it as a reference for the acquisition-smarts of Auric Pacific’s management team.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.