BreadTalk Group Limited (SGX: CTN) is a food and beverage conglomerate with four key divisions – bakery, food atrium, restaurant and 4orth concepts. The group has close to 1,000 outlets spread across 16 countries, and its brand portfolio consists of directly-owned brands such as BreadTalk, Toast Box and Food Republic, as well as partner brands such as Din Tai Fung and Song Fa Bak Kut Teh.
Yesterday, BreadTalk announced a major acquisition – proposing to buy over the entire issued share capital of Food Junction Management Pte Ltd (“FJM”) for a cash consideration of S$80 million from vendor Auric Pacific Group Limited.
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FJM is in the business of operating food courts and food and beverage (F&B) outlets in both Singapore and Malaysia – it’s an instantly-recognisable everyday service for many of us in Singapore. FJM operates a network of 12 food courts in Singapore (mainly in malls such as Bugis Junction, Harbourfront Centre, and Raffles City), and three in Malaysia.
BreadTalk currently operates its own network of food courts under its “Food Atrium” division, and this consists of Food Republic and Food Opera branded outlets, of which 14 are located in Singapore and 2 in Malaysia.
The proposed acquisition of FJM will provide BreadTalk access to FJM’s existing network of food courts and helps to broaden the group’s revenue streams and obtain synergies for this division. Should investors, therefore, give a thumbs up to this acquisition?
To assess if the price paid for the acquisition was reasonable, I used two valuation tests, one for net assets and one for profitability. The announcement mentions that the net asset value of FJM as of 30 June 2019 was S$12,341,745. This means that with the S$80 million consideration, BreadTalk is paying around 6.5x book value for FJM’s business. This seems a steep price to pay as only S$12.3 million is made up of tangible assets of FJM, while the remaining S$67.7 million comprises goodwill, an intangible asset.
For profitability, the same announcement reports that the net profit attributable to FJM for the half-year ended 30 June 2019 was S$3,183. Based on the acquisition price of S$80 million (and annualising the net profit), this means that BreadTalk paid a multiple of around 12,700 times earnings!
Financial effects from debt financing
BreadTalk plans to fund the acquisition through a mixture of debt (60%) and cash (40%). The announcement assumes that a loan of S$49.6 million will be drawn down to fund this proposed acquisition. Assuming the acquisition had been completed on 1 January 2018, earnings per share for the group would have declined by 11.5% from 2.7 Singapore cents to 2.39 Singapore cents.
Net borrowings would have increased by S$73.5 million (as FJM held S$6.5 million of cash used to offset part of the S$80 million cash consideration), and gearing would have increased from 0.25x to 0.70x.
If we use more recent numbers, Q2 2019’s earnings show that BreadTalk’s balance sheet has S$122.7 million of loans and S$99.6 million in notes payable, for a total debt of S$222.3 million. The addition of S$49.6 million will bump total debt up to S$271.9 million. As a comparison, the group held S$128.1 million in cash as of 30 June 2019.
Food atrium’s performance
Food atrium’s performance for H1 2019 was fairly decent, with a profit before tax margin of 9.2%, an improvement from H1 2018’s 7.6%. The division generated S$78.3 million of revenue and S$7.2 million in profit before tax and had 55 food courts and eight direct-operated restaurants.
Though the three-year (2016-2018) revenue trend for food atrium division was flat, the division did manage to turn around from a loss before tax of S$7.1 million in FY 2016 to a profit before tax of S$16.8 million for FY 2018.
While BreadTalk’s rationale for the acquisition is to quickly expand and grow its network of food courts in Singapore and Malaysia, I cannot help but feel that the group has paid too much for FJM. Auric Pacific made a cash offer to privatise Food Junction in June 2013 at S$12 million and is now selling it at a hefty profit of S$68 million after six years.
FJM hardly generates much profit at all and BreadTalk will end up being saddled with a ton of goodwill that is subject to a yearly impairment test if FJM does not perform well post-acquisition.
All in, it looks like a pretty bad deal for BreadTalk shareholders unless the company truly believes it can squeeze out superior value from the FJM acquisition.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.