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Morning Briefing for pub, restaurant and food wervice operators

Thu 5th Oct 2017 - Revolution acknowledges Deltic merger proposal, analysts’ views on deal
Revolution acknowledges Deltic merger proposal, analysts’ views on deal: Revolution Bars Group has acknowledged Deltic Group’s proposed terms for a merger and said it would provide a response in due course. The company stated: “Shareholders are advised there is no certainty the merger proposal would be likely to lead to a transaction that could be announced and completed or Deltic will make an offer for the company. The company notes, in accordance with the statement made by the Takeover Panel on 21 September, unless the panel executive consents, Deltic must, by 5pm on 10 October, either announce a firm intention to make an offer for Revolution under rule 2.7 of the City Code on Takeovers and Mergers, or announce it does not intend to make an offer for Revolution." Canaccord Genuity leisure analyst Nigel Parson said: “Investors may be drawn to the certainty of Stonegate's 203p per share cash offer but this morning's all-share merger proposal from rival Deltic deserves serious consideration – shareholders might double their investment in the Deltic scenario by FY19E. If the new vehicle underperforms, the fall-back is that Stonegate could reappear. We recommend the Deltic proposal. A Deltic/Revolution combination could threaten to be a growing competitor to Stonegate, and Deltic’s management is motivated by the opportunity. A stock-market listing would also potentially give Deltic the currency to roll-up other interesting bar operators such as Be At One, New World Trading Company, the Alchemist and Novus, for example. Deltic was formed by buying Luminar out of administration in 2011. However, it’s a very different business now in an industry where supply has moved back in kilter with lower demand. Over the past decade, nightclubs in the UK have halved to 1,885 clubs. The major players are Stonegate with 72 (smaller) clubs and Deltic with 58 (bigger) clubs. Trading at individual clubs can be volatile but a portfolio should deliver reasonably stable cash flow to fund the faster roll-out of Revolution’s two brands as well as Deltic’s own embryonic Bar & Beyond concept.” Meanwhile, Peel Hunt leisure analyst Douglas Jack said: “At 203p per share, Deltic’s offer would add £54m in equity, implying a market cap of £156m. In return for adding 54% to the equity, Deltic would add 115% of Ebitda by adding its own £16.6m of Ebitda in 2019E and enabling shareholders to benefit from £5.4m of cost synergies in 2019E (£6.8m in 2020E). We believe it would also add £31m of net debt, as well as 11 freeholds and long leaseholds (valued at £16m). In 2019E, we estimate Revolution Bars Group would be valued on 4.6 times EV/Ebitda at Stonegate’s 203p share price (£156m equity plus £34m net debt versus £40m Ebitda including synergies) or 15% equity free cash flow yield (£23m free cash flow versus £156m equity), which could support a large dividend. Investors have to decide whether this 15% equity free cash flow yield is an attractive valuation for owning the merged business. Since 2013, Revolution Bars Group has grown Ebitda by 38%, despite growing its average number of outlets by just 11%. This has been self-financed with net debt increasing by just £6m despite £11m being paid out in dividends. New sites typically generate 30% to 40% cash returns, and over the next two years the estate is forecast to grow by 17%, driving £2m annual growth in Ebitda. Deltic is the UK’s leading nightclub operator. Like wet-led pubs, surviving nightclubs have benefited from a big fall in supply. We believe both Stonegate and Deltic’s nightclubs have performed well since 2012. Since 2013, Deltic’s Ebitda has grown from £7.3m to £13.3m in 2017. Within its original invested estate, Deltic’s admissions have grown by 8.0% with sales up 26.2%. Admissions’ share of sales has fallen to 19.3% from 21.3%, with admissions spend per head (up 5%) being outpaced by drink spend per head (up 19%), and refurbishments paying back in two years. With such strong growth and returns, there is a case for equity offers being as attractive as cash offers. Revolution Bars Group’s travails reflect previous finance department failings, but these are no longer relevant – the accounts have been forensically audited – and both Deltic and Stonegate have their own finance departments, and are only buying a strong operating estate. Revolution Bars Group shareholders, equivalent to 96% of the equity base, now have to decide whether to follow the board’s recommendation to take 203p per share cash and de-list the company, or aspire to something greater.”

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