A majority of 60.4% in favour of a bet-the-farm corporate deal counts as a lukewarm endorsement. A country can leave the European Union (maybe) on less but companies normally regard anything under 90% as embarrassing when a “transformative” acquisition plus big rights issue is on the table.
Debbie Hewitt, chair of the Restaurant Group, thanked the majority “for the support they have shown” in backing the £559m purchase of Wagamama. She will also know that the two-fifths of dissenters, assuming they hang around, will want her out if the super-sized serving of noodles causes medium-term indigestion.
As it was, the Restaurant Group’s shares fell another 15% as the board declared victory. The stock has fallen by a third since Wagamama came on to the menu last month.
The buyer will hope that, once the hefty 13-for-nine £315m rights issue has cleared, the market will warm to the pitch that Wagamama will reinvigorate a tired-looking portfolio currently led by Frankie & Benny’s and Garfunkel’s.
Maybe, but it remains hard to ignore the key statistics of this purchase. The price represents 13 times top-line earnings, which is a very high ratio for an established restaurant format. On a per-leasehold basis, broker Langton Capital reckons £4m-a-pop is the most ever paid for a chain of any size in the UK. On any normal yardstick, this deal is plain expensive.
By rights, it should be the private equity sellers giving thanks to the three-fifths of Restaurant Group’s shareholders who gave a thumbs-up. Duke Street reckons it has a made a tidy 3.4 times return on its money during seven years of owning Wagamama. It has grown the chain impressively – but also got supremely lucky in finding such a gung-ho buyer in the current nervous climate.
An eye-watering bond for Italy
Cast your eyes away from Brexit for a moment and look at the other bubbling European crisis – Italy. UniCredit, the country’s largest bank, on Wednesday raised $3bn (£2.34bn) of five-year money from Pimco, the world’s largest bond investor, by agreeing to a pay a coupon, or interest rate, of almost 8%. That rate is so high the bank’s chief executive was obliged to offer an explanation.
“Not ideal,” conceded Jean-Pierre Mustier, putting things mildly. Back in January UniCredit paid just 1% in an equivalent offering. Or, since the market rates move around, one can look at the premium over the relevant bond benchmarks. In January, UniCredit paid a premium of 0.7 percentage points. Now it’s at the ugly level of 4.2 points.
What’s happened in the interim, of course, is that the Italian government and Brussels are at loggerheads over the country’s spending plans. The bond market is spooked by a confrontation between a populist (and currently popular) government and a European commission that is threatening to impose fines for breaching budget rules. One consequence is that Italian banks are having to pay more for their money.
Mustier argued it was still sensible to raise $3bn at 7.83% “to show we had access to the market in large size”. Fair enough: big international lenders like UniCredit need to demonstrate access even when the weather outside is terrible. But two points follow. First, since UniCredit is possibly the strongest of the Italian crew, its domestic rivals might have to pay truly nose-bleed rates to tap the bond market. Second, since high funding costs for banks feed into the real economy, time is not Italy’s friend in the stand-off with the EU.
It’s not all good news for the banks
At least Britain’s banks can withstand a Brexit storm, even the dramatic disorderly no-deal scenario outlined by the Bank of England. They all passed their annual stress tests.
Do not, however, expect international investors suddenly to fall in love with UK banks. Being resilient is not the same as prospering. Share prices have been whacked and will remain so until the Brexit clouds clear. Viewed from US, deciding not to own shares in Lloyds Banking Group – a close proxy for the UK economy – is an easy call.