(Sharecast News) - Wagamama owner The Restaurant Group (TRG) said on Monday that it has bought Mexican restaurant chain Barburrito for £7m in cash.
The business currently operates across 16 sites in high-footfall locations across a range of formats and TRG said it is "well aligned with key consumer trends including healthy eating, convenience, customisable cuisine and offers high quality products at attractive prices with an average spend per customer of circa £10".
For the period ended 26 September 2021, Barburrito's pre-tax profit was £1.7m and as at 26 September 2021, its gross assets were £3.9m. The pre-tax profit figure benefitted from significant temporary government support, however.
Barburrito will be integrated into TRG's Leisure & Concessions division, with the key operational team from Barburrito retained.
TRG also announced that given its "significant" cash headroom and confidence in the underlying cash generation across its businesses, it chose to repay a further £44m of its term loan in June, thereby reducing its total available debt facilities to £361m.
The debt facilities currently comprise a £241m term loan and a £120m revolving credit facility which is undrawn. The group currently has cash headroom in excess of £190m against these facilities.
AJ Bell financial analyst Danni Hewson said the acquisition of Barburrito was "significant on multiple levels".
"First, it coincides with the group making early repayments on £44m of debt, which shows further progress in trying to strengthen its finances.
"Its 2018 purchase of Wagamama dramatically increased group debt and came at a time when the restaurant sector was reaching saturation point as so many operators had expanded too fast. In the subsequent years Restaurant Group slimmed down its estate and tried to get its finances back in order. Covid somewhat derailed this plan, but it is now bouncing back fast.
"The fact it feels able to make another acquisition would suggest the business has reached a big turning point. The purchase of Barburrito certainly looks cheap, on just 4.4 times earnings before interest, tax, depreciation and amortisation.
"What's the catch? You must question why the sellers are happy to offload this business on such a low multiple of earnings. Barburrito went into administration in 2020 and was saved by its chairman and management team. While it made a profit in the year to September 2021, that was helped by temporary government support measures such as lower VAT.
"With the prospect of recession upon us and these Covid support measures having been withdrawn, perhaps the owners thought it was time to get out while the going was good?
"And therein lies a problem. If recession hits the UK, how will Barburrito cope with consumers already under significant financial pressure? A lot of its restaurants are situated in shopping centres which could become a lot quieter if people are watching their spending. If someone only has limited money to spend on food, would they pay £10 for a burrito, or buy something cheaper?
"It appears that Restaurant Group got such a good deal because of these near-term risks to earnings.
"Restaurant Group wants to expand the chain, particularly in the south, but it won't be that simple. Many major cities in the UK already offer burrito outlets, so there is plenty of competition. Therefore, Restaurant Group planting flags in new territories for Barburrito won't necessarily lead to guaranteed success."
