Using its noodle: why TRG wants Wagamama

There has been a grim predictability in the casual dining sector this year, with site closures and CVAs impacting many high street brands, from Prezzo ​​and Jamie’s Italian​​ to Cau ​​and Gourmet Burger Kitchen​​. But few will have seen coming The Restaurant Group’s £559m swoop for Wagamama,​​ which was announced this morning (30 October).

The noodle chain, founded by Alan Yau in 1992, isn’t an obvious fit for the company behind Garfunkle’s, Frankie & Benny’s and Chiquito, among others. But it is an obvious target. In a sector where reportedly 37 of the UK’s top 100 restaurant groups are loss making​​, Wagamama is regarded as the golden goose, having consistently traded ahead of the competition for over the past four years (228 consecutive weeks, to be precise).

The company’s latest figures showed it achieved an incredible 8.5% increase in like-for-like sales at its UK restaurants during the 16 weeks to 19 August 2018, and it says it outperformed the market in the UK by 10.1%, figures that will make most restaurant owners struggling with the sector headwinds emerald with envy.

TRG itself has felt these headwinds. In the 42 weeks’ trade in 2018, total sales at the group were 0.5% down on the comparable period in 2017 and like-for-like sales were 2.2% down. Since its half-year results announcement at the end of August, however, like-for-like sales were up 1.4% in the 14 week period following the end of the World Cup. Having Wagamama’s sales on its books would provide a welcome fillip.

Reasons for the move​

TRG’s rationale behind the acquisition is clear. Back in 2016 the group said its trading performance exposed certain issues, with the company undertaking a drive to re-establish the competitiveness of its restaurant brands, serve its customers better and more efficiently, grow its pubs and concessions businesses, and build a leaner and more focused organisation.

It believes it has made significant progress towards each objective and is now in a good place to add another brand to its portfolio in the form of Wagamama.

In Wagamama TRG recognises the brand’s a strong competitive advantage as the only UK pan-Asian concept with scale, having more than three times the sales of the next largest branded UK operator in Asian cuisine. It it also aware of the group's strong and favourable consumer perception, with the company consistently ranking highly on Net Promoter Score among large mainstream brands.

Wagamama is also a brand that appeals to customers across different day parts, although it has failed to gain any traction with its attempts to get customers in for breakfast, and this is an aspect that TRG will no doubt believe it can build upon through the knowledge it has of operating its own brands.

Growth potential​

What really makes Wagamama appealing is its growth potential, with TRG describing the brand’s future prospects as ‘highly attractive’. TRG says its believes there remains scope for continued like-for-like revenue growth, and that there is headroom to increase the size of Wagamama’s UK estate by approximately 40 to 60 additional restaurants without saturation. It also believes there is an opportunity to accelerate Wagamama’s growth, capitalising on the enlarged group’s site portfolio, scale and relationships.

Proposed growth includes the further roll out of the Wagamama brand in the UK, including concessions, international expansion and a greater push into the delivery sector. Some of this will come from the existing TRG estate, with the group proposing to convert at least 15 TRG sites to Wagamamas. It also believes there is an opportunity to leverage its existing concessions relationships at 14 airports across the UK.

So far Wagamama operates just three concessions nationwide, but this number would swell as part of TRG. Wagamama currently operates 133 restaurants in the UK and five in the US, and has 58 franchised restaurants across Europe, the Middle East and New Zealand.

There seems also to be scope to move Wagamama into new parts of the market, including food-to-go, an area with which TRG has already had success with its brands such as The Gathering and Wondertree. TRG says it expects to pilot a food-to-go format in London which, if successful, could be rolled out across its concessions. This could see Wagamama go into transport hubs and go up against brands such as Wasabi, which has sites in King’s Cross and Victoria stations.

“Overall this seems like a good deal, RTN (TRG) will diversify into a higher growth business which is well suited to delivery channels. The deal will give RTN the opportunity to convert underperforming legacy sites to Wagamama,” says Paul Ruddy, gaming and leisure analyst at Investment Bank Goodbody.

“There is still a good pipeline of growth with the statement noting that there is the potential for 40-60 more Wagamama sites in the UK without saturation. Post deal 70% of EBITDA will derive from pubs, concessions and Wagamama, which are delivering good growth.”

Synergies​

So what does the deal mean for TRG? The group says its purchase would create ‘a business with a compelling multi-pronged growth strategy’, that would be strongly growth oriented and benefit from a clear scale advantage. It predicts the acquisition to result in estimated cost synergies and site conversions synergies of approximately £22m.

As Andy McCue, TRG CEO says: “The transaction not only gives us a great brand but also creates a business with a multi-pronged growth strategy which will enhance earnings with continued selective UK rollout, accelerated via conversions of some TRG sites; by further leveraging the brand in concessions both in the UK and internationally; by maximising the opportunities presented by the rapidly growing delivery sector; and by optimising the potential within international markets.”

The City has reacted positively to the news, despite some misgivings over the headline multiple of the sale, which stands at a debt/EBITDA ratio of 2x. “Although slightly above our comfort levels we would expect the group to be highly cash generative,” says Shore Capital.

In its trading comments, Shore says the acquisition would increase TRG’s exposure to fast growing channels and reducing the drag of TRG’s leisure park restaurant businesses.

As part of the move, Wagamama will be run as an autonomous division of TRG with Emma Woods, currently Wagamama’s chief growth officer, becoming Wagamama CEO. Woods will be keener than ever to ensure that Wagamama remains the industry’s golden goose.