Restaurant Group's £700m takeover bid "too low", says Shore Capital

Shore Capital has said that the value of Apollo Group's takeover bid of Restaurant Group is "too low", despite the hospitality company recommending the offer to shareholders.

The Wagamama owner announced on Thursday that it is recommending a 65p-per-share offer from Rock BidCo, a vehicle owned by Apollo Funds, which equates to a 35% premium on the previous close and an enterprise value (EV) of £700m.

Shore Capital analyst Greg Johnson pointed out that the value represents an EV-to-EBITDA ratio of 8.6x on current-year estimates, falling to just 7x next year.

"We do not believe it reflects the quality of the estate (especially having recently exited the challenged leisure business), the freehold asset backing (c£160m) and the progress it was making across its strategic objectives on margin accretion (250-350bps) and deleveraging (under 1.5x EBITDA)," Johnson said.

If the company was to hit its targets, it would improve EBITDA to around £130m within three years, up from £83m last year. This would mean the EV would rise to around 100-120p per share, based on an EV-to-EBITDA multiple of 7-8x.

"Importantly, improving profitability would be expected to lead to a significant step-up in cash generative capabilities underpinning rating expansion."

Johnson said that 80p a share would be "a starting point more consistent with the longer-term opportunity".